-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D5qX7kVBgJcOdHPuY+JzqOPIaQM5pmKAtqz1P5+UpIoG01xMKVbivLjePsrqD53K 9JVGOqs8q3SA415JfBQCuw== 0000912057-97-017727.txt : 19970515 0000912057-97-017727.hdr.sgml : 19970515 ACCESSION NUMBER: 0000912057-97-017727 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970514 ITEM INFORMATION: Other events FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGIS CORP CENTRAL INDEX KEY: 0000716643 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 410749934 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12725 FILM NUMBER: 97605853 BUSINESS ADDRESS: STREET 1: 7201 METRO BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55439 BUSINESS PHONE: 6129477777 MAIL ADDRESS: STREET 1: 7201 METRO BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55439 8-K 1 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) May 14, 1997 -------------------- REGIS CORPORATION ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MINNESOTA ----------------------------------------------------------------------- (State or other jurisdiction of incorporation) 0-11230 41-0749934 -------------------------------- ------------------------------------- (Commission File Number) (IRS Employer Identification No.) 7201 Metro Boulevard, Minneapolis, MN 55439 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 947-7000 ----------------- ------------------------------------------------------------------------ (Former name or former address, if changed since last report) 1 ITEM 5. OTHER EVENTS Attached hereto, as Exhibit A, is a narrative update to Registrant's Form 10-K Annual Report for the year ended June 30, 1996, Item 1 "Business", regarding changes in Registrant's business, as a result of the October 25, 1996 merger with Supercuts, Inc. This update is in addition to information provided in the Registrant's filing on Form S-4 dated September 24, 1996 (File No. 333-12099), and the Registrant's filings on Form 10-Q for the quarters ended December 31, 1996, and March 31, 1997, regarding changes in the Registrant's business, as a result of the October 25, 1996 merger with Supercuts, Inc. Also attached hereto, as Exhibits B and C, are the consolidated financial statements of the Registrant and related Management's Discussion and Analysis of Financial Condition and Results of Operations as set forth in the exhibit index, restated to reflect the merger with Supercuts, Inc. that occurred on October 25, 1996. The merger was accounted for as a "pooling-of-interests". 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. REGIS CORPORATION Date: May 14, 1997 By: /s/ Frank E. Evangelist ----------------------------------- Frank E. Evangelist Senior Vice President-Finance Chief Financial Officer Signing on behalf of the Registrant and as principal accounting officer 3 EXHIBIT INDEX Exhibit A Narrative Update, Item 1 "Business" of the Registrant's Form 10-K for the fiscal year ended June 30, 1996 Exhibit B Audited consolidated balance sheet as of June 30, 1995 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended June 30, 1994, 1995 and 1996, and related Management's Discussion and Analysis of Financial Condition and Results of Operations Exhibit C Unaudited consolidated balance sheet as of September 30, 1996, and the related consolidated statements of operations and cash flows for the three months ended September 30, 1995 and 1996, and related Management's Discussion and Analysis of Financial Condition and Results of Operations Exhibit 15 Letter Re: Unaudited Interim Financial Information Exhibit 23 Consent of Independent Accountants EX-15 2 EXHIBIT 15 Exhibit 15 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION Securities and Exchange Commission 450 Fifth Street, North West Washington, D.C. 20549 RE: Regis Corporation Registrations on Form S-8 (File No. 33-44867, No. 33-89882) Registration on Form S-4 (File No. 333-12099) Registrations on Form S-3 (File No. 33-82094, No. 33-86276, No. 33-89150, No. 33-92244, No. 33-96224 and No. 33-80337) We are aware that our report dated May 14, 1997, on our reviews of the interim financial information of Regis Corporation as of September 30, 1996 and for the three month periods ended September 30, 1996 and 1995, and included in this report on Form 8-K, is incorporated by reference in these registration statements. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of such registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Minneapolis, Minnesota May 14, 1997 16 EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Regis Corporation on Form S-3 (File No. 33-82094, No. 33-86276, No. 33-89150, No. 33-92244, No. 33-96224 and No. 33-80337), Form S-4 (File No. 333-12099) and Form S-8 (File No. 33-44867, No. 33-89882) of our report dated May 9, 1997, on our audits of the consolidated financial statements of Regis Corporation as of June 30, 1996 and 1995, and for the years ended June 30, 1996, 1995 and 1994, which report is included in this Report on Form 8-K. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota May 14, 1997 17 EX-27.1 4 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED FIRST QUARTER BALANCE SHEET AND YEAR-TO-DATE INCOME STATEMENT, INCLUDING SUPERCUTS RESULTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1997 JUL-01-1996 SEP-30-1997 3,228 0 9,364 374 35,069 64,744 237,981 109,079 305,507 85,409 0 0 0 1,128 131,529 305,507 42,381 170,605 23,393 93,404 30,822 30 2,450 10,338 5,797 4,541 0 0 0 4,541 0 .20
EX-27.2 5 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED ANNUAL BALANCE SHEET AND INCOME STATEMENT, INCLUDING SUPERCUTS RESULTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 7,558 0 10,984 344 32,507 67,083 229,664 102,843 303,954 86,798 0 0 0 1,127 126,508 303,954 149,523 617,307 81,165 340,930 125,162 228 9,880 17,377 7,926 9,451 0 0 0 9,451 .42 .42 INCLUDES A RESTRUCTURING CHARGE OF $12,823 EXCLUDING NONRECURRING ITEMS, FULLY DILUTED EPS WOULD BE $.75
EX-99.A 6 EXHIBIT 99.1 EXHIBIT A Set forth below is a narrative update to Registrant's Form 10-K Annual Report for the year ended June 30, 1996, Item 1 "Business" regarding changes in Registrant's business as a result of the October 25, 1996 merger with Supercuts, Inc. (Supercuts). This update is in addition to information provided in the Registrant's filing on Form S-4 dated September 24, 1996 (File No. 333-12099), and filings on Form 10-Q for the quarters ended December 31, 1996, and March 31, 1997, regarding changes in the Registrant's business, as a result of the October 25, 1996 merger with Supercuts. - - BACKGROUND AND INDUSTRY Regis Corporation (the "Company"), based in Minneapolis, is the largest owner, operator and franchisor of hair and retail product salons in the world. The Regis worldwide operations include 3,253 hairstyling salons at March 31, 1997 operating in six divisions: REGIS HAIRSTYLISTS, SUPERCUTS, MASTERCUTS, TRADE SECRET, WAL-MART and INTERNATIONAL. Worldwide operations include 2,444 company-owned salons, 751 franchised SUPERCUTS salons and 58 other franchised salons operating primarily in the TRADE SECRET division. The Company has more than 25,000 employees worldwide (excluding franchisee operations). - - BUSINESS STRATEGY The Company's business strategy maintains its consistent focus on Quality Service, Multiple Salon Concepts, High Quality Haircare Products, Control over Salon Operations, Economics of Scale and high traffic/visibility locations in the retail marketplace. This strategy has been complemented by the October 25, 1996 merger with Supercuts, as follows: / / Although the Company had previously entered the franchising business, through its 1994 acquisition of the Trade Secret division, the merger with Supercuts adds 751 franchised Supercuts salons, similar in concept and format to the Company's MasterCuts division. The Company intends to continue Supercuts commitment to franchising and its franchisees, utilizing the continuing skills and competencies of certain Supercuts employees who will remain in a California office, complemented by added franchising and training staff at the Company's Minneapolis, Minnesota corporate headquarters. 