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.
1999 1998 1997 1996 1995
Revenues $ 974,872 $ 848,444 $ 756,242 $ 654,642 $ 556,616
Operating income (a) 62,802 63,816 31,555 28,624 28,108
Net income (a) 30,346 32,699 8,258 11,077 12,366
Net income per diluted share (a) .76 .84 .22 .30 .35
Total assets 493,624 402,914 349,892 317,481 256,332
Long-term debt, including
current portion 166,986 126,628 120,242 107,061 90,975
Dividends declared $ .10 $ .06 $ .05 $ .05
(a) The following information is provided to facilitate
comparisons of operating income, net income and net income per diluted share,
absent the impact of certain nonrecurring activities (See Note 10 to the
consolidated financial statements). Exclusive of nonrecurring items,
operating income would have been $78,935, $65,795, $50,286 and $41,447 in
1999, 1998, 1997 and 1996, respectively. Exclusive of nonrecurring items, net
income and net income per diluted share, respectively, would have been
$41,901 and $1.05 in 1999; $33,811 and $.87 in 1998; $23,021 and $.61 in
1997; $18,607 and $.51 in 1996; and $11,661 and $.33 in 1995.
KEY RATIOS
For the Years Ended June 30,
1999 1998 1997
Net income per diluted share exclusive of goodwill amortization* 1.20 1.00 0.72
Gross margin percentage 43.5 % 43.2 % 42.4 %
Salon contribution percentage 17.7 % 17.1 % 15.8 %
Product sales mix 28.4 % 28.2 % 26.9 %
Operating income as a percent of revenues* 8.1 % 7.8 % 6.6 %
Debt-to-capitalization ratio 41.4 % 39.0 % 43.5 %
* Excludes nonrecurring items (see Note 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,
1999 1998 1997
Company-owned service revenues (1) 71.6% 71.8 % 73.1 %
Company-owned product revenues (1) 28.4 28.2 26.9
Franchise revenue 4.9 5.4 5.8
Company-owned operations:
Profit margins on service (2) 42.4 42.3 41.4
Profit margins on product (3) 46.2 45.4 45.1
Direct salon (1) 8.6 8.9 9.3
Rent (1) 13.8 13.9 13.9
Depreciation (1) 3.3 3.3 3.4
Direct salon contribution (1) 17.7 17.1 15.8
Selling, general and administrative 11.3 11.5 11.8
Depreciation and amortization 1.3 1.2 1.1
Nonrecurring items 1.7 0.2 2.5
Operating income 6.4 7.5 4.2
Income before income taxes 5.4 6.4 3.0
Net income 3.1 3.9 1.1
Operating income, excluding nonrecurring items 8.1 7.8 6.6
Net income, excluding nonrecurring items 4.3 4.0 3.0
(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
12 Regis Corporation 1999
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 4,954 hairstyling salons at
June 30, 1999 operating in two segments: domestic and international. The
Company's domestic segment includes 4,650 salons operating primarily under
the brand names of Regis Salons, MasterCuts, Trade Secret, SmartStyle,
Supercuts and Cost Cutters. The Company's international operations include
304 salons located in the United Kingdom. The Company has more than 31,000
employees worldwide.
During fiscal 1999, the Company's consolidated revenues increased 14.9
percent to $974.9 million. Exclusive of nonrecurring items, operating income
grew 20.0 percent to $78.9 million and net income per diluted share increased
20.7 percent to $1.05 per share, compared to $.87 per share in the prior
year. During fiscal 1998, the Company's consolidated revenues increased 12.2
percent to a record $848.4 million. Exclusive of nonrecurring items,
operating income grew 30.8 percent to $65.8 million and net income per
diluted share increased 42.6 percent to $.87 per share, compared to $.61 per
share in the prior year.
Financial data presented for fiscal 1998 and 1997 reflect the retroactive
effects of the March 1999 merger with Heidi's, Inc. (Heidi's) and the May
1999 merger with The Barbers, Hairstyling for Men & Women, Inc. (The Barbers)
which were accounted for as poolings-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 Heidi's and The Barbers for each of these periods.
RESULTS OF OPERATIONS
REVENUES
Revenues in fiscal 1999 grew to a record $974.9 million, an increase of
$126.4 million, or 14.9 percent, over fiscal 1998. Approximately 30 percent
of this increase is attributable to increases in same-store sales, with the
remaining increase due to net salon openings and acquisitions occurring in
fiscal 1999 and the full year impact of fiscal 1998 net salon openings and
acquisitions. Mall based and strip center salon operations in the United
States and Canada (Domestic salons) accounted for $129.9 million of the
increase in total revenues. Franchise income increased $1.8 million due to an
increase in sales of franchised salons. These increases were offset by a
decrease in revenue from the Company's International operations. During
fiscal 1999, the Company closed or disposed of its salon operations in South
Africa, Mexico, Ireland, Switzerland and France which resulted in a decrease
in revenues when compared to fiscal 1998.
BUSINESS MIX
(DOLLARS IN THOUSANDS)
1999 1998 1997
Domestic:
Regis $356,473 $319,404 $297,454
MasterCuts $123,454 $107,821 $ 94,963
Trade Secret $136,874 $115,024 $ 91,412
Wal-Mart $ 63,480 $ 45,908 $ 34,625
Strip Centers $145,888 $108,146 $ 94,904
Franchise Income $ 47,732 $ 45,965 $ 43,536
International: $100,971 $106,176 $ 99,848
-------- -------- --------
$974,872 $848,444 $756,242
======== ======== ========
REGIS CORPORATION 1999 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During fiscal 1999, same-store sales from all Domestic company-owned salons
open more than 12 months increased 5.6 percent, compared to increases of 5.8
percent and 3.1 percent in fiscal 1998 and 1997, respectively. Same-store
sales for the United Kingdom salons (U.K. salons) increased 1.2 percent in
fiscal 1999. Same-store sales increases achieved during fiscal 1999, 1998 and
1997 were driven primarily by increased customer transactions and market
based price increases in certain salon divisions. A total of 98 million
customers were served in fiscal 1999 compared to 91 million and 85 million
customers served in fiscal 1998 and 1997, respectively. The Company utilizes
an audiovisual-based training system in its salons. Management believes this
training system provides its employees with improved customer service and
technical skills, and positively contributes to the increase in customers
served.
System-wide sales, inclusive of non-consolidated sales generated from
franchisee salons, grew to $1.5 billion, $1.3 billion, and $1.1 billion in
fiscal 1999, 1998 and 1997, representing increases of 15.4 percent, 18.2
percent and 10.0 percent, respectively. The increase in system-wide sales in
fiscal 1999 and 1998 was the result of same-store sales increases from
existing salons and net salon openings as well as the total number of salons
added to the system through acquisitions. System-wide same-store sales
increased 5.4 percent, 5.3 percent and 2.6 percent in fiscal 1999, 1998 and
1997, respectively.
SERVICE REVENUES increased to $663.5 million, $576.5 million and $521.0
million for 1999, 1998 and 1997. The growth in service revenues of 15.1
percent and 10.7 percent in fiscal 1999 and 1998, respectively, was driven by
acquisitions, same store-sales growth, and accelerated new salon construction.
PRODUCT REVENUES increased to $263.7 million, $226.0 million and $191.7
million in fiscal 1999, 1998 and 1997. The growth in product revenue of 16.7
percent and 17.9 percent in fiscal 1999 and 1998, respectively, continues a
trend of escalating product revenues due to strong product same-store sales
growth, a reflection of continuous focus on product awareness, training and
acceptance of national label merchandise and opening an additional 108 Trade
Secret salons through new construction or acquisitions between the two
periods. In fiscal 1999, product revenues as a percent of total company-owned
revenues increased to 28.4 percent of revenues, compared to 28.2 percent and
26.9 percent of revenues in 1998 and 1997, respectively.
FRANCHISE REVENUE, including royalties and initial franchise fees from
franchisees, and product and equipment sales made by the Company to
franchisees, increased 3.8 percent in fiscal 1999 to $47.7 million from $46.0
million in fiscal 1998. In fiscal 1998, franchise revenue increased 5.6
percent, or $2.4 million, compared to fiscal 1997. The increase in franchise
revenue in 1999 and 1998 is primarily the result of an increase in royalties
on increased franchise sales, which sales are not included in the Company's
consolidated revenues and an increase in product and equipment sales to
franchisees.
