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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to___________________
--------------------
Commission file number 011230
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Regis Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0749934
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7201 Metro Boulevard, Edina, Minnesota 55439
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(952)947-7777
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 2001:
Common Stock, $.05 par value 41,973,933
- ---------------------------- -----------------
Class Number of Shares
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REGIS CORPORATION
INDEX
Part I. Financial Information Page Nos.
--------------------- ---------
Item 1. Consolidated Financial Statements:
Balance Sheet as of September 30, 2001
and June 30, 2001 3
Statement of Operations for the three
months ended September 30, 2001 and 2000 4
Statement of Cash Flows for the three
months ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-12
Review Report of Independent Accountants 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2001 AND JUNE 30, 2001
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, 2001 JUNE 30, 2001
------------------ --------------
ASSETS
Current assets:
Cash $ 34,257 $ 24,658
Receivables, net 20,888 18,861
Inventories 111,554 110,247
Deferred income taxes 9,419 10,087
Other current assets 4,491 8,794
--------- ---------
Total current assets 180,609 172,647
Property and equipment, net 308,990 300,990
Goodwill 251,811 236,117
Other assets 32,256 26,751
--------- ---------
Total assets $ 773,666 $ 736,505
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 6,047 $ 5,438
Accounts payable 43,126 37,689
Accrued expenses 67,614 68,788
--------- ---------
Total current liabilities 116,787 111,915
Long-term debt 267,226 256,120
Other noncurrent liabilities 33,998 28,969
Shareholders' equity:
Common stock, $.05 par value;
issued and outstanding 41,927,458 and 41,726,787
common shares at September 30, 2001 and
June 30, 2001, respectively 2,096 2,087
Additional paid-in capital 169,602 165,489
Accumulated other comprehensive loss (6,891) (4,815)
Retained earnings 190,848 176,740
--------- ---------
Total shareholders' equity 355,655 339,501
--------- ---------
Total liabilities and shareholders' equity $ 773,666 $ 736,505
========= =========
The accompanying notes are an integral part of the
unaudited Consolidated Financial Statements.
3
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000
-------- --------
Revenues:
Company-owned salons:
Service $233,619 $209,896
Product 100,572 87,408
-------- --------
334,191 297,304
Franchise revenues:
Royalties and fees 10,177 9,478
Product sales 5,300 3,972
-------- --------
15,477 13,450
-------- --------
349,668 310,754
Operating expenses:
Company-owned salons:
Cost of service 132,592 120,163
Cost of product 53,260 47,309
Direct salon 31,186 26,072
Rent 47,180 41,337
Depreciation 11,307 9,834
-------- --------
275,525 244,715
Selling, general and administrative 37,641 32,280
Depreciation and amortization 2,429 5,063
Other 3,921 2,935
-------- --------
Total operating expenses 319,516 284,993
-------- --------
Operating income 30,152 25,761
Other income (expense):
Interest (4,782) (5,095)
Other, net 75 350
-------- --------
Income before income taxes 25,445 21,016
Income taxes (10,089) (8,301)
-------- --------
Net income $ 15,356 $ 12,715
======== ========
Net income per share:
Basic $ .37 $ .31
======== ========
Diluted $ .36 $ .31
======== ========
Effective July 1, 2001, Regis changed its accounting for goodwill. For
comparability purposes, see Note 2 for pro forma amounts.
The accompanying notes are an integral part of the
unaudited Consolidated Financial Statements.
