SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods indicated, selected
financial data derived from the Company's consolidated financial statements.
1998 1997 1996 1995 1994
Revenues $ 798,144 $ 713,219 $ 617,307 $ 524,253 $ 453,561
Operating income (a) 59,929 28,447 26,167 26,644 25,712
Net income (a) 30,488 6,574 9,451 11,590 3,883
Net income per diluted share (a) 1.27 .28 .42 .53 .20
Total assets 382,350 331,535 303,954 244,836 226,944
Long-term debt, including
current portion 120,736 113,462 102,381 85,092 82,991
Dividends declared .09 .08 .07 -- --
(a) The following information is provided to facilitate comparisons of
operating income, net income and net income per diluted share, absent
the impact of certain nonrecurring activities (See Notes 3 and 10 to
the Consolidated Financial Statements). Exclusive of nonrecurring
items, operating income would have been $61,908, $47,178, $38,990 in
1998, 1997 and 1996, respectively. Exclusive of nonrecurring items,
net income and net income per diluted share, respectively, would have
been $31,600 and $1.31 in 1998, $21,337 and $.92 in 1997, $16,981 and
$.75 in 1996, $10,885 and $.50 in 1995, $9,883 and $.50 in 1994.
KEY RATIOS
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
Cash flow per share* $ 2.25 $ 1.77 $ 1.50
Net income per diluted share
excluding goodwill amortization** $ 1.50 $ 1.09 $ .89
Gross margin percentage 43.7% 42.8% 42.4%
Product sales mix 28.7% 27.3% 25.3%
Operating income as a percent
of revenues** 7.8% 6.6% 6.3%
Debt-to-capitalization ratio 38.9% 43.2% 36.9%
* Represents net income, excluding nonrecurring and noncash items
** Excludes nonrecurring items (see Notes 3 and 10 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,
1998 1997 1996
Company-owned service revenues(1) 71.3% 72.7% 74.7%
Company-owned product revenues(1) 28.7 27.3 25.3
Franchise income 3.3 3.8 4.1
Company-owned operations:
Profit margins on service(2) 43.0 41.9 41.3
Profit margins on product(3) 45.4 45.0 45.7
Direct salon(1) 9.1 9.5 10.1
Rent(1) 14.0 14.0 13.8
Depreciation(1) 3.3 3.4 3.6
Direct salon contribution(1) 17.3 15.9 14.9
Selling, general and administrative 10.8 11.0 10.6
Depreciation and amortization 1.2 1.2 1.0
Operating income 7.5 4.0 4.2
Income before income taxes 6.4 2.8 2.8
Net income 3.8 .9 1.5
Operating income, excluding
nonrecurring items 7.8 6.6 6.3
Net income, excluding nonrecurring items 4.0 3.0 2.8
(1) Computed as a percent of company-owned revenues
(2) Computed as a percent of service revenues
(3) Computed as a percent of product revenues
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
Regis Corporation, based in Minneapolis, is the largest owner, operator,
franchisor and consolidator of hair and retail product salons in the world. The
Regis worldwide operations include 3,539 hairstyling salons at June 30, 1998
operating in six divisions: Regis Hairstylists, Strip Center Salons (primarily
Supercuts), MasterCuts, Trade Secret, Wal-Mart/SmartStyle and International.
Worldwide operations include 816 franchised salons operating primarily as
Supercuts salons. The Company has 28,000 employees worldwide.
During fiscal 1998, the Company's consolidated revenues increased 11.9 percent
to a record $798.1 million. Exclusive of nonrecurring items, operating income
grew 31.1 percent to $61.9 million and net income increased 42.4 percent to
$1.31 per share, compared to $.92 per share in the prior year.
Financial data for fiscal 1997 and 1996 presented reflect the retroactive
effects of the October 1996 merger with Supercuts, Inc. (Supercuts) which was
accounted for as a pooling-of-interests (see Note 3 to the Consolidated
Financial Statements). The financial statements have been prepared by combining
the historical financial statements of Regis Corporation with those of Supercuts
for each of these periods and include adjustments to conform the historical
accounting policies and practices of Supercuts to those of Regis.
RESULTS OF OPERATIONS
REVENUES
REVENUES in fiscal 1998 were a record $798.1 million, an increase of $84.9
million, or 11.9 percent, over fiscal 1997. Approximately 41 percent of this
increase is attributable to increases in same-store sales, with the remaining
increase due to net salon openings and acquisitions occurring in fiscal 1998 and
the full year impact of fiscal 1997 net salon openings and acquisitions. Regis
Hairstylists, Strip Center Salons, MasterCuts, Trade Secret and
Wal-Mart/SmartStyle salons in the United States and Canada (Domestic salons)
accounted for $78.1 million of the increase in total revenues. The remainder of
the revenue increase of $6.8 million resulted from the Company's International
operations. The Company's International salons are located in the United
Kingdom, South Africa, Switzerland, Mexico, Ireland, France and The United Arab
Emirates.
Revenue by division for fiscal 1998, 1997 and 1996, respectively, are shown in
the Business Mix table (right).
During fiscal 1998, same-store sales from all Domestic company-owned salons open
more than 12 months increased 5.8 percent, compared to increases of 3.1 percent
and 3.6 percent in fiscal 1997 and 1996, respectively. Same-store sales for the
United Kingdom salons (U.K. salons), the primary component of International
salons, increased 5.3 percent in fiscal 1998. Same-store sales increases
achieved during fiscal 1998, 1997 and 1996 were driven primarily by increased
customer transactions, rather than price increases. A total of 71.8 million
customers were served in fiscal 1998 compared to 69.0 million and 64.4 million
customers served in fiscal 1997 and 1996, respectively. The Company utilizes an
audiovisual-based training system in its salons. Management believes this
training system provides its employees with improved customer service and
technical skills, and positively contributes to the increase in customers
served.
BUSINESS MIX
(DOLLARS IN THOUSANDS)
1998 1997 1996
Regis $ 294,584 $ 275,258 $ 267,576
MasterCuts 107,821 94,963 83,411
Wal-Mart/
SmartStyle 40,256 30,294 2,459
Strip Centers 108,146 94,904 97,196
Trade Secret 115,024 91,412 64,960
International 106,176 99,348 76,287
Franchise
Income 26,137 27,040 25,418
----------- ------------ -----------
$ 798,144 $ 713,219 $ 617,307
----------- ------------ -----------
----------- ------------ -----------
REGIS CORPORATION 1998 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUES INCREASED 12 PERCENT IN 1998
5 YEAR COMPOUND ANNUAL GROWTH RATE:15.5%
$ MILLIONS
1996 1997 1998
FRANCHISE 25.4 27.0 26.1
PRODUCT 149.5 187.6 221.6
SERVICE 442.4 498.6 550.4
------ ------ ------
TOTAL $617.3 $713.2 $798.1
------ ------ ------
------ ------ ------
COMPANY-OWNED
REVENUES
COMBINED GROSS MARGINS IMPROVED
90 BASIS POINTS IN 1998
1996 42.4%
1997 42.8%
1998 43.7%
COMBINED GROSS
MARGINS
System-wide sales, inclusive of non-consolidated sales generated from franchisee
salons, were $1.1 billion, $955.1 million, and $845.5 million in fiscal 1998,
1997 and 1996, representing increases of 10.8 percent, 13.0 percent and 17.4
percent, respectively. The increase in system-wide sales in fiscal 1998 was the
result of same-store sales increases from existing salons and net salon openings
as well as the total number of salons added to the system through acquisitions.
System-wide same-store sales increased 5.3 percent, 2.6 percent and 3.3 percent
in fiscal 1998, 1997 and 1996, respectively.
SERVICE REVENUES were $550.4 million, $498.6 million and $442.4 million for
1998, 1997 and 1996, representing increases of 10.4 percent, 12.7 percent and
16.7 percent, respectively. The growth in service revenues was driven by same
store-sales growth, accelerated new salon construction, and acquisitions.