1 / / Company-owned Supercuts salons (totaling 422 salons at March 31, 1997) are very similar in format, service and product mix, price point and employee staffing to that of the company-owned MasterCuts division salons (totaling 350 salons at March 31, 1997). / / Prior to the merger with Supercuts, the Company's United States operations were primarily committed to a strategy of "enclosed mall- based" salons. The salons are designed to be aesthetically appealing and attractive to enclosed mall shoppers in order to provide a steady source of new business. The merger with Supercuts positions the Company in the rapidly growing "strip shopping center" segment of the retail haircare market in the United States. Supercuts salons, company-owned and franchised, are in strip shopping centers located in all regions of the United States, other than the Midwest, and concentrated in primary population centers or markets. The Company intends to continue to focus the future growth of the Supercuts division in strip shopping centers across the United States, as it adds additional company-owned Supercuts salons, and assists current and new franchisees in their expansion and market development. The Company believes the growth opportunities in the "strip shopping center" segment of the retail haircare market in the United States are vast, and will complement the Company's continuing growth of other divisions. The Company does not intend to refocus other divisions, now located in enclosed shopping malls throughout the United States into the strip shopping center segment of the retail haircare market, nor does it intend to refocus Supercuts into the enclosed shopping mall segment of the retail haircare market in the United States. Other than Puerto Rico, Supercuts has no international operations. The Company may elect to grow the Supercuts division through international expansion, but any such plans have not been finalized. --------------------------------------------------- 2 EX-99.B 7 EXHIBIT 99.B EXHIBIT B - Audited consolidated balance sheet as of June 30, 1995 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended June 30, 1994, 1995 and 1996, and related Management's Discussion and Analysis of Financial Condition and Results of Operations. REGIS CORPORATION EXHIBIT B INDEX Page(s) ------- Report of Independent Accountants 2 Consolidated Balance Sheet as of June 30, 1995 and 1996 3 Consolidated Statement of Operations for the years ended June 30, 1994, 1995 and 1996 4 Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1994, 1995 and 1996 5 Consolidated Statement of Cash Flows for the years ended June 30, 1994, 1995 and 1996 6-7 Notes to Consolidated Financial Statements 8-33 Management's Discussion and Analysis of Results of Operations and Financial Condition 34-46 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Regis Corporation: We have audited the accompanying consolidated balance sheet of Regis Corporation as of June 30, 1995 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended June 30, 1994, 1995 and 1996. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Regis Corporation as of June 30, 1995 and 1996, and the consolidated results of its operations and its cash flows for the years ended June 30, 1994, 1995 and 1996, in conformity with generally accepted accounting principles. Minneapolis, Minnesota May 9, 1997 2 CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share amounts) ---------- June 30 ------------------------- ASSETS 1995 1996 ---- ---- Current assets: Cash and cash equivalents $ 3,182 $ 7,558 Accounts receivable 7,823 10,640 Inventories 25,406 32,507 Deferred income taxes 3,036 6,687 Other current assets 6,004 9,691 -------- -------- Total current assets 45,451 67,083 Property and equipment, net 108,342 126,821 Goodwill 72,703 93,352 Other assets 18,340 16,698 -------- -------- Total assets $244,836 $303,954 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt and capital lease obligations, current portion $ 13,498 $ 19,168 Accounts payable 15,000 20,369 Accrued expenses 32,536 47,261 -------- -------- Total current liabilities 61,034 86,798 Long-term debt and capital lease obligations 71,594 83,213 Other noncurrent liabilities 6,789 6,308 Commitments and contingencies (Notes 5 and 11) Shareholders' equity: Capital stock, $.05 par value; authorized, 25,000,000 shares; issued and outstanding, 21,395,093 and 22,537,161 common shares at June 30, 1995 and 1996, respectively 714 1,127 Additional paid-in capital 90,689 104,634 Retained earnings 14,016 21,874 -------- -------- Total shareholders' equity 105,419 127,635 -------- -------- Total liabilities and shareholders' equity $244,836 $303,954 -------- -------- -------- -------- The accompanying notes are an intergral part of the consolidated financial statements. 3 CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts) ----------- Years Ended June 30 -------------------------------- 1994 1995 1996 ---- ---- ---- Revenues: Company-owned operations: Service $336,341 $378,943 $442,366 Product 94,741 120,381 149,523 -------- -------- -------- 431,082 499,324 591,889 Franchise revenues 22,479 24,929 25,418 -------- -------- -------- 453,561 524,253 617,307 -------- -------- -------- Operating expenses: Cost of sales: Service 199,252 225,102 259,765 Product 52,450 64,777 81,165 Rent 55,145 64,439 81,634 Selling, general and admini- strative 100,808 117,396 125,048 Depreciation and amortization 17,287 20,788 25,259 Provision for restructuring activities 12,823 Other, primarily franchise expenses 2,907 5,107 5,446 -------- -------- -------- 427,849 497,609 591,140 -------- -------- -------- Operating income 25,712 26,644 26,167 Other income (expense): Interest (8,992) (8,774) (9,880) Nonrecurring items (10,000) 1,195 700 Other, net 114 793 390 -------- -------- -------- Income before income taxes 6,834 19,858 17,377 Income taxes (2,951) (8,268) (7,926) -------- -------- -------- Net income $ 3,883 $ 11,590 $ 9,451 -------- -------- -------- -------- -------- -------- Net income per share: Primary $.20 $ .54 $ .42 ---- ----- ----- ---- ----- ----- Fully diluted $.20 $ .53 $ .42 ---- ----- ----- ---- ----- ----- Common and common equivalent shares outstanding: Primary 19,906 21,502 22,487 ------ ------ ------ ------ ------ ------ Fully diluted 20,481 22,111 22,791 ------ ------ ------ ------ ------ ------ The accompanying notes are an intergral part of the consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts)
Retained Common Stock Additional Earnings --------------------- Paid-In (Accumulated Shares Amount Capital Deficit) Total ------ ------ ---------- ------------ ------ Balance, June 30, 1993, as previously reported 9,380,000 $ 469 $46,103 $ (7,544) $39,028 Pooling of interests with Supercuts (before 1996 stock dividend) 2,727,930 136 17,114 6,105 23,355 Balance, June 30, 1993 12,107,930 605 63,217 (1,439) 62,383 Proceeds from public offering of common stock,net of offering costs of $1,087 1,050,000 53 8,310 8,363 Shares issued in connection with resolution of MEI Salons litigation 500,000 25 7,600 7,625 Effect of pooling of interests 200,055 10 5,016 740 5,766 Shares issued in connection with salon acquisition 70,000 3 924 927 Proceeds from exercise of stock options 37,679 2 2,674 2,676 Foreign currency translation adjustments (348) (348) Net income ---------- ----- 3,883 3,883 Balance, June 30, 1994 13,965,664 698 --------- -------- -------- 87,741 2,836 91,275 Additional shares issued and adjustment of amounts previously recorded in connection with finalization of the 1994 resolution of MEI Salons litigation 93,220 5 (505) (500) Shares issued in connection with salon acquisitions 184,442 9 2,886 2,895 Shares issued in connection with employee benefit plans 10,333 1 433 434 Proceeds from exercise of stock options 9,736 1 134 135 (410) (410) Foreign currency translation adjustments 11,590 11,590 Net income ---------- ----- --------- -------- -------- Balance, June 30, 1995 14,263,395 714 90,689 14,016 105,419 Stock split effected in the form of a stock dividend 7,438,190 372 (372) Shares issued in connection with subordinated debt conversion 375,000 19 2,794 2,813 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 ---------- ----- --------- -------- -------- --------- -------- -------- The accompanying notes are an intergral part of the consolidated financial statements. 5 CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) ---------- Years Ended June 30 ------------------------------- 1994 1995 1996 ---- ---- ---- Cash flows from operating activities: Net income $ 3,883 $ 11,590 $ 9,451 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,012 21,268 25,691 Deferred income taxes (8,648) (5,040) (3,059) Provision for restructuring charge 12,823 MEI Salons nonrecurring charge 10,000 1,805 Changes in assets and liabilities, exclusive of investing and financing activities (1,754) (700) (6,303) Other 214 1,115 203 -------- ------- ------- Net cash provided by operating activities 21,707 30,038 38,806 -------- ------- ------- Cash flows from investing activities: Capital expenditures (22,658) (30,388) (32,605) Purchases of salon assets, net of cash acquired and certain obligations assumed (11,734) (3,259) (29,343) Advance to Premier Salons (5,850) Payments from Premier Salons 1,093 103 -------- ------- ------- Net cash used in investing activities (39,149) (33,544) (61,948) -------- ------- ------- Cash flows from financing activities: Borrowings on line of credit 142,384 88,166 150,758 Payments on line of credit (125,419) (87,164) (147,158) Proceeds from issuance of long-term debt 920 440 29,435 Repayment of long-term debt (7,904) (9,573) (17,164) Increase in negative book cash 1,153 1,957 Proceeds from sale of assets 7,725 Dividends paid (1,235) Proceeds from issuance of common stock 9,474 569 10,955 -------- ------- ------- Net cash provided by (used in) financing activities 19,455 1,316 27,548 -------- ------- ------- Effect of exchange rate changes on cash 87 (109) (30) -------- ------- ------- Increase (decrease) in cash and cash equivalents 2,100 (2,299) 4,376