4
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 15,356 $ 12,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 13,423 11,626
Amortization 496 3,350
Deferred income taxes 1,021 1,528
Other (200) 379
Changes in operating assets and liabilities:
Receivables 1,486 (1,305)
Inventories (423) (7,856)
Other current assets 3,159 4,433
Other assets 594 (2,456)
Accounts payable 2,046 3,456
Accrued expenses 481 254
Other noncurrent liabilities (1,196) 1,905
--------- ---------
Net cash provided by operating activities 36,243 28,029
--------- ---------
Cash flows from investing activities:
Capital expenditures (19,634) (20,519)
Proceeds from sale of assets 192 3
Purchases of salon net assets, net of cash acquired (16,891) (19,799)
--------- ---------
Net cash used in investing activities (36,333) (40,315)
--------- ---------
Cash flows from financing activities:
Borrowings on revolving credit facilities 82,200 78,300
Payments on revolving credit facilities (70,500) (60,500)
Repayment of long-term debt (730) (833)
(Decrease) increase in negative book cash balances (323) 4,820
Dividends paid (1,249) (1,224)
Proceeds from issuance of common stock 433 411
--------- ---------
Net cash provided by financing activities 9,831 20,974
--------- ---------
Effect of exchange rate changes on cash (142) (457)
--------- ---------
Increase in cash 9,599 8,231
Cash:
Beginning of period 24,658 14,888
--------- ---------
End of period $ 34,257 $ 23,119
========= =========
The accompanying notes are an integral part of the
unaudited Consolidated Financial Statements.
5
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS:
The unaudited interim Consolidated Financial Statements of Regis
Corporation (the Company) as of September 30, 2001 and for the three months
ended September 30, 2001 and 2000, reflect, in the opinion of management,
all adjustments necessary to fairly present the consolidated financial
position of the Company as of September 30, 2001 and the consolidated
results of its operations and its cash flows for the interim periods. The
results of operations and cash flows for any interim period are not
necessarily indicative of results of operations and cash flows for the full
year.
The year-end consolidated balance sheet data was derived from audited
Consolidated Financial Statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America. The unaudited interim Consolidated Financial Statements should
be read in conjunction with the Company's Consolidated Financial Statements
for the year ended June 30, 2001.
With respect to the unaudited financial information of the Company for the
three-month periods ended September 30, 2001 and 2000, included in this
Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied
limited procedures in accordance with professional standards for a review
of such information. However, their separate report dated October 22, 2001
appearing herein, states that they did not audit and they do not express an
opinion on that unaudited financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light
of the limited nature of the review procedures applied.
PricewaterhouseCoopers LLP is not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report on the unaudited
financial information because that report is not a "report" or a "part" of
the registration statement prepared or certified by PricewaterhouseCoopers
LLP within the meaning of Sections 7 and 11 of the Act.
COST OF PRODUCT SALES:
On an interim basis, product costs are determined by applying an estimated
gross profit margin to product revenues.
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 expand 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 Note
2). Goodwill is tested annually or at the time of a triggering event for
impairment.
6
2. NEW ACCOUNTING PRONOUNCEMENTS:
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
three-month period ended September 30, 2001 was to increase net income by
approximately $2.3 million, or $0.05 per 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 period.
FOR THE QUARTER ENDED SEPTEMBER 30,
2001 2000
---------- ---------
(Pro Forma Amounts)
NET INCOME (Dollars in thousands)
Reported net income $ 15,356 $ 12,715
Goodwill amortization (net of tax effect) 2,053
---------- ---------
Adjusted net income $ 15,356 $ 14,768
========== =========
BASIC EARNINGS PER SHARE
Reported basic earnings per share $ .37 $ .31
Goodwill amortization (net of tax effect) .05
---------- ---------
Pro forma basic earnings per share $ .37 $ .36
========== ==========
DILUTED EARNINGS PER SHARE
Reported diluted earnings per share $ .36 $ .31
Goodwill amortization (net of tax effect) .05
---------- ---------
Pro forma diluted earnings per share $ .36 $ .36
========== =========
On July 1, 2001, goodwill was tested for impairment in accordance with
the provisions of the new standard. No amounts were impaired at that
time. In addition, the remaining useful lives of intangible assets being
amortized were reviewed and deemed to be appropriate. The following
provides additional information concerning the Company's intangible
assets, which are included in other assets in the Consolidated Balance
Sheet, as of September 30, 2001 (Dollars in thousands):
Amortized intangible assets:
Franchise agreements $ 8,293
Non-compete agreements 5,496
Trade names 6,753
Other 2,278
-----------
22,820
Accumulated amortization (6,573)
-----------
$ 16,247
===========
7
The intangible assets subject to amortization are amortized on a
straight-line basis over the number of years that approximate their
respective useful lives (ranging from four to 30 years). Total amortization
expense during the three month period ended September 30, 2001 and 2000 was
approximately $290,000 and $207,000, respectively. As of September 30,
2001, future estimated amortization expense related to intangible assets
being amortized will be (Dollars in thousands):
FISCAL YEAR
-----------
Remainder 2002 $1,142
2003 1,449
2004 1,152
2005 948
2006 885
2007 870
Effective July 1, 2001, the Company also adopted the provisions of FAS No.