REVENUES INCREASED 15 PERCENT FROM 1998.
REVENUE COMPONENTS
5 YEAR COMPOUND ANNUAL GROWTH RATE:
14.7%
$ MILLIONS
1997 1998 1999
Service 521.0 576.5 663.5
Product 191.7 226.0 263.7
Franchise 43.5 45.9 47.7
Total $756.2 $848.4 $974.9
14 REGIS CORPORATION 1999
COST OF REVENUE
The aggregate cost of product and service revenues in fiscal 1999 was $524.1
million, compared to $455.7 million and $410.8 million in fiscal 1998 and 1997,
respectively. As discussed in the following paragraphs, the resulting gross
margin percentage for fiscal 1999 improved to 43.5 percent of company-owned
revenues compared to 43.2 percent and 42.4 percent of company-owned revenues in
fiscal 1998 and 1997.
SERVICE MARGINS for fiscal 1999 improved 10 basis points to 42.4 percent of
company-owned revenues, compared to 42.3 percent and 41.4 percent in the two
preceding fiscal years. This continued improvement was driven by ongoing
efforts by the Company to control payroll costs in all operating divisions
and growth in the mix of the Company's higher service margin salon concepts,
primarily Supercuts, MasterCuts and Wal-Mart/SmartStyle.
PRODUCT MARGINS for fiscal 1999 improved to 46.2 percent of company-owned
revenues, compared to 45.4 percent and 45.1 percent in fiscal 1998 and 1997.
This 80 basis point improvement was primarily driven by lower product costs
in Supercuts and Trade Secret salons resulting from the benefit of Regis'
purchasing power. Fiscal 1998 product margins also benefited from lower
product costs, primarily in the Supercuts and Wal-Mart/SmartStyle salons.
COMBINED GROSS
MARGINS CONTINUED
TO IMPROVE IN 1999.
COMBINED GROSS MARGINS
1997 1998 1999
42.4% 43.2% 43.5%
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. Direct
salon expenses were $80.0 million in fiscal 1999, compared to $71.7 million
and $66.3 million in fiscal 1998 and 1997, and improved as a percent of
company-owned revenue to 8.6 percent, compared to 8.9 percent and 9.3 percent
in fiscal 1998 and 1997. The fiscal 1999 improvement in direct salon expenses
is a result of the Company's increased ability to leverage these costs
against strong same-store sales and a maturing salon base. The fiscal 1998
improvement in direct salon expenses was due to the closures of
under-performing stores, primarily Supercuts salons, as well as sales
leverage.
DIRECT SALON
CONTRIBUTION
INCREASED 60 BASIS
POINTS OVER 1998.
DIRECT SALON CONTRIBUTION
1997 1998 1999
15.8% 17.1% 17.7%
RENT
Rent expense in fiscal 1999 was $127.9 million, compared to $111.8 million
and $99.0 million in fiscal 1998 and 1997. Rent expense in fiscal 1999
increased 14.4 percent or $16.1 million from fiscal 1998. Rent expense in
fiscal 1999 improved 10 basis points to 13.8 percent of company-owned
revenues compared to 13.9 percent in fiscal 1998 and 1997, respectively. The
slight improvement is a result of leveraging this fixed cost against
same-store sales increases.
DEPRECIATION--SALON LEVEL
Depreciation expense at the salon level remained consistent in fiscal 1999 at
3.3 percent of revenues compared to 3.3 percent and 3.4 percent in fiscal 1998
and 1997.
REGIS CORPORATION 1999 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
DIRECT SALON CONTRIBUTION
For reasons previously discussed, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in
fiscal 1999 to $164.2 million or 17.7 percent of company-owned revenues,
compared to $137.0 million or 17.1 percent in fiscal 1998 and $112.5 million
or 15.8 percent in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses include field
supervision (payroll, related taxes and travel) and home office
administration costs (such as warehousing, salaries, occupancy costs and
professional fees). SG&A expenses increased $12.5 million in fiscal 1999 to
$110.3 million, compared to $97.9 million in fiscal 1998, but improved as a
percent of total revenue to 11.3 percent in 1999 from 11.5 percent and 11.8
percent in fiscal 1998 and 1997, respectively. The 20 basis point improvement
in SG&A in 1999 is a result of the Company's ability to leverage the fixed
cost components of this category against revenue increases. The 30 basis
point improvement in SG&A in fiscal 1998 was primarily driven by cost
reductions associated with the amalgamation of the Supercuts administrative
office functions.
DEPRECIATION AND AMORTIZATION--CORPORATE
Depreciation and amortization--corporate was 1.3 percent of total revenues in
1999, compared to 1.2 percent and 1.1 percent of total revenues in fiscal
1998 and 1997, respectively. Amortization expense increased in fiscal 1999
and 1998 due to the increased level of goodwill, associated with the
Company's salon acquisition activity. Fiscal 1999 depreciation expense
increased over fiscal 1998 and 1997, primarily due to increased depreciation
levels associated with the Company's fiscal 1998 purchases of additional
corporate office buildings and new distribution center.
NONRECURRING ITEMS
See Note 10 to the Consolidated Financial Statements.
OPERATING INCOME
Operating income in fiscal 1999 was $62.8 million, compared to $63.8 million
in fiscal 1998. Fiscal 1999 operating income was impacted by merger and
transaction costs associated with the Heidi's and The Barbers mergers, a
nonrecurring charge related to restructuring the Company's International
operations and nonrecurring costs associated with the Company's year 2000
remediation program.
Operating income increased to $63.8 million in 1998 from $31.6 million in
fiscal 1997. Fiscal 1997 was significantly affected by Supercuts-related
merger and transaction costs, and restructuring charges (nonrecurring items).
Exclusive of nonrecurring items, operating income in fiscal 1999 improved
20.0 percent to $78.9 million, or 8.1 percent of revenues, compared to $65.8
million and $50.3 million in fiscal 1998 and 1997, respectively. The annual
improvements were driven by improved gross margins and the overall leveraging
of fixed costs.
OPERATING INCOME
INCREASED 20%
OVER 1998.
OPERATING INCOME
$ MILLIONS
EXCLUDING NONRECURRING ITEMS
1997 1998 1999
$50.3 $65.8 $78.9
16 REGIS CORPORATION 1999
INTEREST
Interest expense in fiscal 1999 was $11.6 million, compared to $10.5
million and $10.7 million in fiscal 1998 and 1997, representing 1.2 percent,
1.2 percent and 1.4 percent of total revenues, respectively. Although debt
levels have increased, interest expense as a percent of sales has remained
relatively consistent due to the benefit of reduced interest rates and the
Company's ability to leverage this cost against revenue increases.
INCOME TAXES
The Company's effective tax rate in fiscal 1999 was 42.5 percent of pre-tax
income compared to 39.9 percent and 63.1 percent in fiscal 1998 and 1997. In
fiscal 1999, the Company's effective tax rate was negatively impacted by
nondeductible merger and transaction costs associated with the Company's
mergers with Heidi's and The Barbers, and the U.K. restructuring charges. In
fiscal 1997, the Company's effective tax rate was negatively affected by
nondeductible merger and transaction costs associated with the Supercuts
merger.
Exclusive of nonrecurring items, the Company's effective tax rate was 39.2
percent, 39.9 percent and 42.7 percent, respectively, in fiscal 1999, 1998
and 1997. In fiscal 1999, the Company's effective tax rate benefited from net
operating losses utilized by Heidi's, Inc. prior to the merger and an
increase in international pre-tax income during the fourth quarter of fiscal
1999 which is taxed at a lower rate. The fiscal 1997 effective tax rate was
negatively affected by the Company's inability to fully utilize the income
tax benefits of Supercuts operating costs in certain states. Additionally, as
part of its June 30, 1997 income tax provision, the Company recorded a $1.5
million change in estimate associated with income tax matters related to
years prior to 1997.