The accompanying notes are an intergral part of the consolidated financial statements. 6 CONSOLIDATED STATEMENT OF CASH FLOWS, Continued (Dollars in thousands) ------------- Years Ended June 30 ------------------------------- 1994 1995 1996 ---- ---- ---- Cash and cash equivalents: Beginning of year 3,381 5,481 3,182 -------- ------- ------- End of year $ 5,481 $ 3,182 $ 7,558 -------- ------- ------- -------- ------- ------- Changes in assets and liabilities, exclusive of investing and financing activities: Accounts receivable $ (1,596) $ (1,106) $ (1,190) Inventories (2,354) (2,723) (3,682) Other current assets (2,567) 525 (3,299) Restructuring accruals (2,517) Accounts payable 1,613 784 1,948 Accrued expenses 3,150 1,820 2,437 -------- ------- ------- $ (1,754) $ (700) $ (6,303) -------- ------- ------- -------- ------- ------- The accompanying notes are an intergral part of the consolidated financial statements. 7 REGIS CORPORATION 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, 1996, approximately 26 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 data for all periods presented reflect the retroactive effects of the October 1996 merger with Supercuts, Inc. (Supercuts) which has been accounted for as a pooling-of-interests (see Note 3). The financial statements have been restated by combining the current and historical financial statements of Regis Corporation with those of Supercuts for each of the periods presented and including adjustments to conform the historical accounting policies and practices of Supercuts to those of Regis. 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 in shareholders' equity. Continued 8 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------------- 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES, continued: FRANCHISE REVENUES AND EXPENSES: Franchise revenues include royalties and initial franchise fees from franchisees, and product sales made by the Company to franchisees. Royalties are recognized as revenue in the month in which franchisee services are rendered or products are sold by franchisees. The Company recognizes revenues from initial franchise fees at the time franchisee salons are opened. Product sales by the Company to franchisees are recorded as revenue at the time product is shipped to franchisee locations. Franchise expenses include all direct expenses, such as the cost of product sold to franchisees by the Company, salaries, marketing costs, and an allocation of general corporate overhead and occupancy expenses. CASH AND CASH EQUIVALENTS: The Company considers its investments in all highly liquid debt instruments with original maturities of 3 months or less at date of purchase to be cash equivalents. The carrying amount approximates fair value because of the short maturity of those instruments. 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 income. Fully depreciated assets remain in the accounts until retired from service. Continued 9 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES, continued: GOODWILL: Goodwill recorded in connection with the fiscal 1989 purchase of the publicly held minority interest in the Company and with the 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 17 years depending upon the lease terms of the salon sites acquired. ASSET IMPAIRMENT ASSESSMENTS: On a quarterly basis, the Company measures and evaluates the recoverability of its tangible and intangible noncurrent assets using undiscounted cash flow analysis. CONSULTING AND NONCOMPETE ASSETS: Consulting and noncompete assets recorded in connection with the Company's various acquisitions are amortized on a straight-line basis over the life of the agreement, generally from 3 to 10 years. PREOPENING COSTS: Advertising, sales promotion and expenditures associated with the opening of new salon locations are charged to operations as incurred. 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 tax payable for the period and the change during the period in deferred tax assets and liabilities. Continued 10 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES, continued: NET INCOME PER SHARE: Primary and fully diluted net income per common and common equivalent share has been computed by dividing net income by the weighted average number of common and common equivalent shares outstanding for each period presented using the modified treasury stock method. Common equivalent shares relate primarily to incentive stock options granted to employees. USE OF ESTIMATES: The preparation of 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. 2. OTHER FINANCIAL STATEMENT DATA: The following provides additional information concerning selected balance sheet accounts at June 30, 1995 and 1996: (Dollars in thousands) ---------------------- 1995 1996 ---- ---- Property and equipment: Land $ 700 $ 700 Building and improvements 4,116 4,361 Equipment, furniture and lease- hold improvements 178,621 213,982 Equipment, furniture and lease- hold improvements under capital leases 9,738 10,621 -------- -------- 193,175 229,664 Less accumulated depreciation and amortization (84,442) (101,368) Less amortization of equipment, furniture and leasehold improvements under capital leases (391) (1,475) -------- -------- $108,342 $ 126,821 -------- -------- -------- -------- Continued 11 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 2. OTHER FINANCIAL STATEMENT DATA, continued: Goodwill $ 84,369 $108,955 Less accumulated amortization (11,666) (15,603) -------- -------- $ 72,703 $ 93,352 -------- -------- -------- -------- Accrued expenses: Payroll and payroll related costs $ 16,859 $ 20,695 Taxes 3,947 5,670 Insurance 2,474 2,730 Restructuring 6,493 Other 9,256 11,673 -------- -------- $ 32,536 $ 47,261 -------- -------- -------- -------- Negative book cash balances of $3,308,000 and $5,265,000, at June 30, 1995 and 1996, respectively, are included in accounts payable and represent checks outstanding in excess of cash balances maintained at the respective banks. The following provides supplemental disclosures of cash flow activity for the years ended June 30, 1994, 1995 and 1996: (Dollars in thousands) ---------------------------- 1994 1995 1996 ---- ---- ---- Cash paid during the year for: Interest $8,216 $ 8,020 $ 9,052 Income taxes 8,256 11,714 15,227 Noncash investing and financing activities included the following: Year ended June 30, 1994: - In connection with the acquisition of Trade Secret, the Company entered into a note agreement whereby $3,947,000 of the purchase price will be paid over a seven-year period (Note 3). - In connection with resolution of the MEI Salons litigation, the Company issued 500,000 shares, on a pre-split basis, of its common stock valued at $7,625,000 (Note 4). - In connection with 1994 acquisitions, the Company issued 270,055 shares, on a pre-split basis, of its common stock valued at $6,693,000. Continued 12 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 2. OTHER FINANCIAL STATEMENT DATA, continued: Year ended June 30, 1995: - In connection with 1995 acquisitions, the Company issued 184,442 shares, on a pre-split basis, of its common stock valued at $2,895,000 (Note 3). - Capital lease obligations of $7,725,000 were entered into during the year under a sale leaseback transaction. No gain or loss was realized on the transaction. - In connection with various acquisitions, the Company entered into various related seller financing notes payable (Note 3). Year ended June 30, 1996: - In connection with the conversion of the Company's $2,812,500 of convertible debt, 375,000 shares, on a pre-split basis, of common stock were issued (Note 5). - In connection with various acquisitions, the Company entered into various related seller financing notes payable (Note 3). 