141, "Business Combinations." The initial adoption of this statement 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
retirement of tangible long-lived assets and the associated asset
retirement costs. FAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company is currently in the
process of evaluating the impact of this Statement on its financial
condition and results of operations.
The FASB recently issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. FAS 144 retains and expands upon the fundamental provisions of
existing guidance related to the recognition and measurement of the
impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. Generally, the provisions of
FAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
years. Earlier application is encouraged. The Company believes the adoption
of this Statement will not have a material impact on its financial
condition or results of operations.
8
3. DERIVATIVE INSTRUMENTS:
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.
At September 30, 2001, Regis had interest rate swap contracts to pay fixed
rates of interest (ranging from 5.06 percent to 7.2 percent) and receive
variable rates of interest based on the three-month LIBOR rate (ranging
from 2.6 percent to 3.8 percent during the first quarter of fiscal 2002) on
$25 million, $30 million and $11.8 million notional amount of indebtedness
through April 2003, June 2003 and June 2005, respectively. During the
current quarter, no hedge ineffectiveness occurred. The net loss recorded
in other comprehensive income, net of tax, was $958,000 and $298,000 at
September 30, 2001 and 2000, respectively.
During the quarter, the Company entered into a cross-currency swap, with a
notional amount of $21.8 million, to hedge 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
18 percent of the Company's net investments in foreign operations. For the
quarter ended September 30, 2001, $297,000, net of tax, of net losses
related to this derivative was included in the cumulative translation
adjustment.
4. COMPREHENSIVE INCOME:
Comprehensive income for the Company includes net income, transition
adjustment for the adoption of FAS 133, changes in fair market value of
financial instruments designated as hedges of interest rate exposure and
foreign currency translation exposure that is charged or credited to the
cumulative translation account within shareholders' equity. Comprehensive
income for the three months ended September 30, 2001 and 2000 were as
follows:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
(Dollars in thousands)
2001 2000
-------- --------
Net income $ 15,356 $ 12,715
Other comprehensive income:
Transition adjustment relating to the
adoption of FAS 133, net of taxes (160)
Changes in fair market value of financial
instruments designated as hedges of
interest rate exposure, net of taxes (958) (298)
Change in cumulative foreign currency translation (1,118) (778)
-------- --------
Total comprehensive income $ 13,280 $ 11,479
======== ========
9
5. NET INCOME PER SHARE:
Stock options with exercise prices greater than the average market value of
the Company's common stock were excluded from the computation of diluted
earnings per share for the quarter ended September 30, 2001 and 2000 as
they are considered to be anti-dilutive. The number of excluded stock
options were approximately 832,650 and 3,204,309, respectively, in the
first quarter of fiscal 2002 and 2001.
The following provides information related to the weighted average common
shares used in the calculation of the Company's basic and diluted EPS:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
----------- ----------
Weighted average shares for basic earnings per share 41,740,812 40,720,731
Effect of dilutive securities:
Dilutive effect of stock options 1,142,955 605,560
Contingent shares issuable under contingent stock agreements 22,722 139,028
----------- ----------
Weighted average shares for diluted earnings per share 42,906,489 41,465,319
=========== ==========
6. TRANSACTION AND RESTRUCTURING LIABILITIES:
As of June 30, 2001, the Company's transaction and restructuring
liabilities related to acquisitions totaled approximately $1,056,000.
During the first quarter of fiscal 2002, such liabilities were reduced by
cash payments of $186,000 and increased by $39,000 related to translation
rates, resulting in balance of $909,000 at September 30, 2001. This
remaining amount will be satisfied through periodic contractual payments by
the end of fiscal 2002.