NET INCOME
Net income in fiscal 1999 was $30.3 million, or $0.76 per diluted share,
compared to net income of $32.7 million, or $.84 per diluted share, in fiscal
1998, and $8.3 million, or $.22 per diluted share, in fiscal 1997. Exclusive
of nonrecurring items, net income in fiscal 1999 increased to a record $41.9
million, or $1.05 per diluted share, compared to net income, exclusive of
nonrecurring items, of $33.8 million, or $.87 per diluted share, in fiscal
1998 and $23.0 million, or $.61 per diluted share in fiscal 1997. Earnings
per diluted share, exclusive of nonrecurring items, increased 20.7 percent
and 42.6 percent in fiscal 1999 and 1998, respectively. These increases
primarily resulted from sales increases, improved gross margins and
leveraging of fixed costs, as previously discussed.
EARNINGS PER SHARE
INCREASED 21% OVER
1998.
EARNINGS PER SHARE
DILUTED
EXCLUDING NONRECURRING ITEMS
1997 1998 1999
$0.61 $0.87 $1.05
REGIS CORPORATION 1999 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EFFECTS OF INFLATION
The Company compensates its Regis and International salon employees with
percentage commissions based on sales they generate, thereby enabling salon
payroll expense as a percent of revenues to remain relatively constant.
Accordingly, this provides the Company certain protection against
inflationary increases as payroll expense and related benefits (the Company's
major expense components) are, with respect to these divisions, variable
costs of sales. The Company does not believe inflation, due to its low rate,
has had a significant impact on the results of operations associated with
hourly paid hairstylists for the remainder of its mall-based and strip center
salons.
LIQUIDITY AND CAPITAL RESOURCES
Customers pay for salon services and merchandise in cash at the time of
sale, which reduces the Company's working capital requirements. Net cash
provided by operating activities in fiscal 1999 rose to $72.2 million
compared to $70.7 million in fiscal 1998. The increase in fiscal 1999 is due
to improved operating performance during the year partially offset by cash
paid for merger costs associated with The Barbers and Heidi's mergers of $3.0
million and the U.K. restructuring of $.3 million.
CAPITAL EXPENDITURES AND ACQUISITIONS
During fiscal 1999, the Company had worldwide capital expenditures of $76.2
million, of which $6.4 million related to acquisitions of 280 salons and $3.5
million for equipment acquired under capital leases. During fiscal 1999, the
Company constructed 282 new salons. The Company also completed 95 major
remodeling projects. All capital expenditures during fiscal 1999 were funded
by the Company's operations and borrowings under its revolving credit
facility.
NEW SALON CONSTRUCTION 1999
Regis 41
MasterCuts 47
Trade Secret 44
Wal-Mart/SmartStyle 78
Strip Centers (primarily Supercuts) 60
International 12
The Company anticipates its worldwide salon development program for fiscal
2000 will include approximately 360 new salons and 125 major remodeling and
conversion projects. It is expected that expenditures for these new salons
and other projects will be approximately $66.0 million in fiscal 2000,
excluding capital expenditures associated with acquisitions.
PROJECTED SALON CONSTRUCTION 2000
Regis 50
MasterCuts 50
Trade Secret 45
Wal-Mart/SmartStyle 120
Strip Centers (primarily Supercuts) 85
International 10
FINANCING
Financing activities are discussed in Note 4 to the Consolidated Financial
Statements.
Subsequent to the company's fiscal 1999 year end, the Company replaced both
of its existing revolving credit facilities with a new senior credit facility
which allows for borrowings of $180 million due in July, 2002, and bears
interest at prime rate or LIBOR rate plus .50 percent to 1.00 percent, based
on the Company's debt to capitalization ratio.
Merger and transaction costs are discussed in Note 3 to the Consolidated
Financial Statements.
Nonrecurring items are discussed in Note 10 to the Consolidated Financial
Statements.
18 REGIS CORPORATION 1999
The Company translates the financial statements of its international
subsidiaries to U.S. dollars for financial reporting purposes, and accordingly
is subject to fluctuations in currency exchange rates.
Management believes that cash generated from operations and amounts available
under its existing debt facilities will be sufficient to fund its anticipated
capital expenditures and required debt repayments for the foreseeable future.
DIVIDENDS
In February 1999, the board of directors approved a three-for-two stock
split of its common stock in the form of a 50 percent stock dividend
distributed on March 1, 1999 to shareholders of record on February 15, 1999.
All share and per share amounts have been restated to reflect the stock split.
The Company paid dividends of $.10 per share during fiscal 1999 and $.06 per
share during fiscal 1998. On August 24, 1999 the Board of Directors of the
Company declared a $.03 per share quarterly dividend payable September 22,
1999 to shareholders of record on September 7, 1999.
RETURN ON EQUITY
INCREASED 20 BASIS
POINTS IN 1999.
RETURN ON EQUITY
NET INCOME BEFORE
NONRECURRING ITEMS AS A
PERCENT OF
AVERAGE EQUITY
1997 1998 1999
16.0% 19.1% 19.3%
YEAR 2000
The Company previously initiated a comprehensive project to prepare its
computer systems for the Year 2000. The Company has completed all phases of
the project including the awareness, assessment, validation and
implementation phases. Accordingly, management believes the Year 2000 will
not have a significant impact on operations. As part of the overall project,
the Company is in the process of developing a contingency plan to mitigate
the Company's risk that primary vendors or other external forces could have
an impact on the Company's operations.
Costs associated with the Year 2000 are expensed as incurred and are funded
through operating cash flows. The Company has incurred $4.6 million related
to Year 2000 project costs from the project's inception in fiscal 1998
through fiscal 1999, of which $4.1 million was incurred and charged to
earnings during fiscal 1999. No significant additional costs are anticipated
to be incurred in the future.
The Company has contacted critical suppliers of products and services to
assess whether the suppliers' operations and the products and services they
provide are Year 2000 compliant or to monitor their progress toward Year 2000
compliance. The results of the Company's inquiries have indicated that the
majority of our critical suppliers are either compliant or have a plan in
place to be compliant by the end of 1999. There can be no absolute assurance
that another company's failure to ensure Year 2000 compliance would not have
an adverse effect on the Company.