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 420 company-owned, and franchisor of approximately 750 affordable hair care salons at the acquisition date. Each Supercuts shareholder received 0.40 shares of the Company's common stock in exchange for each Supercuts common share, or approximately 4,550,000 shares of the Company's common stock on a fully diluted basis. The transaction has been accounted for as a pooling- of-interests. As a result of the merger, the Company recorded a merger and transaction charge of $14,322,000, on a pre-tax basis, during the quarter ended December 31, 1996. This charge included $7,717,000 for professional fees including investment banking, legal, accounting and miscellaneous transaction costs, $3,465,000 for severance, and a non-cash charge of $3,140,000 for the write-off of duplicative operating assets, principally associated with the closure of the Supercuts headquarters. Continued 13 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 3. MERGERS AND ACQUISITIONS, continued: The severance accrual of $3,465,000 covers the termination of approximately 105 Supercuts employees who had duplicate positions in corporate office functions. These corporate overhead departments included finance and accounting, human resources, legal, management information systems, purchasing, real estate and marketing. Since the Supercuts 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. To effect the restatement, significant accounting adjustments were necessary to conform the accounting practices of Supercuts to those of Regis. The conforming accounting adjustments included adjustments to previously reported Supercuts revenues resulting in added revenues of $6,366,000, $8,813,000 and $13,008,000, respectively, for conformed years ended June 30, 1994, 1995, and 1996, and adjustment to previously reported Supercuts net income (loss) resulting in reduction of previously reported net income or increase in previously reported net loss of $(6,889,000), $(8,798,000) and $(3,300,000), respectively, net of corresponding tax benefit of $4,222,000, $5,393,000, and $2,197,000, respectively, for conformed years ended June 30, 1994, 1995 and 1996. These conforming adjustments principally relate to consolidation of previously unconsolidated investor/franchisee stores, change in goodwill amortization periods and reversal of the capitalization of certain development costs. Prior to the merger, Supercuts' fiscal year for financial reporting purposes ended on December 31. No material adjustment to retained earnings was necessary to conform with Regis' year end. Revenues and net income (loss) for the combining entities for the three years ended June 30, 1996 were as follows (dollars in thousands): Supercuts, Fiscal year ended June 30 Regis as conformed Combined ------------------------- -------- ------------ -------- 1996 ---- Revenues 499,442 117,865 617,307 Net income (loss) 19,124 (9,673) 9,451 1995 ---- Revenues 422,188 102,065 524,253 Net income (loss) 14,651 (3,061) 11,590 1994 ---- Revenues 376,971 76,590 453,561 Net income (loss) 4,053 (170) 3,883 Continued 14 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 3. Mergers and Acquisitions, continued: OTHER ACQUISITIONS: NATIONAL HAIR CARE CENTERS: Effective June 1, 1996, the Company acquired 154 salons from National Hair Care Centers, LLC. The salons are located within Wal-Mart stores and supercenters throughout the United States and perform hairstyling services and offer hair care products. Of the $12,257,000 purchase price, $10,364,000 was paid in cash at closing and the balance was settled by the Company's issuance of a note for $1,797,000 and a $96,000 noncompete agreement. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $6,900,000 and is being amortized on a straight-line basis over 17 years. U.K. ACQUISITIONS: In September 1995, the Company acquired the outstanding shares of common stock of Essanelle Limited and S&L DuLac, Inc. which operate 87 hairstyling salons in major department stores throughout the U.K. (79 salons) and Switzerland (8 salons). The $6,300,000 aggregate purchase price was paid in cash at closing. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $6,600,000 and is being amortized on a straight-line basis over 15 years. In January 1996, the Company acquired 91 salons from Steiner Salons Limited and Steiner Hairdressing Limited operating throughout the U.K. The $2,824,000 aggregate purchase price was paid in cash at closing. The cost in excess of net tangible and identifiable intangible assets acquired is approximately $2,600,000 and is being amortized on a straight-line basis over 15 years. TRADE SECRET: Effective December 1, 1993, the Company acquired 24 company-owned Trade Secret retail product salons and the franchisor's rights for 64 franchised Trade Secret salons. Trade Secret salons, which are located in enclosed mall shopping centers throughout the United States, offer hair care and beauty products and perform hairstyling services. Of the $11,983,000 aggregate purchase price, $8,036,000 was paid in cash at closing and the balance was settled by the Company's issuance of a note for $3,947,000. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $11,500,000 and is being amortized on a straight-line basis over 40 years. Continued 15 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 3. MERGERS AND ACQUISITIONS, continued: OTHER: During 1995 and 1996, the Company made numerous additional acquisitions. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $6,700,000 and $7,900,000 in 1995 and 1996, respectively, and is being amortized on a straight-line basis over periods of up to 17 years. Of the aggregate purchase price of approximately $9,800,000 associated with these acquisitions in 1995, approximately $3,600,000 was paid in cash at closing; approximately $3,300,000 is payable during the next 5 years; and 184,442 shares, on a pre-split basis, of common stock were issued by the Company. Of the aggregate purchase price of approximately $11,600,000 associated with these acquisitions in 1996, approximately $9,200,000 was paid in cash at closing and approximately $2,400,000 is payable during the next 3 years. The following represents the unaudited pro forma results of operations of the Company (restated for the inclusion of Supercuts results) as if the previously described 1996 acquisitions and related common stock activity had occurred at the beginning of fiscal 1996, as well as at the beginning of the immediately preceding fiscal year: (Unaudited, dollars in thousands, except per share amounts) ------------------------- 1995 1996 ---- ---- Revenues $617,011 $669,810 Income before income taxes 21,019 16,969 Net income 12,538 9,217 Net income per share $ .55 $ .40 These pro forma results may not be indicative of results that actually would have occurred had the acquisitions taken place at the beginning of the periods presented or of results which may occur in the future. 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. Continued 16 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 4. RESOLUTION OF LITIGATION: During fiscal 1994, the Company resolved its litigation with a former joint venture partner, MEI Diversified Inc. (MEI), resulting in both parties terminating all claims against each other and causing the Company to record a $10,000,000 pretax charge. The primary components of the $10,000,000 charge are $7,625,000 for the estimated value of the incremental shares required to be issued to the bankruptcy creditors of MEI and $2,850,000 for the valuation allowance associated with the GEMM receivable as described below. As part of the resolution, the Company issued 500,000 shares, on a pre-split basis, of its common stock to the bankruptcy creditors of MEI and guaranteed that the value of the stock issued would reach $8,750,000, or $17.50 per share, within 12 months. The guarantee required the Company to issue up to an additional 200,000 shares, on a pre-split basis, of its common stock to satisfy any deficiency in value. In fiscal 1994, as part of the litigation resolution, the Company advanced $5,850,000 to GEMM, Inc. (Premier Salons) to finance that company's acquisition of salons from the bankruptcy creditors of MEI. In return, the Company received 1,000,000 shares of $6 par value per share preferred stock of Premier Salons and a note receivable of $5,850,000, bearing interest at an annual rate of prime plus 1/2 percent. Of the note receivable balance, $850,000 was paid in March 1994 and the remaining balance of $5,000,000 is due in 60 monthly installments, commencing in January 1995. The note is partially collateralized by a department store license agreement and underlying operating assets. During fiscal 1995, the Company received a $2,500,000 cash settlement associated with its directors and officers insurance claim. Certain other negative events also occurred in fiscal 1995 with respect to the Company's investment in and advances to Premier Salons which caused the Company to re-evaluate and write off the net carrying value ($2,305,000) of all remaining net assets associated with the fiscal 1994 MEI litigation settlement. In addition, during fiscal 1995, the Company issued 93,220 shares, on a pre-split basis, of its common stock to the bankruptcy creditors of MEI as final resolution of the stock guarantee. This was fewer shares than the Company originally estimated when the transaction was recorded the previous year which resulted in a $500,000 pretax gain. As a result of these transactions, the Company recorded a $695,000 pretax gain during the first and second quarters of the year ended June 30, 1995 and adjusted the amounts previously recorded by decreasing shareholders' equity by $500,000. Continued 17 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 4. RESOLUTION OF LITIGATION, continued: During fiscal 1996 and the third and fourth quarters of fiscal 1995, the Company received $700,000 and $500,000, respectively, of principal payments from Premier Salons under the note agreement. The Company had previously written off the related receivable, and accordingly, has recorded these recoveries as nonrecurring gains. There is no assurance that such recoveries will continue. 