PRODUCT REVENUES were $221.6 million, $187.6 million and $149.5 million in
fiscal 1998, 1997 and 1996, representing increases of 18.1 percent, 25.5 percent
and 24.2 percent, respectively. The growth in product revenue in fiscal 1998
continues a trend of escalating product revenues due to strong product
same-store sales growth, a reflection of continuous focus on product awareness,
training and acceptance of national label merchandise and opening an additional
38 Trade Secret salons between the two periods. In fiscal 1998, product revenues
as a percent of total company-owned revenues increased to 28.7 percent of
revenues, compared to 27.3 percent and 25.3 percent of revenues in 1997 and
1996, respectively.
FRANCHISE INCOME, including royalties and initial franchise fees from
franchisees, and product sales made by the Company to franchisees, decreased 3.3
percent in fiscal 1998 to $26.1 million from $27.0 million in fiscal 1997. The
decrease in franchise income is a result of a reduction in royalty rates charged
to franchisees, partially offset by increases in franchisee sales, which are not
included in the Company's consolidated revenues. The Company feels the reduction
in royalty rates will not have an adverse affect on earnings due to a
corresponding decrease in costs of services provided to the franchisees.
In fiscal 1997, franchise income increased 6.4 percent, or $1.6 million,
compared to fiscal 1996. This increase is the result of an increase in
franchisee sales, which are not included in the Company's consolidated revenues.
COST OF REVENUE
The aggregate cost of revenues in fiscal 1998 was $434.8 million, compared to
$392.8 million and $340.9 million in fiscal 1997 and 1996, respectively. As
discussed in the following paragraphs, the resulting gross margin percentage for
fiscal 1998 improved to 43.7 percent of company-owned revenues compared to 42.8
percent and 42.4 percent of company-owned revenues in fiscal 1997 and 1996.
SERVICE MARGINS for fiscal 1998 improved 110 basis points to 43.0 percent of
company-owned revenues, compared to 41.9 percent and 41.3 percent in the two
preceding fiscal years. This continued improvement was driven by ongoing payroll
control in all operating divisions and growth in the mix of the Company's higher
service margin salon concepts, primarily Strip Center Salons, MasterCuts and
Wal-Mart/SmartStyle.
18 REGIS CORPORATION 1998
PRODUCT MARGINS for fiscal 1998 improved to 45.4 percent of company-owned
revenues, compared to 45.0 percent in fiscal 1997. This 40 basis point
improvement was primarily driven by lower product costs in Supercuts and
Wal-Mart salons resulting from the benefit of Regis' purchasing power.
Product margins declined 70 basis points to 45.0 percent in fiscal 1997,
compared to 45.7 in fiscal 1996. This decline was primarily a result of an
increase in Trade Secret revenues as a percent of total Company revenues, as
Trade Secret product margins are somewhat lower than the other divisions.
Additionally, the Company responded to a disappointing Christmas season by
discounting retail products in the third quarter of 1997. This bolstered the
same-store sales growth but also reduced fiscal 1997 margins.
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. Direct salon
increased to $70.1 million in fiscal 1998, compared to $65.0 million and $60.0
million in fiscal 1997 and 1996, but improved as a percent of company-owned
revenue to 9.1 percent, compared to 9.5 percent and 10.1 percent in fiscal 1997
and 1996. The continued improvement in fiscal 1998 direct salon expenses
resulted from an increased ability to leverage these costs against strong
same-store sales increases and a maturing salon base, as well as the closures of
under-performing stores, primarily Supercuts salons. The fiscal 1997 improvement
resulted from leveraging fixed costs against increased revenues as well as
reductions in advertising costs in the Regis Hairstylists and MasterCuts
divisions.
RENT
Rent expense in fiscal 1998 was $107.9 million, compared to $95.7 million and
$81.6 million in fiscal 1997 and 1996. Rent expense in fiscal 1998 remained
consistent with fiscal 1997 at 14.0 percent of company-owned revenues. In fiscal
1997, rent expense increased 20 basis points due to the mid-year fiscal 1997
acquisitions in the United Kingdom, as well as the Wal-Mart acquisition in June
1996. When compared to Domestic salon operations, the U.K. salons acquired have
higher rent expense and lower selling, general and administrative expense
because certain costs are absorbed by department stores and passed on as rent.
Wal-Mart salons acquired have a higher rent expense, as a percent of
company-owned revenues, as this division has a developing salon base and,
therefore, this fixed cost is spread over a lower sales volume compared to the
majority of the Company's domestic salon base.
DEPRECIATION--SALON LEVEL
Depreciation expense at the salon level remained fairly consistent at 3.3
percent of revenues compared to 3.4 percent and 3.6 percent in fiscal 1997 and
1996. This positive trend is due to leveraging this fixed cost against
increasing revenues.
DIRECT SALON CONTRIBUTION
For reasons described above, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in
fiscal 1998 to $133.7 million and 17.3 percent of company-owned revenues,
compared to $109.3 million and 15.9 percent in fiscal 1997 and $88.4 million and
14.9 percent in fiscal 1996.
DIRECT SALON
CONTRIBUTION
INCREASED 140 BASIS
POINTS IN 1998
1996 14.9%
1997 15.9%
1998 17.3%
DIRECT SALON CONTRIBUTION
REGIS CORPORATION 1998 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING INCOME
INCREASED 31%
IN 1998
$ MILLIONS
EXCLUDING NONRECURRING ITEMS
1996 $39.0-6.3%
1997 $47.2-6.6%
1998 $61.9-7.8%
OPERATING INCOME
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses include field supervision
(payroll, related taxes and travel) and home office administration costs (such
as warehousing, salaries, occupancy costs and professional fees). SG&A expenses
increased $7.8 million in fiscal 1998 to $86.5 million, but improved as a
percent of total revenue to 10.8 percent from 11.0 percent in fiscal 1997. The
20 basis point improvement in SG&A in fiscal 1998 was primarily driven by cost
reductions associated with the amalgamation of the Supercuts administrative
office functions, partially offset by costs incurred to prepare the Company's
internal computer systems for the year 2000.
In fiscal 1997, SG&A expenses increased $13.6 million to $78.7 million and
deteriorated as a percent of total revenue by 40 basis points. This
deterioration was primarily a result of higher distribution center expenses due
to volume increases. In addition, SG&A expense for the International division
was higher in fiscal 1997 than fiscal 1996 due to an extended transition period
for the associated 1996 acquisitions.
DEPRECIATION AND AMORTIZATIONCORPORATE
Depreciation and amortization was 1.2 percent of total revenues, compared to 1.2
percent and 1.0 percent in fiscal 1997 and 1996, respectively. Amortization
expense increased in fiscal 1998 and 1997 due to the increased level of
intangible assets, primarily goodwill, associated with the Company's salon
acquisition activity. In fiscal 1998, depreciation expense within this category
has remained relatively consistent with fiscal 1997 and 1996 as a percent of
revenues.
NONRECURRING ITEMS
See Notes 3 and 10 to the Consolidated Financial Statements.
OPERATING INCOME
Operating income in fiscal 1998 increased to $59.9 million, compared to $28.4
million and $26.2 million in fiscal 1997 and 1996, respectively. Both fiscal
1997 and 1996 were significantly affected by Supercuts-related merger and
transaction costs, and restructuring charges (nonrecurring items).
Exclusive of nonrecurring items, operating income in fiscal 1998 improved to
$61.9 million, or 7.8 percent of revenues, compared to $47.2 million and $39.0
million in fiscal 1997 and 1996. This 31.1 percent improvement was driven by
improved gross margins and the overall leveraging of fixed costs. The fiscal
1997 improvement is primarily attributable to improved gross margins, the
leveraging of direct salon expenses, partially offset by higher SG&A expense as
a percent of revenues.