REGIS CORPORATION 1999 19
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30
1999 1998
ASSETS
Current assets:
Cash $ 7,351 $ 7,678
Receivables, net 16,506 14,414
Inventories 70,056 56,030
Deferred income taxes 8,596 6,429
Other current assets 10,570 6,818
-----------------------------
Total current assets 113,079 91,369
Property and equipment, net 213,299 181,107
Goodwill 153,954 119,042
Other assets 13,292 11,396
-----------------------------
Total assets $ 493,624 $ 402,914
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 23,945 $ 20,091
Accounts payable 22,754 25,394
Accrued expenses 53,310 43,595
-----------------------------
Total current liabilities 100,009 89,080
Long-term debt 143,041 106,537
Other noncurrent liabilities 14,377 8,939
Commitments (Note 5)
Shareholders' equity:
Common stock, $.05 par value; issued and outstanding, 38,641,122 and
38,238,121 common shares at June 30, 1999 and 1998,
respectively 1,932 1,275
Additional paid-in capital 148,591 138,677
Accumulated other comprehensive loss (1,148) (1,677)
Retained earnings 86,822 60,083
-----------------------------
Total shareholders' equity 236,197 198,358
-----------------------------
Total liabilities and shareholders' equity $ 493,624 $ 402,914
=============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
20 REGIS CORPORATION 1999
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30
1999 1998 1997
Revenues:
Company-owned salons:
Service $ 663,426 $ 576,497 $ 520,990
Product 263,714 225,982 191,716
----------------------------------------------
927,140 802,479 712,706
Franchise income 47,732 45,965 43,536
----------------------------------------------
974,872 848,444 756,242
----------------------------------------------
Operating expenses:
Company-owned:
Cost of service 382,080 332,360 305,550
Cost of product 142,002 123,323 105,242
Direct salon 79,979 71,661 66,315
Rent 127,876 111,758 99,037
Depreciation 31,024 26,361 24,027
----------------------------------------------
762,961 665,463 600,171
Selling, general and administrative 110,336 97,875 88,963
Depreciation and amortization 12,983 10,012 8,403
Nonrecurring items 16,133 1,979 18,731
Other 9,657 9,299 8,419
----------------------------------------------
Total operating expenses 912,070 784,628 724,687
----------------------------------------------
Operating income 62,802 63,816 31,555
Other income (expense):
Interest (11,576) (10,492) (10,674)
Other, net 1,507 1,104 1,519
----------------------------------------------
Income before income taxes 52,733 54,428 22,400
Income taxes (22,387) (21,729) (14,142)
----------------------------------------------
Net income $ 30,346 $ 32,699 $ 8,258
==============================================
Net income per share:
Basic $ .79 $ .87 $ .23
==============================================
Diluted $ .76 $ .84 $ .22
==============================================
Weighted average common and
common equivalent shares outstanding 39,740 38,826 37,489
==============================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REGIS CORPORATION 1999 21
CONSOLIDATED STATEMENTS OF CHANGES ON SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS TOTAL INCOME
Balance, June 30, 1996 24,173,835 $ 1,209 $ 110,595 $ (2,088) $ 22,963 $ 132,679
Net income 8,258 8,258 $ 8,258
Foreign currency translation
adjustments 739 739 739
Proceeds from sale of common
stock 500,000 25 11,100 11,125
Proceeds from exercise of stock
options 271,082 14 3,696 3,710
Shares issued under company-
sponsored programs 15,058 1 237 238
Tax benefit realized upon exercise
of stock options 853 853
Dividends (1,722) (1,722)
-------------------------------------------------------------------------------------------
Balance, June 30, 1997 24,959,975 1,249 126,481 (1,349) 29,499 155,880 $ 8,997
==========
Net income 32,699 32,699 32,699
Foreign currency translation
adjustments (328) (328) (328)
Proceeds from sale of common
stock 400,000 20 10,390 10,410
Proceeds from exercise of stock
options 124,605 6 1,348 1,354
Shares issued under company-
sponsored programs 4,415 61 61
Tax benefit realized upon
exercise of stock options 397 397
Dividends (2,115) (2,115)
-------------------------------------------------------------------------------------------
Balance, June 30, 1998 25,488,995 1,275 138,677 (1,677) 60,083 198,358 $ 32,371
==========
Net income 30,346 30,346 30,346
Foreign currency translation
adjustments 529 529 529
Less: Reclassification adjustment
for translation losses realized
in net income (964)
Stock split effected in the form
of a stock dividend 12,741,490 637 (637)
Proceeds from exercise of stock
options 309,929 15 3,794 3,809
Shares issued under company-
sponsored programs 17,941 1 235 236
Shares issued in connection
with salon acquisitions 82,767 4 2,103 2,107
Tax benefit realized upon exercise
of stock options 1,389 1,389
Contribution of shareholder
debt to capital 3,030 3,030
Dividends (3,607) (3,607)
-------------------------------------------------------------------------------------------
Balance, June 30, 1999 38,641,122 $ 1,932 $ 148,591 $ (1,148) $ 86,822 $ 236,197 $ 29,911
===========================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
22 REGIS CORPORATION 1999
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30
1999 1998 1997
Cash flows from operating activities:
Net income $ 30,346 $ 32,699 $ 8,258
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 35,772 30,176 26,951
Amortization 8,296 6,455 5,808
Deferred income taxes (1,065) 7,143 1,059
Nonrecurring items 4,400 1,979 330
Other 1,638 233 537
Changes in operating assets and liabilities:
Accounts receivable (3,338) 1,992 (2,199)
Inventories (9,988) (11,335) (8,385)
Other current assets (3,649) 1 2,367
Other assets (2,191) (2,075) (2,096)
Accounts payable (3,120) (1,733) 6,556
Accrued expenses 11,055 3,919 (3,589)
Other noncurrent liabilities 4,011 1,229 (729)
----------------------------------------------
Net cash provided by operating activities 72,167 70,683 34,868
----------------------------------------------
Cash flows from investing activities:
Capital expenditures (66,325) (57,705) (40,831)
Proceeds from sale of assets 4,453 501 425
Purchases of salon assets, net of cash acquired
and certain obligations assumed (51,017) (24,837) (10,370)
-----------------------------------------------
Net cash used in investing activities (112,889) (82,041) (50,776)
-----------------------------------------------
Cash flows from financing activities:
Borrowings on revolving credit facilities 237,668 163,254 187,328
Payments on revolving credit facilities (225,075) (148,952) (203,425)
Proceeds from issuance of long-term debt 46,533 9,000 47,000
Repayment of long-term debt (18,768) (25,506) (21,379)
Increase (decrease) in negative book cash balances 602 (4,992)
Dividends paid (3,607) (2,115) (1,722)
Proceeds from issuance of common stock 3,701 11,825 15,073
-----------------------------------------------
Net cash provided by financing activities 40,452 8,108 17,883
-----------------------------------------------
Effect of exchange rate changes on cash (57) (77) 8
-----------------------------------------------
(Decrease) increase in cash (327) (3,327) 1,983
Cash:
Beginning of year 7,678 11,005 9,022
-----------------------------------------------
End of year $ 7,351 $ 7,678 $ 11,005
===============================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REGIS CORPORATION 1999 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Regis Corporation (the Company) owns, operates and franchises hairstyling
and hair care salons throughout the United States, the United Kingdom, Canada
and Puerto Rico. Substantially all of the hairstyling and hair care salons
owned and operated by the Company in the United States are located in leased
space in enclosed mall shopping centers or strip shopping centers. Franchised
salons are primarily located in strip shopping centers throughout the United
States.
At June 30, 1999, approximately 15 percent of the Company's outstanding
common stock is owned by Curtis Squire, Inc. (CSI), which is a holding
company controlled by the Chairman of the Board of Directors of the Company,
and approximately 5 percent is owned by management and the Company's benefit
plans.
BASIS OF PRESENTATION:
Consolidated financial statements for 1998 and 1997 have been restated to
include the retroactive effects of the March 1999 merger with Heidi's, Inc.
(Heidi's) and the May 1999 merger with The Barbers, Hairstyling for Men &
Women, Inc. (The Barbers). Both transactions were accounted for as
poolings-of-interests (Note 3).
RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to the current
year presentation.
CONSOLIDATION:
The financial statements include the accounts of the Company and all of its
wholly-owned subsidiaries. In consolidation, all material intercompany accounts
and transactions are eliminated.
FOREIGN CURRENCY TRANSLATION:
Financial position, results of operations and cash flows of the Company's
international subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rates in effect at each fiscal year end. Income statement accounts are
translated at the average rates of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in accumulated other comprehensive income (loss)
within shareholders' equity.
INVENTORIES:
Inventories consist principally of hair care products held either for use in
salon services or for sale. Inventories are stated at the lower of cost or
market with cost determined on the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives
(shorter of asset life or lease term for leasehold improvements).
Expenditures for maintenance and repairs and minor renewals and betterments
which do not improve or extend the life of the respective assets are
expensed. All other expenditures for renewals and betterments are
capitalized. The assets and related depreciation accounts are adjusted for
property retirements and disposals with the resulting gain or loss included
in operations. Fully depreciated assets remain in the accounts until retired
from service.
Effective July 1, 1998, the Company adopted Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The SOP requires the Company to capitalize both internal and
external costs of developing or obtaining computer software for internal use
based on certain criteria. Previously, the Company only capitalized costs
associated with externally developed or purchased computer software.
GOODWILL:
Goodwill recorded in connection with the fiscal 1989 purchase of the
publicly held minority interest in the Company, and acquisitions of business
operations in which the Company has not previously been involved, is
amortized on a straight-line basis, generally over 40 years. Goodwill
recorded in connection with acquisitions which expand the Company's existing
business activities (acquisition of salon sites) is amortized on a
straight-line basis, generally over 20 years.
ASSET IMPAIRMENT ASSESSMENTS:
The Company periodically measures and evaluates the recoverability of its
tangible and intangible noncurrent assets using undiscounted cash flow
analyses.