5. FINANCING ARRANGEMENTS: The Company's long-term debt consists of the following at June 30, 1995 and 1996: (Dollars in thousands) ----------------------- 1995 1996 ---- ---- Senior term notes $ 34,000 $ 39,000 Revolving credit facilities 26,700 30,300 Equipment and leasehold notes payable 7,464 11,112 Other notes payable, principally subordinated notes 13,562 9,654 U.K. term notes 9,265 Investor loan notes 3,366 3,050 -------- -------- 85,092 102,381 Less current portion (13,498) (19,168) -------- -------- Long-term portion $ 71,594 $ 83,213 -------- -------- -------- -------- At June 30, 1996, the senior term notes consist of 3 note agreements: a $24,000,000 note, bearing interest at a fixed rate of 11.52 percent which is subject to annual mandatory repayments of principal until final maturity in June 1998; a $10,000,000 note, bearing interest at a fixed 6.94 percent which is due in July 2005; and a $5,000,000 note, bearing interest at a fixed 7.99 percent which is due in June 2003. Continued 18 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 5. FINANCING ARRANGEMENTS, continued: At June 30, 1996, the Company's revolving credit facilities included $21,200,000 outstanding under the Supercuts facility, and $9,100,000 under the Regis facility. The weighted average interest rate on the Supercuts facility was 8.3 percent at June 30, 1996. The Supercuts facility was refinanced under terms and conditions consistent with those of the Company's existing senior term notes in October 1996, with $22,000,000 of additional senior term notes with mandatory repayments of $10,000,000 and $12,000,000 in fiscal years 2005 and 2007, respectively. Also, subsequent to June 30, 1996, the Company borrowed an additional $23,000,000, under long-term senior term notes with mandatory repayment over fiscal years 1999 through 2007 to fund merger related costs and to pay down the Regis revolving credit facility. Although utilized to pay down borrowings under the revolving credit facility, $5,000,000 of the borrowings is intended to make funds available to support franchisee expansion, and $8,000,000 is intended to refinance a portion of the principal payment on the 11.52 percent senior term notes due in June 1997. These additional term note borrowings bear interest at fixed rates ranging from 7.16 to 8.18 percent. The Company renewed its revolving credit facility in June 1996. Under terms of this renewal, the revolving credit facility allows for borrowings, based on continuing compliance with the terms and conditions of the credit facility, of up to $20,000,000, bears interest at the prime rate, and matures in October 1998. The prime rate at June 30, 1996 was 8.25 percent. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate plus a LIBOR margin up to 1.50 percent. 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. The senior term notes and the revolving credit facility 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 equipment notes payable are primarily comprised of capital lease obligations totaling $6,346,000 and $7,464,000 at June 30, 1996, and 1995, respectively. These capital lease obligations bear an average interest rate of approximately 12 percent and are payable in monthly installments over average terms of approximately 5 years. These balances exclude future interest payable of $1,574,000 and $2,331,000 at June 30, 1996 and 1995, respectively. Continued 19 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 5. FINANCING ARRANGEMENTS, continued: The Company's subordinated debt consists primarily of subordinated promissory notes associated with various acquisitions, which bear interest in the range of 5.84 to 12 percent per year and require monthly payments over terms ranging from 2 to 7 years. At June 30, 1996, included in the total subordinated debt is $1,776,000 payable to a minority interest shareholder in a majority owned subsidiary of the Company. In connection with the U.K. acquisitions (Note 3), the Company's U.K. subsidiary has various term notes, denominated in pounds sterling, primarily with U.K. banks (U.K. notes) bearing interest at rates varying from 4 percent to the LIBOR rate plus 2.5 percent and are subject to annual mandatory principal repayments until final maturity in July 2000. The LIBOR rate at June 30, 1996 was 5.875 percent. The U.K. notes contain covenants applicable to the U.K. subsidiary, including limitations on incurring debt, investments, merger or consolidation and transactions with affiliates. In addition, the U.K. subsidiary must maintain certain interest coverage and debt-to-equity ratios. The investor loan notes bear interest at an annual rate of 25%. These notes and accrued interest were paid in December 1996. The fair value of the senior term and subordinated notes based upon a discounted cash flow analysis using the Company's current incremental borrowing rate approximates their carrying values at June 30, 1996. Aggregate maturities of long-term debt at June 30, 1996, are as follows: Fiscal Year (Dollars in thousands) 1997 $19,168 1998 20,451 1999 15,726 2000 6,349 2001 2,352 Thereafter 38,335 ------- $102,381 ------- ------- Continued 20 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 6. COMMITMENTS: OPERATING LEASES: The Company is committed under long-term operating leases for the rental of most of its salon locations. The terms of the leases range from 1 to 20 years, with many leases renewable for an additional 5- to 10-year term at the option of the Company, and certain leases include escalation provisions. The Company is generally required to pay additional rent based on a percentage 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 percentage of sales. Total rent expense includes the following: (Dollars in thousands) ------------------------------ 1994 1995 1996 ---- ---- ---- Minimum rent $34,575 $41,719 $49,667 Percentage rent based on sales 9,377 9,634 16,078 Real estate taxes and other expenses 11,193 13,086 15,889 ------ ------ ------ $55,145 $64,439 $81,634 ------ ------ ------ ------ ------ ------ FUTURE MINIMUM LEASE PAYMENTS: As of June 30, 1996, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancellable operating leases with remaining terms of greater than 1 year are as follows: Fiscal Year (Dollars in thousands) 1997 $ 57,021 1998 52,485 1999 44,612 2000 35,088 2001 25,826 Thereafter 87,386 ------- Total minimum lease payments $302,418 ------- Continued 21 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 6. COMMITMENTS, continued: 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. 7. INCOME TAXES: The provision for income taxes consists of: (Dollars in thousands) ------------------------------- 1994 1995 1996 ---- ---- ---- Current: Federal $ 9,376 $11,085 $ 9,142 State 1,875 2,217 1,828 International 348 6 15 Deferred: United States (8,348) (5,040) (2,596) International (300) - (463) ------- ------- ------- $ 2,951 $ 8,268 $ 7,926 ------- ------- ------- ------- ------- ------- Continued 22 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 7. INCOME TAXES, continued: The components of the net deferred tax asset and liability are as follows: (Dollars in thousands) ---------------------- 1995 1996 ---- ---- Net current deferred tax asset: Nonrecurring items $ 552 $ 362 Insurance 721 632 Compensation 724 1,051 Vacation 340 462 Restructuring - 4,180 Other, net 610 - ------- ------- $ 2,947 $ 6,687 ------- ------- ------- ------- Net noncurrent deferred tax asset (liability): Depreciation and amortization $(1,715) $(3,286) Deferred rent 1,263 1,816 Nonrecurring items 2,126 1,359 Compensation 725 851 Excess of tax over book basis of certain assets associated with store development program 8,016 8,068 Other, net (318) 476 ------- ------- $10,097 $ 9,284 ------- ------- ------- ------- Management believes no valuation allowance for the net deferred tax asset is required due to its recoverability through reduction of future taxable income. Continued 23 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 7. INCOME