INTEREST
Interest expense in fiscal 1998 was $10.1 million compared to $10.3 million and
$9.9 million in fiscal 1997 and 1996, representing 1.3 percent, 1.4 percent and
1.6 percent of total revenues, respectively. The decline in interest expense as
a percent of total revenues in fiscal 1998 and 1997 is due to the benefit of
reduced interest rates in the respective periods.
20 REGIS CORPORATION 1998
INCOME TAXES
The Company's effective tax rate in fiscal 1998 was 40.2 percent of pre-tax
income compared to 66.6 percent and 45.6 percent in fiscal 1997 and 1996. In
fiscal 1997, the Company's effective tax rate was negatively affected by
nondeductible merger and transaction costs associated with the Supercuts merger.
Exclusive of nonrecurring items, the Company's effective tax rate was 40.2
percent, 43.1 percent and 42.4 percent, respectively, in fiscal 1998, 1997 and
1996. The fiscal 1997 and 1996 effective tax rates, exclusive of nonrecurring
items, were negatively affected by the Company's inability to fully utilize the
income tax benefits of Supercuts operating costs in certain states.
Additionally, as part of its June 30, 1997 income tax provision, the Company
recorded a $1.5 million change in estimate associated with income tax matters
related to years prior to 1997.
NET INCOME
Net income in fiscal 1998 grew to a record $30.5 million, or $1.27 per diluted
share, compared to net income of $6.6 million, or $.28 per diluted share, in
fiscal 1997 and $9.5 million, or $.42 per diluted share, in fiscal 1996.
Exclusive of nonrecurring items, net income in fiscal 1998 increased to $31.6
million, or $1.31 per diluted share, compared to net income of $21.3 million, or
$.92 per diluted share, in fiscal 1997 and $17.0 million, or $.75 per diluted
share in fiscal 1996. Earnings per diluted share, exclusive of nonrecurring
items, increased 42.4 percent, 22.7 percent and 50.0 percent in fiscal 1998,
1997 and 1996, respectively. These increases have primarily resulted from sales
increases, improved gross margins and leveraging of fixed costs, as previously
discussed.
EFFECTS OF INFLATION
The Company compensates its Regis Hairstylists 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 Strip Center, MasterCuts, Trade Secret or Wal-Mart/SmartStyle divisions.
LIQUIDITY AND CAPITAL RESOURCES
Customers generally pay for salon services and merchandise in cash at the time
of sale, which reduces the Company's working capital requirements. Net cash
provided by operating activities in fiscal 1998 rose to $67.7 million compared
to $34.9 million in fiscal 1997. The increase in fiscal 1998 is due to improved
operating performance during the year and to payments in fiscal 1997 associated
with the Supercuts merger and restructuring costs. Cash payments associated with
these costs were $18.4 million in fiscal 1997.
CAPITAL EXPENDITURES AND ACQUISITIONS
During fiscal 1998, the Company had worldwide capital expenditures of $65.9
million, of which $4.4 million related to acquisitions of 201 salons, $5.9
million for equipment acquired under capital leases, $9.7 million for the
Company's new distribution center and $7.0 million for the purchase of
additional administrative office facilities. During fiscal 1998, the Company
constructed 181 new salons (33 Regis Hairstylists, 4 Strip Center Salons, 50
MasterCuts, 32 Trade Secret, 45 Wal-Mart/SmartStyle and 17 International) and
added 201 salons through acquisitions. The Company also completed 97 major
remodeling projects. All capital expenditures during fiscal 1998 were funded by
the Company's operations and borrowings under its revolving credit facility.
EARNINGS PER SHARE
GREW 42% IN 1998
DILUTED
EXCLUDING NONRECURRING ITEMS
1996 $0.75
1997 $0.92
1998 $1.31
EARNINGS PER SHARE
CASH FLOW PER
SHARE INCREASED
27% IN 1998
NET INCOME BEFORE NONRECURRING
AND NONCASH ITEMS
1996 $1.50
1997 $1.77
1998 $2.25
CASH FLOW PER SHARE
REGIS CORPORATION 1998 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NEW SALON
CONSTRUCTION 1998
Strip Centers
(primarily Supercuts) 4
Wal-Mart/SmartStyle 45
MasterCuts 50
Trade Secret 32
Regis 33
International 17
PROJECTED SALON
CONSTRUCTION
1999
Strip Centers
(primarily Supercuts) 45
Wal-Mart/SmartStyle 80
MasterCuts 50
Trade Secretq 40
Regis 45
International 15
The Company anticipates its worldwide salon development program for fiscal 1999
will include approximately 275 new salons and 125 major remodeling and
conversion projects. It is expected that expenditures for these new salons and
other projects will be approximately $50.0 million in fiscal 1999, excluding
capital expenditures associated with acquisitions.
FINANCING
The Company renewed its revolving credit facility in June 1998. Under the terms
of the renewal, the revolving credit facility allows for borrowings up to $25.0
million through December 1998, $35.0 million through December 1999, $45.0
million through December 2000 and $50.0 million through October 2001, and bears
interest at the prime rate. The prime rate at June 30, 1998 and 1997 was 8.50
percent. The facility also allows for borrowings bearing interest at LIBOR rates
plus 1.00 to 1.25 percent, based on the Company's debt to capitalization ratio.
The weighted average interest rate associated with this facility was 7.67
percent and 7.63 percent, respectively, during fiscal 1998 and 1997. The
revolving credit facility requires a quarterly commitment fee at the rate of 1/4
percent per year on the unused portion of the facility. Letters of credit
totaling $0.9 million were outstanding at June 30, 1998, which reduces the
amount available under the revolving credit facility.
In May 1998, the Company also entered into an additional uncommitted revolving
credit facility which allows for borrowings up to $20.0 million, bears interest
at the prime rate or LIBOR plus 1.0 percent, and matures in May 1999. There are
no borrowings under this facility as of June 30, 1998.
In July 1998, the Company paid down its revolving credit facilities by $14.0
million with the proceeds of a 7.14 percent senior term note with interest due
quarterly, and principal payments of $9.0 million and $5.0 million due in July
2007 and 2008, respectively.
In March 1997, the Company entered into a treasury lock agreement for the
purpose of establishing the effective interest rate on the refinancing of a
$14.0 million senior term note which matured in June 1998. The contract was
entered into to reduce the risk to the Company of future interest rate
fluctuations. The contract had a notional amount of $14.0 million and was tied
to the U.S. government ten-year treasury note rate. Upon settlement of the
agreement in June 1998, the Company incurred a loss of $1.6 million on the
contract. This loss will be amortized as interest expense through 2008. The
Company does not enter into financial instruments for trading or speculative
purposes.
See merger and transaction costs discussed in Note 3 to the Consolidated
Financial Statements.
See nonrecurring items discussed in Note 10 to the Consolidated Financial
Statements.
The Company translates the financial statements of its international
subsidiaries to U.S. dollars for financial reporting purposes, and accordingly
is subject to fluctuations in currency exchange rates.
22 REGIS CORPORATION 1998
Management believes that cash generated from operations and amounts available
under its revolving credit facilities will be sufficient to fund its anticipated
capital expenditures and required debt repayments for the foreseeable future.
DIVIDENDS
The Company paid dividends of $.09 per share during fiscal 1998 and $.08 per
share during fiscal 1997. On August 27, 1998, the Board of Directors of the
Company declared a $.03 per share quarterly dividend payable September 23, 1998,
to shareholders of record on September 8, 1998.
YEAR 2000
The Company has initiated a comprehensive project to prepare its computer
systems for the year 2000. The Company has completed the awareness and
assessment phases of the project and is in the process of remediation. The
remediation, validation, and implementation phases are planned to be completed
by late summer of calendar year 1999. Accordingly, management believes the year
2000 will not have a significant impact on operations. If necessary modification
and conversions are not completed on a timely basis, the year 2000 could have an
adverse effect on the Company's operations. At this time, the Company believes
it is unnecessary to adopt a contingency plan covering the possibility that the
project will not be completed in a timely manner, but as part of the overall
project, the Company will continue to assess the need for a contingency plan.