FRANCHISE INCOME AND EXPENSES:
Franchise income includes royalties, initial franchise fees from franchisees
and sales of product and equipment to franchisees. Royalties are recognized
as income in the month in which franchisee services are rendered or products
are sold by franchisees. The Company recognizes income from initial franchise
fees at the time franchisee salons are opened. Product sales by the Company
to franchisees are recorded at the time product is shipped to franchise
locations. Franchise expenses include all direct expenses such as the cost of
product and equipment sold to franchisees, salaries, marketing costs, and an
allocation of general corporate overhead and occupancy expenses. Cost of
product and equipment sold to franchisees is included in other operating
expenses in the Consolidated Statement of Operations. All other expenses
described above associated with franchise operations are included in selling,
general and administrative expenses in the Consolidated Statement of
Operations.
24 REGIS CORPORATION 1999
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
bases of assets and liabilities using currently enacted tax rates in effect
for the years in which the differences are expected to reverse. Income tax
expense is the current tax payable for the period and the change during the
period in deferred tax assets and liabilities.
NET INCOME PER SHARE:
Basic earnings per share is calculated as net income divided by
weighted-average common shares outstanding. The Company's only dilutive
securities are issuable under the Company's stock option plan. Diluted
earnings per share is calculated as net income divided by weighted-average
common shares outstanding, increased to include assumed exercise of dilutive
stock options (common equivalent shares).
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share:
1999 1998 1997
Weighted average shares
for basic earnings
per share 38,426,712 37,712,951 36,402,041
Dilutive effect of stock
options 1,312,886 1,112,825 1,087,282
----------------------------------------------
Weighted average shares
for diluted earnings
per share 39,739,598 38,825,776 37,489,323
==============================================
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME:
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". This statement
established standards for reporting and presenting comprehensive income and its
components. Components of comprehensive income for the Company include net
income and foreign currency translation adjustments and are presented in the
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income.
2. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet
accounts:
(DOLLARS IN THOUSANDS)
1999 1998
Property and equipment:
Land $ 2,190 $ 2,190
Buildings and improvements 20,377 19,468
Equipment, furniture, software
and leasehold improvements 340,105 285,336
Equipment, furniture and lease-
hold improvements under
capital leases 14,093 13,718
---------------------------
376,765 320,712
Less accumulated depreciation
and amortization (157,828) (135,730)
Less amortization of equipment,
furniture and leasehold
improvements under capital
leases (5,638) (3,875)
---------------------------
$ 213,299 $ 181,107
===========================
Goodwill $ 190,272 $ 147,123
Less accumulated amortization (36,318) (28,081)
---------------------------
$ 153,954 $ 119,042
===========================
Accrued expenses:
Payroll and payroll related costs $ 26,308 $ 24,700
Insurance 8,656 6,989
Transaction and restructuring 5,981 1,630
Other 12,365 10,276
---------------------------
$ 53,310 $ 43,595
===========================
Transaction and Restructuring:
UTILIZATION
JULY 1, 1999 JUNE 30,
1998 CHARGE CASH NON-CASH 1999
Restructuring--
International
Severance $ 966 $ (404) $ 562
Salon closures
& dispositions 3,806 193 $ (2,812) 1,187
Other 844 (105) (388) 351
--------------------------------------------------------------------
5,616 (316) (3,200) 2,100
Restructuring--Mergers
Severance $ 1,232 2,526 (875) 2,883
Salon closures
& dispositions 398 430 (93) (620) 115
Other 1,400 (74) (580) 746
--------------------------------------------------------------------
1,630 4,356 (1,042) (1,200) 3,744
Transaction Charges--
Mergers 2,066 (1,929) 137
--------------------------------------------------------------------
1,630 $12,038 $ (3,287) $ (4,400) $ 5,981
====================================================================
REGIS CORPORATION 1999 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides supplemental disclosures of cash flow activity:
(DOLLARS IN THOUSANDS)
1999 1998 1997
Cash paid during the
year for:
Interest $ 11,256 $ 10,111 $ 10,985
Income taxes $ 24,180 $ 14,486 $ 13,985
Non-cash investing and financing activities include the following:
- - In 1999 and 1998, the Company financed capital expenditures totaling $3.5
million and $5.9 million, respectively, through the issuance of capital
leases.
- - In 1999, in connection with the Company's merger with Heidi's, a
shareholder contributed a $3.0 million note to equity.
- - In 1999 and 1998, in connection with various acquisitions, the Company
entered into seller-financed payables and non-compete agreements as well
as issuing 82,767 shares of the Company's stock (Note 3).
- - In 1997, in connection with various acquisitions, the Company entered into
seller-financed notes payable of approximately $2.6 million.
3. MERGERS AND ACQUISITIONS:
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC. MERGER:
Effective May 20, 1999, the Company consummated the merger with The Barbers,
Hairstyling for Men & Women, Inc. (The Barbers) in a stock-for-stock
transaction. The Barbers was a national operator and franchisor of 979
affordable hair care salons. Each shareholder of The Barbers received .50
shares of the Company's common stock in exchange for each share of The
Barbers common stock, resulting in the issuance of approximately 2.0 million
shares of the Company's common stock. The Barbers transaction has been
accounted for as a pooling-of-interests. Prior period financial statements
have been restated to reflect this merger as if the merged companies had
always been combined.
As a result of the merger, the Company recorded a nonrecurring charge of $4.8
million during the quarter ended June 30, 1999. This charge included $1.4
million for professional fees including investment banking, legal, accounting
and miscellaneous transaction costs and $3.4 million for severance and other
costs, principally associated with the closure of The Barbers headquarters.
Severance expense of $2.1 million covered the termination of approximately 20
employees of The Barbers who had duplicate positions within the corporate
office functions. These corporate overhead departments primarily included
finance, accounting and human resources.
Revenues and net income for each of the combining entities prior to the merger
were as follows (dollars in thousands):
NINE MONTHS YEAR YEAR
ENDED ENDED ENDED
MARCH 31, JUNE 30, JUNE 30,
1999 1998 1997
REVENUES:
Regis $693,063 $822,964 $735,415
The Barbers 20,984 25,480 20,827
----------------------------------------
Combined total $714,047 $848,444 $756,242
========================================
NET INCOME:
Regis $ 24,321 $ 30,988 $ 7,034
The Barbers 1,472 1,711 1,224
----------------------------------------
Combined total $ 25,793 $ 32,699 $ 8,258
========================================
HEIDI'S, INC. MERGER:
Effective March 15,1999, the Company consummated the merger with Heidi's,
Inc. (Heidi's), a company based in Detroit, Michigan which operated 24 salons
in shopping malls. Under the terms of the merger agreement, the shareholders
of Heidi's, a privately held company, received 537,937 shares of Regis
Corporation common stock. The transaction has been accounted for as a
pooling-of-interests. Prior period financial statements have been restated to
reflect this merger as if the merged companies had always been combined.
As a result of the merger, the Company recorded a nonrecurring charge of $1.2
million during the quarter ended March 31, 1999. This charge included $0.7
million for professional fees including investment banking, legal, accounting
and miscellaneous transaction costs, $0.5 million for severance and other
costs principally associated with the closure of Heidi's headquarters.
Severance expense of $0.4 million covered the termination of approximately
ten Heidi's employees who had duplicate positions within corporate office
functions. In addition, during the fourth quarter of 1999, the Company
recorded a $0.4 million charge related to impaired salon assets.
Revenues and net income for each of the combining entities prior to the merger
were as follows (dollars in thousands):
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1998 1997
REVENUES:
Regis $ 441,367 $ 798,144 $ 713,219
Heidi's 13,367 24,820 22,196
---------------------------------------
Combined total $ 454,734 $ 822,964 $ 735,415
=======================================
NET INCOME:
Regis $ 16,882 $ 30,488 $ 6,574
Heidi's 443 500 460
---------------------------------------
Combined total $ 17,325 $ 30,988 $ 7,034
=======================================
26 REGIS CORPORATION 1999
SUPERCUTS, INC. MERGER:
During October 1996, the Company received shareholder
approval for its merger with Supercuts, Inc. (Supercuts) in a stock-for-stock
transaction, resulting in the issuance of 4.5 million shares of the Company's
common stock. Supercuts was the national operator of approximately 430
company-owned and franchisor of approximately 740 affordable hair care salons
at the acquisition date. As a result of the merger, the Company recorded a
pre-tax merger restructuring and transaction charge of $14.3 million.