TAXES, continued: 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) ---------------------------- 1994 1995 1996 ---- ---- ---- Income before income taxes: United States $7,070 $19,887 $16,709 International (236) (29) 668 ------ ------- ------- $6,834 $19,858 $17,377 ------ ------- ------- ------ ------- ------- Computed income tax expense at federal statutory rate $2,324 $ 6,950 $ 6,082 Increase (decrease) in income taxes resulting from: State income taxes, net of federal income tax benefit 565 971 953 Net effect of targeted jobs tax credit (459) (486) Other, principally nondeductible acquisition costs 521 833 891 ------ ------- ------- Income tax expense $2,951 $ 8,268 $ 7,926 ------ ------- ------- ------ ------- ------- In September 1996, Supercuts completed an Internal Revenue Service examination. As part of its September 30, 1996 income tax provision, the Company recorded a $1,500,000 change in estimate associated with income tax matters related to years prior to 1996. Continued 24 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 8. RESTRUCTURING: During the three months ended December 31, 1995, a majority of the Board of Directors of Supercuts concluded that it was appropriate to modify Supercuts' strategic growth plans and to replace its Chairman of the Board and Chief Executive Officer (Lipson). It was decided that future expansion efforts would focus primarily on expanding with existing franchisees in existing franchise markets. Additionally, because of the significant operating losses and negative cash flow from certain salons, it was decided that salons in certain markets would be closed or sold to franchisees or other third parties. The anticipated date of completion of the restructuring is December 1997. Until closures and dispositions are completed, the results of operations of these salons will continue to be included in the Company's results. The restructuring charge described above was approximately $11,965,000 (as adjusted from the $18,925,000 originally reported due to conforming accounting adjustments - Note 3). Approximately $7,000,000 of this charge relates to store closings or dispositions. The balance relates principally to the Lipson litigation (Note 11). This charge was recorded in the quarter ended December 31, 1995. In order to revise estimates included in the December 1995 restructuring charge for legal and professional fees, an additional $858,000 was charged against earnings in the quarter ended June 30, 1996. This additional charge resulted in aggregate restructuring charges of $12,383,000 for the year ended June 30, 1996. Of the $12,383,000 charge, $4,384,000 was related to non-cash activity (i.e. primarily the write-off of assets that were purchased before the merger and do not require a cash outlay for disposal). As of June 30, 1996, $6,493,000 of the Company's 1996 restructuring charges are included in accrued expenses in the balance sheet and are primarily associated with litigation matters, as described in Note 11, and salon closures and dispositions. In the quarter ended December 31, 1996, an additional $2,909,000 was charged against earnings to revise restructuring charge estimates made in fiscal 1996 and $1,500,000 was charged against earnings associated with identified Regis salon closures. The changes in the estimated June 30, 1996 restructuring charges represent changes in accounting estimates associated with litigation matters, legal and professional fees and lease obligations. Of the $4,409,000 charge recorded in the quarter ended December 31, 1996, $330,000 was related to non-cash activity. The Supercuts and Regis salons identified for closure or disposition, related to the December 1995 and 1996 restructuring charges described above, contributed approximately $7,000,000 of annual revenues with associated after-tax annualized operating losses of approximately $1,000,000. Continued 25 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 9. 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. 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, not to exceed 1,200,000 in the aggregate. 401(k) BENEFIT PLAN: The Company has a 401(k) defined contribution plan. All Supercuts employees with more than one year of service are eligible to participate in this plan and may elect to make contributions between 1% and 15% of their gross pay. The Company will match 50% on the first 1% to 5% of the employee's contribution. As a result of the merger with Regis Corporation, the 401(k) defined contribution plan was terminated on October 23, 1996. Continued 26 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 9. EMPLOYEE BENEFIT PLANS, continued: Company contributions to the aforementioned plans, which are charged to earnings in the period contributed, included the following: (Dollars in thousands) ------------------------- 1994 1995 1996 ---- ---- ---- ESOP $344 $428 $616 PSP 119 ESAP 131 197 231 SPP 110 132 172 401(k) 173 212 EMPLOYEE STOCK OPTION PLAN: The Company's Stock Option Plan (the Plan), as amended, provides for granting both incentive stock options and nonqualified stock options. A total of 1,650,000 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. 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. Continued 27 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 9. EMPLOYEE BENEFIT PLANS, continued: Stock options and shares reserved for grant are as follows: Options Outstanding Shares ------------------------ Reserved Price for Grant Shares Per Share --------- ------- ------------- Balance, June 30, 1993 677,896 484,021 $4.00 - 35.63 Additional shares reserved 600,000 Granted (856,900) 856,900 7.50 - 34.53 Cancelled 92,365 (92,365) 4.00 - 35.63 Exercised (38,524) 4.00 - 27.63 -------- --------- ------------- Balance, June 30, 1994 513,361 1,210,032 4.00 - 34.53 Additional shares reserved 450,000 Granted (170,100) 170,100 12.37 - 20.70 Cancelled 63,233 (63,233) 4.00 - 34.53 Exercised (20,082) 4.00 - 27.35 -------- --------- ------------- Balance, June 30, 1995 856,494 1,296,817 4.00 - 34.53 Granted (450,400) 450,400 11.95 - 19.40 Cancelled 79,262 (79,262) 4.00 - 34.53 Exercised (108,525) 4.00 - 15.58 -------- --------- ------------- Balance, June 30, 1996 485,356 1,559,430 $4.00 - 34.38 -------- --------- ------------- -------- --------- ------------- Options exercisable at June 30, 1996 596,737 $4.00 - 34.38 Continued 28 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 9. EMPLOYEE BENEFIT PLANS, continued: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, a new standard of accounting and reporting for stock-based compensation plans. The Company is not required to adopt the new standard until fiscal 1997. The Company will continue to measure compensation cost, if any, for its stock option plans using the intrinsic value based method of accounting it has historically used. Therefore, the new standard will have no effect on the Company's operating results. The Company's financial statement disclosures will be expanded in fiscal 1997, as required, to include pro forma disclosures as if the fair value based method of accounting had been followed. BOARD OF DIRECTORS STOCK OPTION PLAN: The Company also has a stock option plan for its outside directors. Options to purchase 80,000 shares of common stock at prices ranging from $4.00 to $34.38 per share have been granted through 1996. All options vest over a 4-year period. At June 30, 1996, there were 40,625 options exercisable at prices ranging from $4.00 to $34.38 per share. During fiscal 1996, 5,625 options were exercised. OTHER: The Company has established several unfunded deferred compensation plans which cover certain management and executive personnel. The amounts charged to earnings for these plans were $106,000 in 1994, $128,000 in 1995 and $379,000 in 1996. 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. The Company has the ability and intent to fund future payments through certain life insurance policies on the Chairman of the Board. Continued 29 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 10. 