Costs associated with the year 2000 are expensed as incurred and are funded
through operating cash flows. Based on the Company's most recent assessment, the
associated expense to be incurred is estimated to be approximately $5 million
and will be charged to earnings, primarily over the next 18 months. In fiscal
1998, primarily in the fourth quarter, the Company charged $0.5 million in year
2000 project costs to earnings.
The Company is in contact with critical suppliers of products and services to
assess whether the suppliers' operations and the products and services they
provide are year 2000 capable or to monitor their progress toward year 2000
compliance. There can be no absolute assurance that another company's failure to
ensure year 2000 compliance would not have not have an adverse effect on the
Company.
Time and cost estimates are based on currently available information and are
management's best estimates. However, there is no guarantee that these estimates
will be achieved, and actual results may differ materially from those
anticipated. Developments which could affect estimates include, but are not
limited to, the availability and cost of trained personnel; the ability to
locate and correct all relevant computer code and equipment; and planning and
modification success of third party suppliers of products and services. The
Company will continue to assess and evaluate cost estimates and target dates for
completion of each phase of the year 2000 project on a periodic basis.
OTHER
During fiscal 1997, the Company resolved the litigation brought by David E.
Lipson and DEL Holding Corporation (DEL), a corporation controlled by Mr.
Lipson, against Supercuts. The Company paid Mr. Lipson and DEL $6.7 million in
complete settlement of all claims of Mr. Lipson, DEL or any other entity
controlled by Mr. Lipson. See Note 10 to the Consolidated Financial Statements.
This was funded through the issuance of the Company's common stock.
RETURN ON BEGINNING
EQUITY INCREASED 450
BASIS POINTS IN 1998
NET INCOME BEFORE
NONRECURRING ITEMS AS A PERCENT
OF BEGINNING EQUITY
1996 16.1%
1997 16.7%
1998 21.2%
RETURN ON
BEGINNING EQUITY
REGIS CORPORATION 1998 23
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30
ASSETS 1998 1997
Current assets:
Cash $ 4,774 $ 8,935
Accounts receivable, net 10,556 12,388
Inventories 53,826 42,596
Deferred income taxes 6,069 6,335
Other current assets 6,688 6,819
--------------------
Total current assets 81,913 77,073
Property and equipment, net 175,831 139,573
Goodwill 114,217 99,818
Other assets 10,389 15,071
--------------------
Total assets $382,350 $331,535
--------------------
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 19,741 $ 30,722
Accounts payable 22,374 24,111
Accrued expenses 41,650 37,291
--------------------
Total current liabilities 83,765 92,124
Long-term debt 100,995 82,740
Other noncurrent liabilities 8,329 7,557
Commitments (Note 5)
Shareholders' equity:
Common stock, $.05 par value; issued and
outstanding, 23,820,362 and 23,317,924
common shares at June 30, 1998 and 1997,
respectively 1,191 1,166
Additional paid-in capital 132,560 120,483
Retained earnings 55,510 27,465
--------------------
Total shareholders' equity 189,261 149,114
--------------------
Total liabilities and shareholders' equity $382,350 $331,535
--------------------
--------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
24 REGIS CORPORATION 1998
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30
1998 1997 1996
Revenues:
Company-owned salons:
Service $550,448 $498,559 $442,366
Product 221,559 187,620 149,523
-------------------------------
772,007 686,179 591,889
Franchise income 26,137 27,040 25,418
-------------------------------
798,144 713,219 617,307
-------------------------------
Operating expenses:
Company-owned:
Cost of service 313,931 289,621 259,765
Cost of product 120,914 103,181 81,165
Direct salon 70,094 64,962 59,915
Rent 107,912 95,726 81,634
Depreciation 25,463 23,430 21,042
-------------------------------
638,314 576,920 503,521
Selling, general and administrative 86,452 78,666 65,133
Depreciation and amortization 9,941 8,325 6,315
Nonrecurring items 1,979 18,731 12,823
Other 1,529 2,130 3,348
-------------------------------
Total operating expenses 738,215 684,772 591,140
-------------------------------
Operating income 59,929 28,447 26,167
Other income (expense):
Interest (10,056) (10,264) (9,880)
Other, net 1,104 1,519 1,090
-------------------------------
Income before income taxes 50,977 19,702 17,377
Income taxes (20,489) (13,128) (7,926)
-------------------------------
Net income $ 30,488 $ 6,574 $ 9,451
-------------------------------
-------------------------------
Net income per share:
Basic $ 1.30 $ .29 $ .43
-------------------------------
-------------------------------
Diluted $ 1.27 $ .28 $ .42
-------------------------------
-------------------------------
Weighted average common and
common equivalent shares outstanding 24,086 23,231 22,720
-------------------------------
-------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REGIS CORPORATION 1998 25
CONSOLIDATED STATEMENTS OF CHANGES ON SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
Balance, June 30, 1995 14,263,395 $ 714 $ 90,689 $ 14,016 $ 105,419
Shares issued in connection with
subordinated debt conversion 375,000 19 2,794 2,813
Stock split effected in the form of a
stock dividend 7,438,190 372 (372)
Proceeds from sale of common stock 370,000 18 10,013 10,031
Shares issued in connection with employee
benefit plans 12,842 1 101 102
Proceeds from exercise of stock options 77,734 3 819 822
Tax benefit realized upon exercise of
stock options 590 590
Dividends (1,235) (1,235)
Foreign currency translation adjustments (358) (358)
Net income 9,451 9,451
-----------------------------------------------------------------------
Balance, June 30, 1996 22,537,161 1,127 104,634 21,874 127,635
Proceeds from sale of common stock 500,000 25 11,100 11,125
Shares issued in connection with employee
benefit plans 13,056 1 240 241
Proceeds from exercise of stock options 267,707 13 3,656 3,669
Tax benefit realized upon exercise of
stock options 853 853
Dividends (1,722) (1,722)
Foreign currency translation adjustments 739 739
Net income 6,574 6,574
-----------------------------------------------------------------------
Balance, June 30, 1997 23,317,924 1,166 120,483 27,465 149,114
Proceeds from sale of common stock 400,000 20 10,390 10,410
Proceeds from exercise of stock options 102,438 5 1,290 1,295
Tax benefit realized upon exercise of
stock options 397 397
Dividends (2,115) (2,115)
Foreign currency translation adjustments (328) (328)
Net income 30,488 30,488
-----------------------------------------------------------------------
Balance, June 30, 1998 23,820,362 $ 1,191 $ 132,560 $ 55,510 $ 189,261
-----------------------------------------------------------------------
-----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
SATEMENTS.