The Supercuts transaction has been accounted for as a pooling-of-interests.
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.
OTHER ACQUISITIONS:
During 1999 and 1998, the Company made numerous acquisitions in addition to
its mergers with The Barbers and Heidi's. These acquisitions have been
recorded using the purchase method of accounting. Accordingly, the purchase
prices have been allocated to assets acquired and liabilities assumed based
on their estimated fair values at the date of acquisition. The acquisitions
recorded using the purchase method of accounting, individually and in the
aggregate, are not material to the Company's operations.
Costs in excess of net tangible and identifiable intangible assets acquired
and components of the aggregate purchase prices of the acquisitions were as
follows:
(DOLLARS IN THOUSANDS)
1999 1998
Costs in excess of net tangible and
identifiable intangible assets
acquired $45,147 $21,743
======================
Components of aggregate purchase price:
Cash $51,017 $24,837
Stock 2,107
Current and noncurrent
payables 2,830 2,180
----------------------
$55,954 $27,017
======================
4. FINANCING ARRANGEMENTS:
The Company's long-term debt consists of the following:
(DOLLARS IN THOUSANDS)
INTEREST MATURITY
RATE % DATES 1999 1998
Senior term notes 6.27 - 8.18 2000-2008 $ 109,919 $ 68,000
Revolving credit
facilities 5.96 - 7.38 2000-2001 41,343 28,750
Equipment and
leasehold notes
payable 8.00 - 11.90 2000-2004 11,236 12,113
U.K. term notes 5.23 - 5.40 2001-2003 520 5,827
Other notes payable 5.00 - 11.90 2000-2007 3,968 11,938
---------------------------
166,986 126,628
Less current portion (23,945) (20,091)
---------------------------
Long-term portion $ 143,041 $ 106,537
===========================
In January 1999, the Company borrowed $15 million under a 6.27 percent senior
term note due June 2003 and $10 million under a 6.83 percent senior term note
due December 2005 to finance recent acquisitions by the Company. In September
1998, the Company borrowed $7.5 million under a 6.55 percent senior term note
due September 2003 to refinance the Company's distribution center revolving
line of credit established in fiscal 1998.
In July 1998, the Company paid down its revolving credit facilities by $14.0
million with the proceeds of a 7.14 percent senior term note with interest due
quarterly, and principal payments of $9.0 million and $5.0 million due in July
2007 and 2008, respectively.
In March 1997, the Company entered into a treasury lock agreement for the
purpose of establishing the effective interest rate on the refinancing of a
$14.0 million senior term note which matured in June 1998. The contract was
entered into to reduce the risk to the Company of future interest rate
fluctuations. The contract had a notional amount of $14.0 million and was
tied to the U.S. government ten-year treasury note rate. Upon settlement of
the agreement in June 1998, the Company incurred a loss of $1.6 million on
the contract. This loss is being amortized as additional interest expense
through 2008. The Company does not enter into financial instruments for
trading or speculative purposes.
In March 1999, the Company retired the majority of its U.K. term notes due
June 2001 with proceeds from its revolving line of credit. To facilitate
this, the Company amended its existing working capital line of credit
agreement to increase the amount available by $10 million to $45 million,
eliminated covenants related to the Company's international operations and
added a multi-
REGIS CORPORATION 1999 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
currency provision to the existing revolving credit facility. This facility
bears interest at the prime rate or LIBOR rate plus 1.00 to 1.25 percent
based on the Company's debt to capitalization ratio. The prime rate at June
30, 1999 and 1998 was 7.75 percent and 8.5 percent, respectively. The
revolving credit facility requires a quarterly commitment fee at the rate of
1/4 percent per year on the unused portion of the facility. Letters of credit
totaling $0.9 million were outstanding at June 30, 1999 and 1998, which
reduce the amount available under the revolving credit facility.
The Company also has an additional revolving credit facility which, at the
discretion of the lender, allows for borrowings up to $20.0 million and bears
interest at the prime rate or LIBOR plus 1.0 percent. There were $10 million
of borrowings under this facility as of June 30, 1999, and no borrowings as
of June 30, 1998.
In July 1999, the Company replaced both of its existing revolving credit
facilities with a new senior credit facility which allows for borrowings of
$180 million due in July, 2002, and bears interest at prime rate or LIBOR
rate plus .50 percent to 1.00 percent, based on the Company's debt to
capitalization ratio.
The equipment and leasehold notes payable are primarily comprised of capital
lease obligations totaling $8.9 million at June 30, 1999 and 1998,
respectively. These capital lease obligations are payable in monthly
installments over five years.
The debt agreements contain covenants, including limitations on incurrence of
debt, granting of liens, investments, merger or consolidation, and
transactions with affiliates. In addition, the Company must maintain
specified interest coverage and debt-to-equity ratios.
The fair values of the senior term, equipment and leasehold and subordinated
notes payable, based upon discounted cash flow analyses using the Company's
current incremental borrowing rate, approximate their carrying values at June
30, 1999.
Aggregate maturities of long-term debt at June 30, 1999 are as follows:
FISCAL YEAR (DOLLARS IN THOUSANDS)
2000 $ 23,945
2001 17,043
2002 34,710
2003 10,545
2004 17,676
Thereafter 63,067
----------
$ 166,986
==========
5. COMMITMENTS:
OPERATING LEASES:
The Company is committed under long-term operating leases for the rental of
most of its company-owned salon locations. The terms of the leases range from
one to 20 years, with many leases renewable for an additional five to ten
year term at the option of the Company, and certain leases include escalation
provisions. For certain leases, the Company is required to pay additional
rent based on a percent of sales and, in most cases, real estate taxes and
other expenses. Rent expense for the Company's international department store
salons is based primarily on a percent of sales.
The Company also leases the premises in which the majority of its franchisees
operate and has entered into corresponding sublease arrangements with the
franchisees. These leases, generally with terms of approximately five years,
are expected to be renewed on expiration. Future minimum lease payments for
the next five years, which are reimbursable from the franchisees under
sublease arrangements, are approximately $22.6 million annually. All
additional lease costs are passed through to the franchisees.
Total rent expense, net of sublease income from franchisees, includes the
following:
(DOLLARS IN THOUSANDS)
1999 1998 1997
Minimum rent $ 79,499 $ 73,265 $ 64,580
Percentage rent based
on sales 22,513 16,912 16,799
Real estate taxes and
other expenses 25,864 21,581 17,658
----------------------------------------
$ 127,876 $ 111,758 $ 99,037
========================================
FUTURE MINIMUM LEASE PAYMENTS:
As of June 30, 1999, future minimum lease payments (excluding percentage rents
based on sales and sublease rental obligations which are passed through to the
franchisees) due under existing noncancellable operating leases with remaining
terms of greater than one year are as follows:
FISCAL YEAR (DOLLARS IN THOUSANDS)
2000 $ 92,084
2001 79,165
2002 66,939
2003 55,342
2004 43,064
Thereafter 98,837
---------
Total minimum lease payments $ 435,431
=========
28 REGIS CORPORATION 1999
SALON DEVELOPMENT PROGRAM:
As a part of its salon development program, the Company continues to
negotiate and enter into leases and commitments for the acquisition of
equipment and leasehold improvements related to future salon locations.