7. SEGMENT INFORMATION:
Each of the Company's operating segments have generally similar products
and services. The Company is organized to manage its operations based on
geographical location. The Company's operating segments have been
aggregated into two reportable segments: domestic salons and international
salons. The Company operates or franchises 6,398 domestic salons in the
United States and Canada located within high-profile regional malls and
strip shopping centers under several different concepts including Regis
Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters
brand names. The Company's International segment represents 886 salons,
including 517 franchised salons, operating in malls, leading department
stores, mass merchants and high-street locations.
10
Summarized financial information of the Company's reportable segments for
the three months ended September 30, 2001 and 2000, respectively, is shown
in the following table.
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
(Dollars in thousands)
2001 2000
--------- --------
Total revenues:
Domestic $ 326,062 $287,202
International 23,606 23,552
--------- --------
Total $ 349,668 $310,754
========= ========
Salon contribution (including franchise
product costs):
Domestic $ 66,664 $ 60,378
International 3,558 2,726
--------- --------
Total $ 70,222 $ 63,104
========= =========
8. ACQUISITIONS:
During the three month period ended September 30, 2001 and 2000, the
Company made numerous acquisitions. These acquisitions have been recorded
using the purchase method of accounting. Accordingly, the purchase prices
have been allocated to assets acquired and liabilities assumed based on
their estimated fair values at the 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.
Costs in excess of net tangible and identifiable intangible assets acquired
and components of the aggregate purchase prices of the acquisitions were as
follows:
THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
(Dollars in thousands)
2001 2000
------- -------
Costs in excess of net tangible and
identifiable intangible assets acquired $16,254 $17,125
======= =======
Components of aggregate purchase price
Cash $16,891 $19,799
Stock 3,554
Current and noncurrent payables assumed 5,158 494
------- -------
$25,603 $20,293
======= =======
11
With respect to a September 2001 purchase of 523 salons in the
International division, the Company is currently in the process of
allocating the purchase price to the identifiable intangible assets, and
goodwill. Identifiable intangible assets acquired primarily consist of
acquired trade names and franchise rights. Based upon the preliminary
purchase price allocation, the change in the carrying amount of the
goodwill for the three months ended September 30, 2001 is as follows
(Dollars in thousands):
Domestic International
-------- -------------
Balance as of June 30, 2001 $230,716 $ 5,401
Goodwill acquired 3,756 12,498
Translation rate adjustments and other (783) 223
-------- -------
Balance as of September 30, 2001 $233,689 $18,122
======== =======
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.
12
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Regis Corporation:
We have reviewed the accompanying consolidated balance sheet of Regis
Corporation as of September 30, 2001, and the related consolidated statements of
operations and of cash flows for the three month periods ended September 30,
2001 and 2000. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of June 30,
2001, and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the year then ended (not presented
herein), and in our report dated August 28, 2001, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
accompanying consolidated balance sheet information as of June 30, 2001, is
fairly stated, in all material respects in relation to the consolidated balance
sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
October 22, 2001
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Regis Corporation (the Company), 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 7,284 salons at September 30,
2001 operating in two segments: domestic and international. Each of the
Company's operating segments have generally similar products and services. The
Company is organized to manage its operations based on geographical location.
The Company's domestic segment includes 6,398 salons operating primarily under
the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts
and Cost Cutters. The Company's international operations include 886 salons
located primarily in the United Kingdom and France. The Company has 41,000
employees worldwide.
First quarter fiscal 2002 revenues grew to a record $349.7 million, including
franchise revenues of $15.5 million, a 12.5 percent increase over fiscal 2001
first quarter total revenues of $310.8 million.
Operating income in first quarter of fiscal 2002 increased to $30.2 million, a
17.0 percent increase over operating income of $25.8 million in the comparable
fiscal 2001 period.
Net income in the first quarter of fiscal 2002 increased to a record $15.4
million, or $.36 per diluted share, a net income and earnings per share increase
of 20.8 and 16.1 percent, respectively, from first quarter fiscal 2001 net
income of $12.7 million, or $.31 per diluted share.
The Company completed the implementation of the new accounting standard
associated with the discontinuance of amortization of goodwill, effective July
1, 2001, as discussed in Note 2 to the Consolidated Financial Statements.