26 REGIS CORPORATION 1998
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30
1998 1997 1996
Cash flows from operating activities:
Net income $ 30,488 $ 6,574 $ 9,451
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 29,265 26,381 23,357
Amortization 6,396 5,703 4,432
Deferred income taxes 7,264 1,114 (3,059)
Nonrecurring items 1,979 18,731 12,823
Other 255 259 503
Changes in operating assets and liabilities:
Accounts receivable 1,673 (1,222) (1,190)
Inventories (10,777) (8,376) (3,682)
Other current assets 20 2,339 (3,299)
Other assets (1,713) 13 (1,996)
Accounts payable (1,358) 6,487 1,948
Accrued expenses 3,072 (22,396) (80)
Other noncurrent liabilities 1,110 (750) (402)
------------------------------
Net cash provided by operating activities 67,674 34,857 38,806
------------------------------
Cash flows from investing activities:
Capital expenditures (55,631) (39,425) (32,605)
Purchases of salon assets, net of cash acquired
and certain obligations assumed (24,775) (10,370) (29,343)
------------------------------
Net cash used in investing activities (80,406) (49,795) (61,948)
------------------------------
Cash flows from financing activities:
Borrowings on revolving credit facilities 163,254 187,328 150,758
Payments on revolving credit facilities (148,952) (203,425) (147,158)
Proceeds from issuance of long-term debt 9,000 45,000 29,435
Repayment of long-term debt (24,620) (21,067) (17,164)
Increase (decrease) in negative book cash balances 376 (4,842) 1,957
Dividends paid (2,115) (1,722) (1,235)
Proceeds from issuance of common stock 11,705 15,035 10,955
------------------------------
Net cash provided by financing activities 8,648 16,307 27,548
------------------------------
Effect of exchange rate changes on cash (77) 8 (30)
------------------------------
(Decrease) increase in cash (4,161) 1,377 4,376
Cash:
Beginning of year 8,935 7,558 3,182
------------------------------
End of year $ 4,774 $ 8,935 $ 7,558
------------------------------
------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REGIS CORPORATION 1998 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND
SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Regis Corporation (the Company) owns, operates and franchises hairstyling and
hair care salons throughout the United States and in a number of other
countries, principally the United Kingdom (U.K.). Substantially all of the
hairstyling and hair care salons owned and operated by the Company in the United
States are located in leased space in enclosed mall shopping centers or strip
shopping centers. Franchised salons are primarily located in strip shopping
centers throughout the United States.
At June 30, 1998, approximately 20 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 6 percent is owned by management and the Company's benefit plans.
BASIS OF PRESENTATION:
Financial and share data for 1996 reflect the retroactive effects of the October
1996 merger with Supercuts, Inc. (Supercuts) which was accounted for as a
pooling-of-interests (Note 3).
CONSOLIDATION:
The financial statements include the accounts of the Company and all of its
wholly-owned subsidiaries. In consolidation, all material intercompany accounts
and transactions are eliminated.
FOREIGN CURRENCY TRANSLATION:
Financial position, results of operations and cash flows of the Company's
international subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rates in effect at each fiscal year end. Income statement accounts are
translated at the average rates of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation account grouped
within shareholders' equity.
INVENTORIES:
Inventories consist principally of hair care products held either for use in
salon services or for sale. Inventories are stated at the lower of cost or
market with cost determined on the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements).
Expenditures for maintenance and repairs and minor renewals and betterments
which do not improve or extend the life of the respective assets are expensed.
All other expenditures for renewals and betterments are capitalized. The assets
and related depreciation accounts are adjusted for property retirements and
disposals with the resulting gain or loss included in operations. Fully
depreciated assets remain in the accounts until retired from service.
GOODWILL:
Goodwill recorded in connection with the fiscal 1989 purchase of the publicly
held minority interest in the Company, and acquisitions of business operations
in which the Company has not previously been involved, is amortized on a
straight-line basis, generally over 40 years. Goodwill recorded in connection
with acquisitions which expand the Company's existing business activities
(acquisition of salon sites) is amortized on a straight-line basis, generally
over 12 to 19 years depending upon the lease terms of the salon sites acquired.
ASSET IMPAIRMENT ASSESSMENTS:
The Company periodically measures and evaluates the recoverability of its
tangible and intangible noncurrent assets using undiscounted cash flow analyses.
FRANCHISE INCOME AND EXPENSES:
Franchise income includes royalties and initial franchise fees from franchisees.
Royalties are recognized as income in the month in which franchisee services are
rendered or products are sold by franchisees. The Company recognizes income from
initial franchise fees at the time franchisee salons are opened. All expenses
associated with franchise operations are included in selling, general and
administrative expenses in the Consolidated Statement of Operations.
INCOME TAXES:
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred income tax assets and liabilities are
determined based on the differences between the financial statement and tax
basis of assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse. Income tax expense
is the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
NET INCOME PER SHARE:
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share", and has disclosed basic and diluted
earnings per share for all periods presented in accordance with the standard.
Basic earnings per share is calculated as net income divided by weighted average
common shares outstanding. The Company's only dilutive securities are issuable
under the Company's stock option plan. Diluted earnings per share is calculated
as net income divided by weighted average common shares outstanding, increased
to include assumed exercise of dilutive stock options. Prior periods have been
restated to reflect the new standard.
28 REGIS CORPORATION 1998
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share:
1998 1997 1996
Weighted average shares
for basic earnings per share 23,481,064 22,624,037 21,936,209
Diluted effect of
stock options 604,704 607,075 783,983
---------------------------------------
Weighted average shares
for diluted earnings
per share 24,085,768 23,231,112 22,720,192
---------------------------------------
---------------------------------------
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
Effective with the Company's first quarter reporting of fiscal 1999, the Company
will adopt SFAS No. 130, "Reporting Comprehensive Income". This statement
establishes standards for reporting and presenting comprehensive income and its
components. Components of comprehensive income for the Company include net
income and foreign currency translation adjustments. The effects of foreign
currency translation adjustments are disclosed in the Consolidated Statements of
Changes in Shareholders' Equity.
Effective with the Company's fiscal 1999 year end reporting, the Company will
adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This statement establishes standards for defining operating
segments and reporting certain information regarding operating segments. The
Company is reviewing the requirements of this statement and believes that it may
change, to some degree, the nature and extent of its current business segment
disclosures. This statement does not impact the basic consolidated financial
statements; it affects the disclosure of segment information in the Notes to
Consolidated Financial Statements.
2. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet
accounts:
(DOLLARS IN THOUSANDS)
1998 1997
Property and equipment:
Land $ 2,190 $ 700
Buildings and improvements 19,468 6,172
Equipment, furniture and
leasehold improvements 275,826 237,845
Equipment, furniture and
leasehold improvements
under capital leases 13,718 9,983
----------------------
311,202 254,700
Less accumulated depreciation
and amortization (131,496) (113,228)
Less amortization of equipment,
furniture and leasehold
improvements under
capital leases (3,875) (1,899)
----------------------
$ 175,831 $ 139,573
----------------------
----------------------
Goodwill $ 140,703 $ 120,429
Less accumulated amortization (26,486) (20,611)
----------------------
$ 114,217 $ 99,818
----------------------
----------------------
Accrued expenses:
Payroll and payroll
related costs $ 23,455 $ 19,923
Insurance 6,989 5,653
Other 11,206 11,715
----------------------
$ 41,650 $ 37,291
----------------------
----------------------
The following provides supplemental disclosures of cash flow activity:
(DOLLARS IN THOUSANDS)
1998 1997 1996
Cash paid during the year for:
Interest $ 9,918 $10,862 $ 9,052
Income taxes 13,239 13,016 15,227
Non-cash investing and financing activities include the following:
Years ended June 30, 1998 and 1997:
- - In connection with various acquisitions, the Company entered into
seller-financed notes payable (Note 3).
- - In 1998, the Company financed capital expenditures totaling $5.9 million
through the issuance of capital leases.
REGIS CORPORATION 1998 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended June 30, 1996:
- - In connection with the conversion of the Company's $2.8 million of
convertible debt, 562,500 shares of common stock were issued.
- - In connection with various acquisitions, the Company entered into
seller-financed notes payable of approximately $4.2 million.
3. MERGERS AND ACQUISITIONS:
SUPERCUTS, INC. MERGER:
Effective October 25, 1996, the Company received shareholder approval for the
merger agreement with Supercuts in a stock-for-stock merger transaction.
Supercuts was the national operator of approximately 430 company-owned, and
franchisor of approximately 740 affordable hair care salons at the acquisition
date.
As a result of the merger, the Company recorded a nonrecurring charge of $14.3
million during the quarter ended December 31, 1996. This charge included $7.7
million for professional fees including investment banking, legal, accounting
and miscellaneous transaction costs, $3.5 million for severance, and a non-cash
charge of $3.1 million for the write-off of duplicative operating assets,
principally associated with the closure of the Supercuts headquarters.