6. INCOME TAXES:
The provision for income taxes consists of:
(DOLLARS IN THOUSANDS)
1999 1998 1997
Current:
Federal $ 20,661 $ 12,401 $ 11,070
State 3,190 2,019 1,721
International (399) 166 292
Deferred:
United States (393) 7,039 1,083
International (672) 104 (24)
----------------------------------
$ 22,387 $ 21,729 $ 14,142
==================================
The components of the net deferred tax assets are as follows:
(DOLLARS IN THOUSANDS)
1999 1998
Net current deferred
tax asset:
Insurance $ 2,587 $ 2,234
Payroll and payroll 2,624 2,200
related costs
Nonrecurring items 2,581 2,065
Other, net 804 (70)
-------------------------
$ 8,596 $ 6,429
=========================
Net noncurrent deferred
tax asset:
Depreciation and
amortization $ (3,496) $ (1,235)
Deferred rent 2,128 1,985
Payroll and payroll
related costs 2,444 1,265
Other, net (268) (105)
-------------------------
$ 808 $ 1,910
=========================
(DOLLARS IN THOUSANDS)
1999 1998 1997
Income (loss) before
income taxes:
United States $ 58,567 $ 54,437 $ 23,034
International (5,834) (9) (634)
-------------------------------------------
$ 52,733 $ 54,428 $ 22,400
===========================================
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory rate to earnings before
income taxes, as a result of the following:
1999 1998 1997
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal
income tax benefit 3.4 3.6 5.0
Nondeductible
merger and
transaction costs 2.5 9.9
Change in estimate 6.7
Other, principally
non-deductible
goodwill 1.6 1.3 6.5
-------------------------------
42.5% 39.9% 63.1%
===============================
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.
EXECUTIVE STOCK AWARD PLAN:
The Company has a nonqualified executive stock award plan (ESAP) covering
those employees not eligible to participate under the qualified ESOP.
Contributions to the ESAP are at the discretion of the Company.
STOCK PURCHASE PLAN:
The Company has an employee stock purchase plan (SPP) available to
substantially all employees. Under terms of the plan, eligible employees may
purchase the Company's common stock through payroll deductions. The Company
contributes an amount equal to 15 percent of the purchase price of the stock
to be purchased on the open market, not to exceed an aggregate contribution
of $2.2 million.
REGIS CORPORATION 1999 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company contributions to the aforementioned plans, which are charged to
earnings in the period contributed, included the following:
(DOLLARS IN THOUSANDS)
1999 1998 1997
ESOP $1,303 $1,146 $ 662
ESAP 248 301 257
SPP 341 274 223
REGIS 401(K)PLAN:
Effective July 1, 1999, the Company established a qualified 401(k) defined
contribution plan covering substantially all field supervisors, warehouse and
corporate office employees.
STOCK OPTIONS:
The Company's Stock Option Plan (the Plan), as amended, provides for granting
both incentive stock options and nonqualified stock options. A total of
3,300,000 shares of common stock may be granted under the Plan to employees
of the Company for a term not to exceed 10 years from the date of grant.
Options granted to employees generally vest over a five year period. Options
may also be granted under this Plan to the Company's outside directors for a
term not to exceed five years from the vesting date. Options granted to
outside directors vest over a four year period.
The Plan contains restrictions on transferability, time of exercise, exercise
price and on disposition of any shares acquired through exercise of the
options. Incentive stock options are granted at not less than fair market
value on the date of grant. The Board of Directors determines the Plan
participants and establishes the terms and conditions of each option.
In May 1999, in connection with The Barbers merger (Note 3) and effective
termination of The Barbers stock option plans, outstanding stock options and
warrants of The Barbers were converted to options to purchase approximately
370,000 shares of Regis common stock on the basis of the exchange ratio
established to effect the merger.
In October 1996, in connection with the Supercuts merger (Note 3) and
effective termination of the Supercuts stock option plans, outstanding
Supercuts stock options were converted to options to purchase approximately
400,000 shares of Regis common stock on the basis of the exchange ratio
established to effect the merger.
Common shares available for grant as of June 30, 1999, 1998 and 1997, were
611,095, 579,820 and 895,275, respectively.
Stock options outstanding and weighted average exercise prices are as follows:
OPTIONS OUTSTANDING
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
Balance, June 30, 1996 2,817,452 $ 8.18
Granted 485,250 13.47
Cancelled (150,924) 14.45
Exercised (412,100) 8.71
------------------------
Balance, June 30, 1997 2,739,678 $ 8.69
Granted 538,505 17.24
Cancelled (272,163) 13.41
Exercised (191,748) 7.20
------------------------
Balance, June 30, 1998 2,814,272 $ 9.97
Granted 28,500 $ 19.53
Cancelled (37,275) 14.30
Exercised (309,929) 11.29
------------------------
Balance, June 30, 1999 2,495,568 $ 9.88
========================
At June 30, 1999, the weighted average exercise prices and remaining
contractual lives of stock options are as follows:
RANGE OF $2.10- $5.45- $9.33- $16.67-
EXERCISE PRICES $5.00 $8.25 $15.50 $24.25 TOTAL
Total options
outstanding 719,825 646,613 559,050 570,080 2,495,568
Weighted average
exercise price $ 4.20 $ 6.52 $ 13.21 $ 17.64 $ 9.88
Weighted average
remaining
contractual life
in years 3.97 5.13 7.15 8.49 6.01
Options exercisable 539,822 598,801 282,077 142,050 1,562,750
Weighted average
price of
exercisable
options $ 3.93 $ 6.39 $ 12.75 $ 17.95 $ 7.74
30 REGIS CORPORATION 1999
The Company measures compensation cost for its incentive stock plans using the
intrinsic value-based method of accounting. Had the Company used the
fair-value-based method of accounting for its stock option and incentive plans
beginning in 1996 and charged compensation cost against income, over the vesting
period based on the fair value of options at the date of grant net income and
net income per share would have been as follows:
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
Net income:
As reported $ 30,346 $ 32,699 $ 8,258
Pro forma 29,213 32,046 7,609
Net income per diluted share:
As reported $ .76 $ .84 $ .22
Pro forma $ .74 $ .83 $ .20
The pro forma information above only includes stock options granted in 1999,
1998 and 1997. Compensation expense under the fair-value-based method of
accounting will increase over the next few years as additional stock option
grants are considered.
The weighted-average fair value per option granted during 1999, 1998 and 1997
was $12.23, $7.33 and $5.90, respectively, calculated by using the fair value
of each option grant on the date of grant. The fair value of options was
calculated utilizing the Black-Scholes option-pricing model and the following
key assumptions:
1999 1998 1997
Risk-free interest rate 5.60 % 5.56 % 6.41 %
Expected life in years 6.0 6.0 6.5
Expected volatility 37.35 % 34.16 % 35.50 %
Expected dividend yield .42 % .38 % .39 %
OTHER:
The Company has established unfunded deferred compensation plans which cover
certain management and executive personnel. The Company maintains life
insurance policies on the plans' participants. The amounts charged to
earnings for these plans were $1.9 million, $0.6 million and $0.4 million in
1999, 1998 and 1997, respectively.
The Company has a survivor benefit plan for the Chairman of the Board's
spouse, payable upon his death, at a rate of $300,000 annually, adjusted for
inflation, for the remaining life of his spouse. The Company has funded its
future obligations under this plan through life insurance policies on the
Chairman of the Board (the Chairman).
The Company has entered into an agreement with the Chairman providing that
the Chairman will continue to render services to the Company until at least
May 2007, and for such further period as may be agreed upon mutually. The
Company has agreed to pay the Chairman an annual amount of $0.6 million,
adjusted for inflation, for the remainder of his life. The Chairman has
agreed that during the period in which payments to him are made, as provided
in the agreement, he will not engage in any business competitive with the
business conducted by the Company. Compensation associated with this
agreement is charged to expense as services are provided.
Effective July 1, 1998, the Company established a survivor benefit plan for
the Chief Executive Officer's spouse, payable upon his death, at a rate of
one half of his deferred compensation benefit, adjusted for inflation, for
the remaining life of his spouse. The Company has funded its future
obligations under this plan through life insurance policies on the Chief
Executive Officer.
8. SHAREHOLDERS' EQUITY:
In addition to the shareholder equity activity described in Note 7, the
following activity has taken place:
STOCK SPLIT
In February 1999, the board of directors approved a three-for-two stock split of
its common stock in the form of a 50 percent stock dividend distributed on March
1, 1999 to shareholders of record on February 15, 1999. All share and per share
amounts have been restated to reflect the stock split.
AUTHORIZED SHARES AND DESIGNATION OF PREFERRED CLASS:
The Company has 50 million shares of capital stock authorized, par value $.05,
of which all outstanding shares, and shares available under the Stock Option
Plan, have been designated as common.