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 by geographic area is presented below. All intercompany revenues and expenses have been eliminated. (Dollars in thousands) --------------------------- 1994 1995 1996 ---- ---- ---- Revenues: United States $408,700 $472,316 $531,599 International 44,861 51,937 85,708 -------- -------- -------- $453,561 $524,253 $617,307 -------- -------- -------- -------- -------- -------- Operating income: United States $ 25,148 $ 25,543 $ 23,552 International 564 1,101 2,615 -------- -------- -------- $ 25,712 $ 26,644 $ 26,167 -------- -------- -------- -------- -------- -------- Total assets: United States $219,492 $238,083 $275,954 International 7,452 6,753 28,000 -------- -------- -------- $226,944 $244,836 $303,954 -------- -------- -------- -------- -------- -------- 11. CONTINGENCIES: On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"), a Nevada corporation, which Supercuts believes is wholly owned by Mr. Lipson, brought legal action against Supercuts, a wholly owned subsidiary of the Company, and certain Supercuts directors and officers. The initial lawsuit, prior to subsequent amendments, sought payment of $3,000,000, allegedly due to DEL pursuant to a Consulting Agreement dated as of August 22, 1995, between Supercuts and DEL. The initial lawsuit also sought unspecified damages allegedly sustained by Mr. Lipson as a result of a delay in his ability to sell 1,508,220 shares of Supercuts' common stock, which were sold by him between February 20 and February 28, 1996, because of Supercuts' refusal to remove restrictive legends from certificates representing such stock. According to his lawsuit, Mr. Lipson sold the number of shares noted for an aggregate of $7,800,000 or a reported average price of $5.20 per share. Supercuts' common stock price range for the month of February 1996, was a high of 7-3/8, a low of 5-1/8 and a close of 5-1/8. All matters that were heard in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 96C-0822, are currently on appeal in the United States Court of Appeals for the Seventh Circuit. Continued 30 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 11. CONTINGENCIES, continued: In August 1996, Mr. Lipson also brought legal action against Supercuts in the Circuit Court of Cook County, Illinois alleging that Supercuts has defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000." The court has set a hearing date of June 18, 1997 with respect to this matter. Mr. Lipson has also filed suit against Supercuts in the Court of Chancery of the State of Delaware seeking advancement of expenses incurred by him in certain litigation and other proceedings. On December 10, 1996, the Delaware Court ruled that Mr. Lipson is entitled to an advancement of certain expenses incurred by him, but did not establish the amount of the advancement. While additional future charges, if any, related to this litigation could have a material adverse impact on the Company's net income in the quarterly period in which they would be recorded, management of the Company believes, based on the advice of counsel, that such additional charges, if any, will not have a material adverse effect on the consolidated financial position or annual results of operations of the Company. 12. SHAREHOLDERS' EQUITY: In addition to the shareholder equity activity described in Note 9, the following activity has taken place: STOCK SPLIT: In May 1996, the Company's Board of Directors authorized a three-for-two stock split in the form of a 50 percent stock dividend distributed on June 4, 1996 to shareholders of record on May 20, 1996. All per share and number of share data have been retroactively restated to reflect the stock split, except for the Consolidated Statements of Changes in Shareholders' Equity. INCREASE IN AUTHORIZED SHARES: On November 12, 1996, at the annual meeting of the shareholders of the Company, the shareholders approved an increase in the authorized shares of common stock of the Company from 25,000,000 to 50,000,000. SHAREHOLDERS' RIGHTS PLAN: In December 1996, the Board of Directors adopted a shareholders' rights plan and declared a dividend of one preferred share purchase right on each outstanding share of common stock. Continued 31 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 12. SHAREHOLDERS' EQUITY, continued: 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 any interest of 20 percent or more. If the rights become exercisable, they entitle all holders, except the take-over bidder, to purchase stock in the Company at a bargain price. 13. RELATED PARTY TRANSACTION: In addition to related party activity described in Notes 1, 9, and 11, Supercuts entered into an agreement with DEL pursuant to which DEL was compensated for Mr. Lipson's past services as Chairman of the Supercuts Board of Directors and Chief Executive Officer. Under this agreement, Supercuts paid DEL amounts of approximately $225,000, $450,000 and $400,000 in 1996, 1995 and 1994, respectively. Under this agreement, upon Mr. Lipson's separation from Supercuts, DEL would receive semi-annual payments of $150,000 over a ten year period, and would accelerate in the event of a change in control, as defined. Supercuts is currently disputing various terms of the DEL agreement, including Mr. Lipson's contention that $3 million was due under this agreement on his termination, January 4, 1996. Continued 32 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------- 14. QUARTERLY FINANCIAL DATA (UNAUDITED):
(Dollars in thousands, except per share amounts) Quarter Ended ------------------------------------- Septem- Decem- Year ber 30 ber 31 March 31 June 30 Ended -------- -------- -------- ------- ------ 1996 ---- Revenues $140,575 $155,316 $155,465 $165,951 $617,307 Operating income 9,053 (3,240) 8,966 11,388 26,167 Net income 4,018 (3,815) 3,952 5,296 9,451 Primary net income per share (a) .18 (.17) .17 .23 .42(c) Fully diluted net income per share (a) .18 (.17) .17 .23 .42(c) Dividends declared per share (d) .017 .017 .017 .02 .07 1995 ---- Revenues $125,858 $132,766 $128,403 $137,226 $524,253 Operating income 5,929 7,019 6,189 7,507 26,644 Net income 2,244 3,143 2,823 3,380 11,590 Primary net income per share (b) .11 .15 .13 .16 .54(c) Fully diluted net income per share (b) .10 .14 .13 .15 .53(c)
(a) For the quarters ended September 30, 1995, December 31, 1995, March 31, 1996 and June 30, 1996 and the full year 1996, exclusive of nonrecurring gains, primary net income per share would have been $.18, $.16, $.17, $.25 and $.76, respectively. Exclusive of nonrecurring gains, fully diluted net income per share for the aforementioned periods would have been $.18, $.16, $.17, $.25 and $.75, respectively. (b) For the quarters ended September 30, 1994, December 31, 1994, March 31, 1995 and June 30, 1995 and the full year 1995, exclusive of nonrecurring gains, primary net income per share would have been $.10, $.13, $.12, $.15 and $.51, respectively. Exclusive of nonrecurring gains, fully diluted net income per share for the aforementioned periods would have been $.10, $.13, $.12, $.15 and $.50, respectively. (c) The summation of quarterly net income per share does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis. (d) Dividends declared per share on the outstanding Regis shares. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SUMMARY Regis Corporation, based in Minneapolis, is the largest owner, operator and franchisor of mall-based hair and retail product salons in the world. The Regis worldwide operations include 3,131 hairstyling salons at June 30, 1996 operating in six divisions: Regis Hairstylists, Supercuts, MasterCuts, Trade Secret, Wal-Mart and International. Worldwide operations include 661 franchised Supercuts salons and 72 other franchised salons operating primarily in the Trade Secret division. The Company has more than 25,000 employees worldwide. During fiscal 1996, the Company's consolidated revenues increased 17.7 percent to a record $617,307,000. Operating income grew 46.3 percent to $38,990,000 before the provision for restructuring activities of $12,823,000 related to Supercuts. Exclusive of nonrecurring gains and the restructuring charge, fiscal 1996 earnings were $.75 per share, an increase of 50 percent, compared to $.50 per share in the prior year. Effective October 25, 1996, the Company received shareholder approval for the merger agreement with Supercuts, Inc. (Supercuts) in a stock-for-stock merger transaction. Supercuts is a national operator of approximately 450 company owned/managed and franchisor of over 700 affordable hair care salons. Each Supercuts shareholder received 0.40 shares of the Company's common stock in exchange for each Supercuts, Inc. common share, or approximately 4,550,000 shares of the Company's common stock on a fully diluted basis. Financial data for all periods presented reflect the retroactive effects of the October 1996 merger with Supercuts which has been accounted for as a pooling-of-interests. The financial statements have been prepared by combining the current and historical financial statements of Regis Corporation with those of Supercuts for each of the periods presented. 34 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percentage of revenues. All percentages were computed as a percentage of company-owned salon revenues. For purposes of this analysis, franchise revenues have been netted against the related franchise expenses and included in the cost category "Other, including franchise revenues and expenses". Franchise revenues are not material to the Company, as they represent less than 5 percent of total revenues.