The Supercuts transaction has been accounted for as a pooling-of-interests,
therefore prior period financial statements were restated to reflect this merger
as if the merged companies had always been combined. To effect the restatement,
significant accounting adjustments were necessary to conform the accounting
practices of Supercuts to those of Regis.
Revenues and net income (loss) for the combining entities were as follows
(dollars in thousands):
SUPERCUTS,
YEAR ENDED JUNE 30 REGIS AS CONFORMED COMBINED
1997
Revenues $594,714 $118,505 $713,219
Net income (loss) 13,206 (6,632) 6,574
1996
Revenues 499,442 117,865 617,307
Net income (loss) 19,124 (9,673) 9,451
OTHER ACQUISITIONS:
During 1998 and 1997, the Company made numerous acquisitions in addition to
Supercuts. Costs in excess of net tangible and identifiable assets and
components of the aggregate purchase price of the acquisitions were as follows:
(DOLLARS IN THOUSANDS)
1998 1997
Costs in excess of net tangible
and identifiable assets $ 21,743 $ 9,700
------------------------------
------------------------------
Components of aggregate
purchase price:
Cash $ 24,837 $ 11,300
Notes payable 2,130 2,600
------------------------------
$ 26,967 $ 13,900
------------------------------
------------------------------
The aforementioned acquisitions, except Supercuts, have been recorded using the
purchase method of accounting. Accordingly, the purchase prices have been
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The acquisitions recorded using the
purchase method, individually and in the aggregate, are not material to the
Company's operations.
4. FINANCING ARRANGEMENTS:
The Company's long-term debt consists of the following:
(DOLLARS IN THOUSANDS)
INTEREST MATURITY
RATE % DATE 1998 1997
Senior term notes 6.94 -8.18 1998-2006 $ 68,000 $ 74,000
Revolving credit
facilities 6.99 -7.67 1998-2001 28,750 14,448
Equipment and
leasehold notes
payable 8.00-11.90 2000-2002 12,113 9,664
U.K. term notes 4.00-8.42 2001-2003 5,827 8,083
Other subordinated
notes payable 5.00-12.00 2000-2004 6,046 7,267
-------------------------
120,736 113,462
Less current portion (19,741) (30,722)
-------------------------
Long-term portion $ 100,995 $ 82,740
-------------------------
-------------------------
In July 1998, the Company paid down its revolving credit facilities by $14.0
million with the proceeds of a 7.14 percent senior term note with interest due
quarterly, and principal payments of $9.0 million and $5.0 million due in July
2007 and 2008, respectively.
30 REGIS CORPORATION 1998
In March 1997, the Company entered into a treasury lock agreement for the
purpose of establishing the effective interest rate on the refinancing of a
$14.0 million senior term note which matured in June 1998. The contract was
entered into to reduce the risk to the Company of future interest rate
fluctuations. The contract had a notional amount of $14.0 million and was tied
to the U.S. government ten-year treasury note rate. Upon settlement of the
agreement in June 1998, the Company incurred a loss of $1.6 million on the
contract. This loss will be amortized as interest expense through 2008. The
Company does not enter into financial instruments for trading or speculative
purposes.
The Company renewed its working capital revolving credit facility in June 1998.
Under the terms of the renewal, the revolving credit facility allows for
borrowings up to $25.0 million through December 1998, $35.0 million through
December 1999, $45.0 million through December 2000 and $50.0 million through
October 2001, and bears interest at the prime rate. The prime rate at June 30,
1998 and 1997 was 8.50 percent. The facility also allows for borrowings bearing
interest at LIBOR rates plus 1.00 to 1.25 percent based on the Company's debt to
capitalization ratio. The revolving credit facility requires a quarterly
commitment fee at the rate of 1/4 percent per year on the unused portion of the
facility. Letters of credit totaling $0.9 million were outstanding at June 30,
1998, which reduce the amount available under the revolving credit facility.
The Company also has an additional revolving credit facility which, at the
discretion of the lender, allows for borrowings up to $20.0 million and bears
interest at the prime rate or LIBOR plus 1.0 percent. There are no borrowings
under this facility as of June 30, 1998.
The equipment and leasehold notes payable are primarily comprised of capital
lease obligations totaling $8.9 million and $5.1 million at June 30, 1998 and
1997, respectively. These capital lease obligations are payable in monthly
installments over five years.
The debt agreements contain covenants, including limitations on incurrence of
debt, granting of liens, investments, merger or consolidation, and transactions
with affiliates. In addition, the Company must maintain specified interest
coverage and debt-to-equity ratios.
The fair value of the senior term, equipment and leasehold and subordinated
notes payable, based upon discounted cash flow analyses using the Company's
current incremental borrowing rate, approximate their carrying values at June
30, 1998.
Aggregate maturities of long-term debt at June 30, 1998 are as follows:
FISCAL YEAR (DOLLARS IN THOUSANDS)
1999 $ 19,741
2000 14,967
2001 11,680
2002 21,910
2003 1,960
Thereafter 50,478
----------
$ 120,736
----------
----------
5. COMMITMENTS:
OPERATING LEASES:
The Company is committed under long-term operating leases for the rental of most
of its company-owned salon locations. The terms of the leases range from one to
20 years, with many leases renewable for an additional five to ten year term at
the option of the Company, and certain leases include escalation provisions. For
certain leases, the Company is required to pay additional rent based on a
percent of sales and, in most cases, real estate taxes and other expenses. Rent
expense for the Company's international department store salons is based
primarily on a percent of sales.
The Company also leases the premises in which the majority of its franchisees
operate and has entered into corresponding sublease arrangements with the
franchisees. These leases, generally with terms of approximately five years, are
expected to be renewed on expiration. Future minimum lease payments for the next
five years, which are reimbursable from the franchisees, are approximately $17.0
million annually. All additional lease costs are passed through to the
franchisees.
Total rent expense, excluding sublease rental obligations which are passed
through to the franchisees, includes the following:
(DOLLARS IN THOUSANDS)
1998 1997 1996
Minimum rent $ 70,372 $ 62,125 $ 49,667
Percentage rent
based on sales 16,912 16,799 16,078
Real estate taxes and
other expenses 20,628 16,802 15,889
----------------------------------------
$107,912 $ 95,726 $ 81,634
----------------------------------------
----------------------------------------
FUTURE MINIMUM LEASE PAYMENTS:
As of June 30, 1998, future minimum lease payments (excluding percentage rents
based on sales and sublease rental obligations which are passed through to the
franchisees) due under existing
REGIS CORPORATION 1998 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
noncancellable operating leases with remaining terms of greater than one year
are as follows:
FISCAL YEAR (DOLLARS IN THOUSANDS)
1999 $ 78,800
2000 68,301
2001 53,975
2002 43,880
2003 36,420
Thereafter 109,094
----------
Total minimum lease payments $ 390,470
----------
----------
SALON DEVELOPMENT PROGRAM:
As a part of its salon development program, the Company continues to negotiate
and enter into leases and commitments for the acquisition of equipment and
leasehold improvements related to future salon locations.