14
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
information derived from the Company's Consolidated Statement of Operations
expressed as a percent of revenues. The percentages are computed as a
percent of total Company revenues, except as noted.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
2001 2000
------ ------
Company-owned service revenues (1) 69.9% 70.6%
Company-owned product revenues (1) 30.1 29.4
Franchise revenues:
Royalties and fees 2.9 3.0
Product sales 1.5 1.3
Company-owned operations:
Profit margins on service (2) 43.2 42.8
Profit margins on product (3) 47.0 45.9
Direct salon (1) 9.3 8.8
Rent (1) 14.1 13.9
Depreciation (1) 3.4 3.3
Direct salon contribution (1) 17.6 17.7
Selling, general and administrative 10.8 10.4
Depreciation and amortization (4) 0.7 1.6
Operating income 8.6 8.3
Income before income taxes 7.3 6.8
Net income 4.4 4.1
- ----------
(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) See Note 2 to the financial statements regarding discontinuation of
goodwill amortization, effective July 1, 2001, and comparative financial
information.
15
RESULTS OF OPERATIONS
REVENUES
Revenues for the first quarter of fiscal 2002 grew to a record $349.7 million,
an increase of $38.9 million or 12.5 percent, over the same period in fiscal
2001. Approximately 44 percent of this increase is attributable to salon
acquisitions, with the remaining increase primarily due to net salon openings
and same-store sales increases.
For the first quarter of fiscal 2002 and 2001, respectively, revenues by
division were as follows:
2001 2000
-------- --------
(Dollars in thousands)
Domestic:
Regis Salons $102,852 $ 96,327
Strip Center Salons (primarily Supercuts
and Cost Cutters) 94,367 78,728
MasterCuts 40,895 38,398
Trade Secret 47,773 45,587
SmartStyle 40,175 28,162
International 23,606 23,552
-------- --------
$349,668 $310,754
======== ========
Included in the table above are franchise revenues of $15,447 and $13,450 for
the three months ended September 30, 2001 and 2000, respectively.
During the first quarter of fiscal 2002, same-store sales from all domestic
company-owned salons open more than 12 months increased 3.2 percent, compared to
an increase of 5.0 percent in fiscal 2001. Same-store sales increases achieved
during the first three months of fiscal 2002 and 2001 were driven primarily by a
shift in the mix of service sales, increased customer transactions and market
based price increases in certain salon divisions. A total of 30.1 million
customers were served system-wide in the first three months of fiscal 2002
compared to 28.0 million customers served during the same period of fiscal 2001.
System-wide sales, inclusive of non-consolidated sales generated from franchisee
salons, increased to $513.2 million for the first quarter of fiscal 2002,
representing an increase of 12.7 percent over the same period last year.
System-wide same-store sales increased 3.8 percent and 5.2 percent in the first
quarter of fiscal 2002 and 2001, respectively.
SERVICE REVENUES. Service revenues in the first quarter of fiscal 2002 grew to
$233.6 million, an increase of $23.7 million or 11.3 percent, over the same
period in fiscal 2001. The increase in service revenues is primarily a result of
salon acquisitions, accelerated new salon construction and same-store sales
growth.
16
PRODUCT REVENUES. Product revenues in the first quarter of fiscal 2002 grew to
$100.6 million, an increase of $13.2 million, or 15.1 percent, over the same
period in fiscal 2001. This increase continues a trend of escalating product
revenues due to strong product same-store sales growth of 6.7 percent in the
first quarter of fiscal 2002, a reflection of the continuous focus on product
awareness, training and acceptance of national label merchandise and opening
additional Trade Secret salons through new construction or acquisitions. Product
revenues as a percent of total company-owned revenues increased to 30.1 percent
for the first quarter of fiscal 2002 compared to 29.4 percent for the same
period a year ago.
FRANCHISE REVENUES. Franchise revenues, including royalties and initial
franchise fees from franchisees, and product and equipment sales made by the
Company to franchisees, increased to $15.5 million in the first quarter of
fiscal 2002, compared to $13.5 million for the same period of fiscal 2001. The
increase in franchise revenues is primarily the result of increased sales of
product to franchisee salons.