In addition, 250,000 shares of authorized capital stock have been designated as
Series A Junior Participating Preferred Stock (preferred stock). None of the
preferred stock has been issued.
REGIS CORPORATION 1999 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHAREHOLDERS' RIGHTS PLAN:
The Company has a shareholders' rights plan pursuant to which one preferred
share purchase right is held by shareholders for each outstanding share of
common stock. The rights become exercisable only following the acquisition by
a person or group, without the prior consent of the Board of Directors, of 20
percent or more of the Company's voting stock, or following the announcement
of a tender offer or exchange offer to acquire an interest of 20 percent or
more. If the rights become exercisable, they entitle all holders, except the
take-over bidder, to purchase one one-hundredth of a share of preferred stock
at an exercise price of $120, subject to adjustment, or in lieu of purchasing
the preferred stock, to purchase for the same exercise price common stock of
the Company (or in certain cases common stock of an acquiring company) having
a market value of twice the exercise price of a right.
9. SEGMENT INFORMATION:
Commencing with its 1999 fiscal year end reporting, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This new standard requires that public companies report
financial and descriptive information about their reportable operating
segments, generally based on the way that management organized the segments
within the enterprise for making operating decisions and assessing
performance.
Each of the Company's operating segments have generally similar product and
services. The Company is organized to manage its operations based on
geographical location. The Company's operating segments have been aggregated
into two reportable segments: domestic salons and international salons. The
Company operates or franchises 4,650 domestic salons located within
high-profile regional malls and strip shopping centers under several
different concepts including Regis Salons, MasterCuts, Trade Secret,
SmartStyle, Supercuts and Cost Cutters brand names. The Company's
International segment includes 304 salons operating in leading department
stores, mass merchants and high street locations.
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Consolidated Financial Statements. The Company
evaluates the performance of its operating segments based on direct salon
contribution, before supervision and corporate overhead expenses.
Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's reportable segments
is shown in the following table.
(DOLLARS IN THOUSANDS)
1999 1998 1997
Company-owned revenues:
Domestic $826,169 $696,303 $613,358
International 100,971 106,176 99,348
----------------------------------------
Total $927,140 $802,479 $712,706
========================================
Salon contribution:
Domestic $151,643 $124,137 $101,711
International 12,536 12,879 10,824
----------------------------------------
Total $164,179 $137,016 $112,535
========================================
Salon depreciation
and amortization:
Domestic $ 27,696 $ 23,108 $ 20,879
International 3,328 3,253 3,148
----------------------------------------
Total $ 31,024 $ 26,361 $ 24,027
========================================
Total assets:
Domestic $372,956 $274,192 $226,703
International 19,250 26,408 30,671
Corporate 101,418 102,314 93,219
----------------------------------------
Total $493,624 $402,914 $350,593
========================================
Long-lived assets:
Domestic $307,439 $239,423 $198,622
International 16,236 21,333 23,957
Corporate 43,578 39,393 20,359
----------------------------------------
Total $367,253 $300,149 $242,938
========================================
Capital expenditures:
Domestic $ 50,445 $ 38,180 $ 32,063
International 3,402 2,706 3,211
Corporate 12,478 16,819 5,557
----------------------------------------
Total $ 66,325 $ 57,705 $ 40,831
========================================
Purchases of salon
assets:
Domestic $ 50,866 $ 24,837 $ 9,941
International 151 429
----------------------------------------
Total $ 51,017 $ 24,837 $ 10,370
========================================
In addition to the company-owned revenues detailed in the table above, the
Company also recorded franchise income of $47.7 million, $46.0 million and
$43.5 million, respectively, as part of consolidated revenues. The expenses
associated with the Company's franchising activities are included in selling,
general & administrative and other operating expenses within the Consolidated
Statement of Operations, as described in Note 1 to the consolidated financial
statements.
32 REGIS CORPORATION 1999
Corporate assets detailed above are primarily comprised of fixed assets
associated with the Company's headquarters and distribution centers, corporate
cash, inventories located at corporate distribution centers, deferred income
taxes, franchise receivables, and other corporate assets.
10. NONRECURRING ITEMS:
Nonrecurring items included in operating income consist of gains or losses on
assets and business dispositions and other items of a nonrecurring nature. The
following table summarizes nonrecurring items recorded by the Company:
(DOLLARS IN THOUSANDS)
1999 1998 1997
Restructuring charge--
International $ 5,616
Restructuring charge--
Mergers (Note 3) 4,356 $ 1,500
Merger transaction costs
(Note 3) 2,066 14,322
Year 2000 remediation 4,095
Loss on divestiture of
Anasazi business
and assets $ 1,979
Resolution of Supercuts
officer litigation 2,909
--------------------------------
$16,133 $ 1,979 $18,731
================================
During the fourth quarter of fiscal 1999, the Company's Board of Directors
approved a restructuring plan associated with its International operations
headquartered in the United Kingdom. This plan includes relocating the
headquarters out of London to Coventry, England with the majority of the
accounting and information technology functions transferring to the Company's
corporate headquarters in Minneapolis, Minnesota and divestiture of certain
markets and salons which have been generating negative cash flows.
The restructuring charge related to the plan described above was $5.6
million. Of the total charge, $1.0 million related to severance payments due
to the elimination of duplicative accounting and information technology
functions, $0.2 million for legal, professional and other miscellaneous fees,
$0.3 million for duplicate rent related to the relocation of operations to
Coventry, and $0.3 million related to the write-off of assets, primarily at
the prior London headquarters, and $3.8 million related to salon closing and
dispositions.
International salons identified for closure or disposition in the
restructuring charge described above, contributed $8.0 million in annual
revenues with associated after-tax annualized operating losses of
approximately $0.9 million.
During 1999, the Company recorded $4.1 million of expense associated with Year
2000 remediation.
Anasazi Exclusive Salons, LLC, a salon products manufacturing company, was sold
to Curtis Acquisition LLC, which is controlled by two members of the Company's
Board of Directors, one of whom is the Chairman.
In 1997, the Company recorded an additional $2.9 million charge to earnings to
revise restructuring charge estimates made in 1996 related to resolution of
Supercuts officer litigation. The Company also recorded a $1.5 million charge
associated with identified Regis salon closures during 1997.
Approximately $4.4 million, $2.0 million and $0.3 million of the nonrecurring
items in 1999, 1998, and 1997, respectively, are non-cash in nature.
REGIS CORPORATION 1999 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Regis Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the consolidated financial position of Regis Corporation at June 30, 1999 and
1998, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 24, 1999
- -------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
---------------------------------------------------------------
YEAR
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ENDED
1999
Revenues $227,699 $240,913 $245,435 $260,825 $974,872
Operating income 16,531 18,276 15,457 12,538 62,802
Net income 8,664 9,652 7,477 4,553 30,346
Net income per
diluted share (a) .22 .24 .19 .11 .76
Dividends declared per share .02 .02 .03 .03 .10
1998
Revenues $200,810 $211,873 $209,548 $226,213 $848,444
Operating income 13,223 16,531 14,848 19,214 63,816
Net income 6,493 8,173 7,334 10,699 32,699
Net income per
diluted share (b) .17 .21 .19 .27 .84
Dividends declared per share .013 .013 .013 .020 .060
(a) For the quarters ended March 31 and June 30, 1999 and the full year 1999,
exclusive of nonrecurring items (Note 10), net income per diluted share
would have been $.23 and $.32 and $1.05, respectively.
(b) For quarter ended September 30, 1997 and the full year 1998, exclusive of
nonrecurring items (Note 10), net income per diluted share would have been
$.20 and $.87, respectively.
34 REGIS CORPORATION 1999
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, 1999, Regis shares were owned by approximately 13,200
shareholders. The common stock price was $19.875 per share on August 13, 1999.
1999 1998
HIGH LOW HIGH LOW
1st quarter $ 21.00 $ 15.17 $ 17.00 $ 15.29
2nd quarter 26.67 17.33 18.00 15.31
3rd quarter 28.44 23.17 20.00 16.67
4th quarter 26.88 19.19 20.00 17.33
REGIS CORPORATION 1999 35