6. INCOME TAXES:
The provision for income taxes consists of:
(DOLLARS IN THOUSANDS)
1998 1997 1996
Current:
Federal $ 11,210 $ 10,133 $ 9,142
State 1,849 1,589 1,828
International 166 292 15
Deferred:
United States 7160 1,138 (2,596)
International 104 (24) (463)
--------------------------------------------
$ 20,489 $ 13,128 $ 7,926
--------------------------------------------
--------------------------------------------
The components of the net deferred tax asset are as follows:
(DOLLARS IN THOUSANDS)
1998 1997
Net current deferred tax asset:
Insurance $ 2,234 $ 1,756
Payroll and payroll
related costs 2,097 1,313
Nonrecurring items 2,065 3,266
Other, net (327)
------------------------
$ 6,069 $ 6,335
------------------------
------------------------
Net noncurrent deferred tax asset:
Depreciation and amortization $ (1,380) $ 3,898
Deferred rent 1,985 1,785
Payroll and payroll
related costs 1,167 1,115
Other, net (248) 1,724
------------------------
$ 1,524 $ 8,522
------------------------
------------------------
(DOLLARS IN THOUSANDS)
1998 1997 1996
Income (loss) before
income taxes:
United States $ 50,986 $ 20,336 $ 16,709
International (9) (634) 668
---------------------------------------
$ 50,977 $ 19,702 $ 17,377
---------------------------------------
---------------------------------------
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory income tax rate to income before income taxes is
as follows:
(DOLLARS IN THOUSANDS)
1998 1997 1996
Computed income tax
expense at federal
statutory rate $ 17,842 $ 6,945 $ 6,082
Increase in income taxes
resulting from:
State income taxes,
net of federal
income tax benefit 1,836 1,033 953
Nondeductible merger
and transaction costs 2,228
Change in estimate 1,500
Other, principally
nondeductible
goodwill 811 1,422 891
------------------------------------
Income
tax expense $ 20,489 $ 13,128 $ 7,926
------------------------------------
------------------------------------
During 1997, the Company recorded a $1.5 million change in estimate associated
with income tax matters related to years prior to 1996 resulting from the
completion of an Internal Revenue Service examination.
7. EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has a qualified employee stock ownership plan (ESOP) covering
substantially all field supervisors, warehouse and corporate office employees.
Contributions to the ESOP are at the discretion of the Company.
PROFIT SHARING PLAN:
The Company has a qualified profit sharing plan (PSP) covering the same
employees as its ESOP. Contributions to the PSP are at the discretion of the
Company.
32 REGIS CORPORATION 1998
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 and PSP.
Contributions to the ESAP are at the discretion of the Company.
STOCK PURCHASE PLAN:
The Company has an employee stock purchase plan (SPP) available to substantially
all employees. Under terms of the plan, eligible employees may purchase the
Company's common stock through payroll deductions. The Company contributes an
amount equal to 15 percent of the purchase price of the stock to be purchased on
the open market, not to exceed an aggregate contribution of $2.2 million.
Company contributions to the aforementioned plans, which are charged to earnings
in the period contributed, included the following:
(DOLLARS IN THOUSANDS)
1998 1997 1996
ESOP $ 1,146 $ 662 $ 616
ESAP 301 257 231
SPP 274 223 172
STOCK OPTIONS:
The Company's Stock Option Plan (the Plan), as amended, provides for granting
both incentive stock options and nonqualified stock options. A total of
2,200,000 shares of common stock may be granted under the Plan to employees of
the Company for a term not to exceed 10 years from the date of grant. Options
granted to employees generally vest over a five year period. Options may also be
granted under this Plan to the Company's outside directors for a term not to
exceed five years from the vesting date. Options granted to outside directors
vest over a four year period, although the previous Supercuts Board members were
fully vested at the time of the merger.
The Plan contains restrictions on transferability, time of exercise, exercise
price and on disposition of any shares acquired through exercise of the options.
Incentive stock options are granted at not less than fair market value on the
date of grant. The Board of Directors determines the Plan participants and
establishes the terms and conditions of each option.
Separate from the Stock Option Plan described above, in an action approved by
shareholders in October 1996 in connection with the merger (Note 3) and
effective termination of the Supercuts stock option plans, outstanding Supercuts
stock options were converted to options to purchase approximately 400,000 shares
of Regis common stock on the basis of the exchange ratio established to effect
the merger.
Common shares available for grant as of June 30 were 467,550, 53,850 and 405,356
for 1998, 1997 and 1996, respectively.
Stock options outstanding and weighted average exercise prices are as follows:
OPTIONS OUTSTANDING
------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Balance, June 30, 1995 1,353,817 $12.24
Granted 473,400 16.25
Cancelled (79,262) 20.62
Exercised (114,150) 7.34
-----------------------------
Balance, June 30, 1996 1,633,805 13.32
Granted 307,500 20.44
Cancelled (102,117) 21.68
Exercised (271,357) 13.18
-----------------------------
Balance, June 30, 1997 1,567,831 14.20
Granted 328,500 26.00
Cancelled (236,570) 17.58
Exercised (105,664) 12.40
-----------------------------
Balance, June 30, 1998 1,554,097 $ 16.30
-----------------------------
-----------------------------
At June 30, 1998, the weighted average exercise price and remaining contractual
life of stock options are as follows:
RANGE OF $ 4.00- $ 12.38- $ 26.25-
EXERCISE PRICES $ 8.67 $ 26.00 $ 34.38 TOTAL
- -------------------------------------------------------------------------------
Total options
outstanding 622,547 834,950 96,600 1,554,097
Weighted average
exercise price $ 7.76 $ 21.09 $ 29.89 $ 16.30
Weighted average
remaining
contractual
life in years 5.4 8.5 4.7 7.0
Options exercisable 361,247 195,150 96,600 652,997
Weighted average
price of exercisable
options $ 7.60 $ 16.38 $ 29.89 $ 13.52
In 1997, the Company adopted SFAS No. 123, a standard of accounting and
reporting for stock-based compensation plans. The Company has continued to
measure compensation cost for its incentive stock plans using the intrinsic
value-based method of accounting it has historically used and, therefore, the
standard has no effect on the Company's operating results.
REGIS CORPORATION 1998 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 DATA)
1998 1997 1996
Net income:
As reported $ 30,488 $ 6,574 $ 9,451
Pro forma 29,989 6,000 8,528
Net income per share:
As reported $ 1.27 $ .28 $ .42
Pro forma 1.25 .26 .38
The pro forma information above only includes stock options granted in 1998,
1997 and 1996. Compensation expense under the fair-value-based method of
accounting will increase over the next few years as additional stock option
grants are considered.
The weighted average fair value per option granted during 1998, 1997 and 1996
was $10.92, $9.47 and $11.00, respectively. The weighted average fair value was
calculated by using the fair value of each option grant on the date of grant.
The fair value of options was calculated utilizing the Black-Scholes
option-pricing model and the following key assumptions:
1998 1997 1996
Risk-free interest rate 5.56 % 6.41 % 5.91 %
Expected life in years 6.0 6.5 7.0
Expected volatility 34.16 % 35.50 % 41.43 %
Expected dividend yield .38 % .39 % .25 %
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 $0.6 million, $0.4 million and $0.4 million in 1998, 1997 and 1996,
respectively.
The Company has a survivor benefit plan for the Chairman of the Board's spouse,
payable upon his death, at a rate of $0.3 million annually, adjusted for
inflation, for the remaining life of his spouse. The Company has funded its
future obligations under this plan through life insurance policies on the
Chairman of the Board (the Chairman).
The Company has entered into an agreement with the Chairman providing that the
Chairman will continue to render services to the Company until at least May
2007, and for such further period as may be agreed upon mutually. The Company
has agreed to pay the Chairman an annual amount of $0.6 million, adjusted for
inflation, for the remainder of his life. The Chairman has agreed that during
the period in which payments to him are made, as provided in the agreement, he
will not engage in any business competitive with the business conducted by the
Company. Compensation associated with this agreement is charged to expense as
services are provided.
Effective July 1, 1998, the Company established a survivor benefit plan for the
Chief Executive Officer's spouse, payable upon his death, at a rate of one half
of his deferred compensation benefit, adjusted for inflation, for the remaining
life of his spouse. The Company has funded its future obligations under this
plan through life insurance policies on the Chief Executive Officer.
8. SHAREHOLDERS' EQUITY:
In addition to the shareholder equity activity described in Note 7, the
following activity has taken place:
INCREASE IN AUTHORIZED SHARES AND DESIGNATION OF PREFERRED CLASS:
The Company has 50 million shares of capital stock authorized, par value $.05,
of which all outstanding shares and shares available under the Stock Option Plan
have been designated as common.