COST OF REVENUE
The aggregate cost of service and product revenues for company-owned salons in
the first quarter of fiscal 2002 was $185.9 million compared to $167.5 million
in the same period in fiscal 2001. The resulting combined gross margin
percentages for the first quarter of fiscal 2002 improved 70 basis points to
44.4 percent of company-owned revenues compared to 43.7 percent in the same
period in fiscal 2001. This overall improvement was due to improvement in
service and retail product margins.
Service margins improved to 43.2 percent in the first quarter of fiscal 2002,
representing a 40 basis point improvement over service margins of 42.8 percent
in the same period of fiscal 2001. The improvement is primarily a result of
increased efforts to control payroll and payroll related costs in the Company's
International and fixed cost payroll divisions (MasterCuts and Strip Center
Salons, including Supercuts).
Product margins improved 110 basis points to 47.0 percent in the first quarter
of fiscal 2002 from 45.9 percent in the same period of fiscal 2001. This
improvement is 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. Further, product
margins in the first quarter of fiscal 2001 were adversely impacted by retail
discounting associated with the introduction of new packaging for several
different product lines.
17
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. For the
first quarter of fiscal 2002, direct salon expense of $31.2 million increased to
9.3 percent of company-owned revenues from 8.8 percent when compared to the same
period a year ago. The current year increase of 50 basis points is primarily a
result of higher utility and workers' compensation costs.
RENT
Rent expense for the first quarter of fiscal 2002 was $47.2 million or 14.1
percent of company-owned revenues, compared to $41.3 million or 13.9 percent of
company-owned revenues in the same period in fiscal 2001. The increase in rent
expense as a percentage of company-owned revenues in the first three months of
fiscal 2002 is primarily a result of higher common area maintenance costs
relative to same-store sales increases.
DEPRECIATION - SALON LEVEL
Depreciation expense at the salon level remained relatively consistent in the
first quarter of fiscal 2002 at 3.4 percent of revenues, compared to 3.3.
percent in the same period of fiscal 2001.
DIRECT SALON CONTRIBUTION
For reasons previously discussed, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, increased in
the first quarter of fiscal 2002 to $58.7 million compared to $52.6 million. As
a percent of sales, direct salon contribution decreased ten basis points to 17.6
percent of company-owned revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Expenses in this category include field supervision (payroll, related taxes and
travel) and home office administration costs (such as warehousing, salaries,
occupancy costs and professional fees). Selling, general and administrative
(SG&A) expenses were $37.6 million, or 10.8 percent of total revenues in the
first quarter of fiscal 2002, compared to $32.3 million, or 10.4 percent of
total revenues in the same period in fiscal 2001. This 40 basis point increase
is primarily due to costs associated with closing the Company's Minneapolis
distribution center, as well as the timing of promotional spending for the
holiday season. Further, same-store sales increases were lower in the first
quarter of fiscal 2002 as compared to the corresponding period of the prior year
which contributed to the increase in this fixed cost category as a percent of
revenues.
DEPRECIATION AND AMORTIZATION - CORPORATE
Corporate depreciation and amortization decreased to 0.7 percent of total
revenues in the first quarter of fiscal 2002, compared to 1.6 percent in the
same period in fiscal 2001. This decrease is related to implementation of FAS
No. 142 in July 2001, which discontinues the amortization of acquired goodwill,
as discussed in Note 2 to the Consolidated Financial Statements.
18
OPERATING INCOME
Operating income in the first quarter of fiscal 2002 improved to $30.2 million,
or 8.6 percent of total revenue, an increase of $4.4 million or 17.0 percent
over the same period in fiscal 2001.
INTEREST
Interest expense in the first quarter of fiscal 2002 declined to $4.8 million,
representing 1.4 percent of total revenues, compared to $5.1 million, or 1.6
percent of total revenues in the same period in fiscal 2001. Interest expense as
a percent of total revenues has decreased due to lower interest rates in fiscal
2002 when compared to the same period a year ago.
INCOME TAXES
The Company's annual effective income tax rate for the first three months of
fiscal 2002 was 39.7 percent compared to 39.5 percent in the same period a year
ago. Management expects the underlying effective tax rate for all of fiscal 2002
to fall between 39 and 40 percent.
NET INCOME
Net income in the first quarter of fiscal 2002 grew to $15.4 million, or $.36
per diluted share, compared to $12.7 million, or $.31 per diluted share in the
same period in fiscal 2001. The increase in earnings per diluted share primarily
resulted from sales increases, improved gross margins and the change in
accounting for goodwill, partially offset by higher fixed costs.
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 divisions, variable costs of sales. The
Company does not believe inflation, due to its low rate, has had a significant
impact on the results of operations associated with hourly paid hairstylists for
the remainder of its mall-based and strip center salons.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements are discussed in Note 2 to the Consolidated
Financial Statements.
19
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 for the first three months of fiscal 2002 increased to
$36.2 million compared to $28.0 million during the same period in fiscal 2001.
The increase between the two periods is primarily due to a change in working
capital.
CAPITAL EXPENDITURES AND ACQUISITIONS
During the first three months of fiscal 2002, the Company had worldwide capital
expenditures of $21.3 million, of which $1.7 million related to acquisitions.
The Company constructed 90 new corporate salons in the first quarter of fiscal
2002, including 14 new Regis Salons, 12 new MasterCuts salons, 8 new Trade
Secret salons, 39 new SmartStyle salons, 11 new Strip Center Salons and 6 new
International salons, and completed 40 major remodeling projects. All capital
expenditures during the first three months of 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 2002
will include approximately 410 new salons and 150 major remodeling and
conversion projects. It is expected that expenditures for these new salons and
other projects will be approximately $70 to $75 million in fiscal 2002,
excluding capital expenditures associated with acquisitions.
During the first quarter of fiscal 2002, the Company had worldwide expenditures
of $16.9 million related to the acquisition of 553 salons, including 517
franchised salons.
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.
FINANCING
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.
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
During the first three months of fiscal 2002, the Company paid dividends
totaling $1.2 million, or $.03 per share. On October 24, 2001, the Board of
Directors of the Company declared a $.03 per share quarterly dividend payable on
November 21, 2001 to shareholders of record on November 7, 2001.
20
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This quarterly report on Form 10-Q, 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. Additional information
concerning potential factors that could affect future financial results is
included in the Company's Form S-3 Registration Statement filed with the
Securities and Exchange Commission on October 25, 2001
21
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk exposure of the Company relates to changes in interest
rates in connection with its debt, some of which bears interest at floating
rates based on LIBOR plus an applicable borrowing margin. To a lesser extent,
the Company is also exposed to foreign currency translation risk related to its
net investments in its foreign subsidiaries.
As of September 30, 2001, the Company had $152 million of floating and $121
million of fixed rate debt outstanding. The Company manages its interest rate
risk by balancing the amount of fixed and variable debt. In addition, on
occasion the Company uses interest rate swaps to further mitigate the risk
associated with changing interest rates. Generally, the terms of the interest
rate swap agreements range from two to three years with settlement on a
quarterly basis. As of September 30, 2001, the Company has entered into interest
rate swap agreements covering $66.8 million of the floating rate obligations, as
discussed in Note 3 to the Consolidated Financial Statements.
The Company has also entered into a cross currency swap with a notional amount
of $21.8 million to hedge its foreign currency exposure in certain of its net
investments.
22
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On October 23, 2001, at the annual meeting of the shareholders of the Company, a
vote on the election of the Company's directors took place with the following
results:
FOR WITHHOLD AUTHORITY
---------- ------------------
Rolf F. Bjelland 35,066,366 1,391,069
Paul D. Finkelstein 30,596,823 5,860,612
Christopher A. Fox 30,596,951 5,860,484
Thomas L. Gregory 34,906,704 1,550,731
Van Zandt Hawn 35,066,066 1,391,369
Susan Hoyt 35,066,241 1,391,194
David B. Kunin 34,837,644 1,619,791
Myron Kunin 30,814,047 5,643,388
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 15 Letter Re: Unaudited Interim Financial Information.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the three months ended
September 30, 2001:
None.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGIS CORPORATION
Date: November 9, 2001 By: /s/ Randy L. Pearce
-------------------------------------
Randy L. Pearce
Executive Vice President
Chief Financial and
Administrative Officer
Signing on behalf of the
registrant and as principal
accounting officer
24