In addition, 250,000 shares of authorized capital stock have been designated as
Series A Junior Participating Preferred Stock (preferred stock). None of the
preferred stock has been issued.
SHAREHOLDERS' RIGHTS PLAN:
The Company has a shareholders' rights plan pursuant to which one preferred
share purchase right is held by shareholders for each outstanding share of
common stock.
The rights become exercisable only following the acquisition by a person or
group, without the prior consent of the Board of Directors, of 20 percent or
more of the Company's voting stock, or following the announcement of a tender
offer or exchange offer to acquire an interest of 20 percent or more. If the
rights become exercisable, they entitle all holders, except the take-over
bidder, to purchase one one-hundredth of a share of preferred stock at an
exercise price of $120, subject to adjustment, or in lieu of purchasing the
preferred stock, to purchase for the same exercise price common stock of the
Company (or in certain cases common stock of an acquiring company) having a
market value of twice the exercise price of a right.
34 REGIS CORPORATION 1998
9. GEOGRAPHIC BUSINESS OPERATIONS:
The Company owns and operates hairstyling and hair care salons throughout the
United States and in several other countries, principally the U.K. A summary of
the Company's operations for the United States and International is presented
below. All intercompany revenues and expenses have been eliminated.
(DOLLARS IN THOUSANDS)
1998 1997 1996
Revenues:
United States $ 679,777 $ 603,170 $ 531,599
International 118,367 110,049 85,708
-------------------------------------------
$ 798,144 $ 713,219 $ 617,307
-------------------------------------------
-------------------------------------------
Operating income:
United States $ 57,106 $ 26,584 $ 23,552
International 2,823 1,863 2,615
-------------------------------------------
$ 59,929 $ 28,447 $ 26,167
-------------------------------------------
-------------------------------------------
Total assets:
United States $ 356,369 $ 300,814 $ 275,954
International 25,981 30,721 28,000
-------------------------------------------
$ 382,350 $ 331,535 $ 303,954
-------------------------------------------
-------------------------------------------
10. NONRECURRING ITEMS:
The following table summarized nonrecurring items recorded by the Company:
(DOLLARS IN THOUSANDS)
1998 1997 1996
Salon closures and
dispositions,
primarily Supercuts $ 1,500 $ 7,000
Resolution of Supercuts
officer litigation 2,909 5,823
Merger and transaction
costs (Note 3) 14,322
Loss on divestiture of
Anasazi business
and assets $ 1,979
----------------------------------------
$ 1,979 $ 18,731 $ 12,823
----------------------------------------
----------------------------------------
Anasazi Exclusive Salon Products, LLC., a salon products manufacturing company,
was sold to Curtis Acquisition LLC, which is controlled by two members of the
Company's Board of Directors, one of whom is the Chairman.
Approximately $2.0 million, $.3 million and $4.4 million of the nonrecurring
items in 1998, 1997 and 1996, respectively, are non-cash in nature.
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Shareholders and Directors of
Regis Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the consolidated financial
position of Regis Corporation at June 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 21, 1998
REGIS CORPORATION 1998 35
QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
------------------------------------------------------------ YEAR
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ENDED
1998
Revenues $ 188,681 $ 198,952 $ 197,273 $ 213,238 $ 798,144
Operating income 12,115 15,821 13,889 18,104 59,929
Net income 5,796 7,957 6,769 9,966 30,488
Net income per
diluted share (a) .24 .33 .28 .41 1.27(c)
Dividends declared per share .02 .02 .02 .03 .09
1997
Revenues $ 170,605 $ 176,458 $ 175,488 $ 190,668 $ 713,219
Operating income 12,360 (7,966) 9,773 14,280 28,447
Net income (loss) 4,541 (8,880) 4,251 6,662 6,574
Net income (loss) per
diluted share (b) .20 (.38) .18 .29 .28(c)
Dividends declared per share .02 .02 .02 .02 .08
(a) For the quarter ended September 30, 1997 and for the full year 1998,
exclusive of nonrecurring items (Notes 3 and 10), net income per diluted share
would have been $.29 and $1.31, respectively.
(b) For quarters ended September 30, 1996, December 31, 1996, March 31, 1997,
June 30, 1997, and for the full year 1997, exclusive of nonrecurring items
(Notes 3 and 10), net income per diluted share would have been $.25, $.21, $.18,
$.28 and $.92, respectively.
(c) The summation of quarterly net income per share amounts does not equate to
the calculation for the full fiscal year, as quarterly calculations are
performed on a discrete basis.
STOCK DATA
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, 1998, Regis shares were owned by approximately 13,000
shareholders. The common stock price was $29.19 per share on August 14, 1998.
1998 1997
HIGH LOW HIGH LOW
1st quarter $25.50 $22.94 $34.00 $21.75
2nd quarter 27.00 22.97 27.50 15.25
3rd quarter 30.00 25.00 18.50 15.75
4th quarter 30.00 26.00 24.00 17.63
36 REGIS CORPORATION 1998
CORPORATE INFORMATION
BOARD OF DIRECTORS
Myron Kunin
CHAIRMAN OF THE BOARD
Regis Corporation
Paul D. Finkelstein
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Regis Corporation
Christopher A. Fox
EXECUTIVE VICE PRESIDENT
Regis Corporation
Rolf Bjelland
EXECUTIVE VICE PRESIDENT
CHIEF INVESTMENT OFFICER
Lutheran Brotherhood
Thomas L. Gregory
CONSULTANT
TLG Associates
Van Zandt Hawn
DIRECTOR AND FOUNDER
Goldner Hawn Johnson &
Morrison Incorporated
Susan S. Hoyt
EXECUTIVE VICE PRESIDENT
HUMAN RESOURCES
Staples, Inc.
David B. Kunin
CHAIRMAN
Anasazi Exclusive Salon
Products, LLC
CORPORATE OFFICERS
Myron Kunin
CHAIRMAN
Paul D. Finkelstein
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Christopher A. Fox
EXECUTIVE VICE PRESIDENT
Mary Anders
SENIOR VICE PRESIDENT,
MARKETING
Kris Bergly
CHIEF OPERATING OFFICER
Wal-Mart/SmartStyle Family
Hair Salons
Bert M. Gross
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND
SECRETARY
William E. Halfacre
SENIOR VICE PRESIDENT,
RETAIL AND PURCHASING
CHIEF OPERATING OFFICER
Trade Secret
Bruce D. Johnson
SENIOR VICE PRESIDENT,
DESIGN AND CONSTRUCTION
Mark Kartarik
SENIOR VICE PRESIDENT
PRESIDENT AND
CHIEF OPERATING OFFICER
Supercuts, Inc.
Sharon Kiker
CHIEF OPERATING OFFICER
Regis Hairstylists
Gordon Nelson
SENIOR VICE PRESIDENT,
FASHION AND EDUCATION
Randy L. Pearce
SENIOR VICE PRESIDENT, FINANCE,
AND CHIEF FINANCIAL OFFICER
Anthony W. E. Rammelt
SENIOR VICE PRESIDENT,
INTERNATIONAL MANAGING
DIRECTOR, EUROPE
Rob Ribnick
CHIEF OPERATING OFFICER
MasterCuts
ANNUAL MEETING
The annual meeting of Regis shareholders will be held at The Minneapolis
Institute of Arts, 2400 Third Avenue South, Minneapolis, Minnesota, on
October 13, 1998, at 4:00 p.m.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended June 30, 1998, may be
obtained without charge by writing to:
Bert M. Gross, Secretary
Regis Corporation
7201 Metro Boulevard
Minneapolis, Minnesota 55439
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
South St. Paul, Minnesota
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
CORPORATE HEADQUARTERS
7201 Metro Boulevard
Minneapolis, Minnesota 55439
PHONE (612) 947-7777
FAX (612) 947-7700
WEBSITE
http://www.regiscorp.com