FOR THE YEARS ENDED JUNE 30, ---------------------------- 1994 1995 1996 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Operating expenses: Cost of sales 58.4 58.1 57.6 Rent 12.8 12.9 13.8 Selling, general and administrative 23.4 23.5 21.1 Depreciation and amortization 4.0 4.2 4.3 Provision for restructuring activities 2.2 Other, including franchise revenues and expenses (4.6) (4.0) (3.4) ----- ------ ----- 94.0 94.7 95.6 ----- ------ ----- Operating income 6.0 5.3 4.4 Other income (expense): Interest (2.1) (1.7) (1.7) Nonrecurring items (2.3) 0.2 0.2 Other, net - 0.2 - ----- ------ ----- Income before income taxes 1.6 4.0 2.9 Income taxes (0.7) (1.7) (1.3) ----- ------ ----- Net income 0.9% 2.3% 1.6% ----- ------ ----- ----- ------ -----
35 YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995: SALES REVENUES. Revenues for fiscal 1996 were a record $617,307,000, representing an increase of $93,054,000, or 17.7 percent, over fiscal 1995. Nearly 50 percent of the increase is attributable to acquisitions occurring in fiscal 1996 and the full year impact of the fiscal 1995 acquisitions, with the remaining increase due to net salon openings, and increases in customers served and product sales. Regis Hairstylists, Supercuts, MasterCuts, Trade Secret and Wal-Mart salons in the United States and Canada (Domestic salons) accounted for $60,230,000 of the increase in total sales. The remainder of the sales increase, or $32,824,000, was related to the Company's salon operations in the United Kingdom, South Africa, Switzerland and Mexico (International salons) and was largely influenced by the Company's fiscal 1996 acquisitions in the United Kingdom. For fiscal 1996, revenues from Regis Hairstylists were $267,576,000, an increase of 4.1 percent; revenues from Supercuts were $117,865,000, an increase of 15.5 percent; revenues from MasterCuts salons were $83,411,000, an increase of 18.3 percent; Trade Secret company-owned revenues were $64,960,000, an increase of 39.8 percent; and International salon revenues were $76,287,000, an increase of 75.5 percent. A total of 64,400,000 customers were served in fiscal 1996, an increase of 10.1 percent, from 58,500,000 customers served in fiscal 1995. 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. SERVICE REVENUES. Service revenues in fiscal 1996 were $442,366,000, an increase of $63,423,000, or 16.7 percent, over fiscal 1995. This increase was primarily due to acquisitions, net salon openings, and same-store sales growth. PRODUCT REVENUES. Product revenues in fiscal 1996 were $149,523,000, an increase of $29,142,000, or 24.2 percent, over fiscal 1995. The Trade Secret retail product salon operations represented $14,463,000 of this overall increase, reflecting acquisitions occurring in fiscal 1996 and the full year impact of the fiscal 1995 acquisitions, net salon openings, and same-store sales growth. Product revenues for the Company's Regis Hairstylists, Supercuts, MasterCuts and Wal-Mart salons increased $10,299,000 and represented 18.0 percent of their fiscal 1996 service and product revenues, up from 17.3 percent in fiscal 1995, reflecting increased customer awareness and further acceptance of national brand salon merchandise and sales training of Company employees. The balance of the increase relates to International salons and was largely caused by the fiscal 1996 salon acquisitions. 36 COST OF SALES Cost of sales in fiscal 1996 was $340,930,000, compared to $289,879,000 in fiscal 1995. The resulting combined gross margin for fiscal 1996 improved 50 basis points percent to 42.4 percent, compared to 41.9 percent in fiscal 1995. This improvement is due to several factors, the most significant of which is an improved sales leverage on the salaries and commissions structure at Regis Hairstylists, which is the major component of cost of sales. Improved gross margin was also the result of an increase in the percentage of product revenues in Regis Hairstylists and MasterCuts, which generally have a higher gross profit margin than service revenues. Service margins improved to 41.3 percent in fiscal 1996, compared to 40.6 percent in fiscal 1995. Retail product margins declined during fiscal 1996 to 45.7 percent, compared to 46.2 percent during fiscal 1995. RENT EXPENSE Rent expense in fiscal 1996 was $81,634,000, or 13.8 percent of revenues, compared to $64,439,000, or 12.9 percent of revenues, in fiscal 1995. The percentage increase is due to the fiscal 1996 U.K. acquisitions of the Essanelle department store salons and the Steiner salons. When compared to Domestic salon operations, the U.K. salon operations have higher rent expenses and lower selling and administrative expenses, because certain costs are absorbed by department stores and passed on as rent. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative (SG&A) expense in fiscal 1996 was $125,048,000, or 21.1 percent of revenues, compared to $117,396,000, or 23.5 percent of revenues, in fiscal 1995. Such expenses include costs associated with salon operations (such as advertising, promotion, insurance, telephone and utilities), field supervision costs (payroll, related taxes and travel) and total home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). A portion of the improvement was attributable to the fiscal 1996 U.K. salon acquisitions which, for the reasons described under rent expense above, have a lower level of SG&A expense. The balance of the rate improvement was due to continued sales leveraging of fixed and semi-fixed costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense in fiscal 1996 was 4.3 percent of revenues, compared to 4.2 percent in fiscal 1995. Amortization costs have increased due to the increased level of intangible assets associated with the Company's salon acquisition activity. Depreciation expense, the major component within this category, has remained relatively consistent as a percent of revenues. 37 RESTRUCTURING CHARGES See Note 8 to the Consolidated Financial Statements. OPERATING INCOME Operating income in fiscal 1996 improved to $38,990,000 before the provision for restructuring activities of $12,823,000 related to Supercuts, an increase of $12,346,000, or 46.3 percent, over fiscal 1995. Operating income, excluding the restructuring charge, increased to 6.6 percent of revenues in fiscal 1996, compared to 5.3 percent in fiscal 1995. This improvement is attributable primarily to improved gross margins and the leveraging of selling, general and administrative expense as a percentage of revenues. Operating income, after the provision for restructuring activities, was $26,167,000 in fiscal 1996 compared to $26,644,000 in fiscal 1995. INTEREST EXPENSE Interest expense for fiscal 1996 was $9,880,000, or 1.7 percent of revenues, compared to $8,774,000, or 1.7 percent of revenues, in fiscal 1995. NONRECURRING ITEMS During fiscal 1996, the Company received $700,000 of principal payments from Premier Salons under a note agreement. The Company had previously written off the related receivable, and accordingly, has recorded these recoveries as nonrecurring gains. There is no assurance that such recoveries will continue. Fiscal 1995 nonrecurring items are discussed in the comparison of 1995 and 1994 Results of Operations. INCOME TAXES The Company's effective income tax rate for fiscal 1996 was 45.6 percent of pre-tax income compared to 41.6 percent of pre-tax income for fiscal 1995. The increase in the effective rate is attributable to the Company's inability to fully utilize the income tax benefits of the Supercuts operating losses in certain states. 38 NET INCOME Net income for fiscal 1996 was $9,451,000, or $.42 per share on a fully diluted basis, compared to net income for fiscal 1995 of $11,590,000, or $.53 per share. Exclusive of nonrecurring gains and the restructuring charge, net income for fiscal 1996 would have been $.75 per share on a fully diluted basis, compared to net income for fiscal 1995 of $.50 per share, an increase of 50 percent. 39 YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994: REVENUES REVENUES. Revenues for fiscal 1995 were a record $524,253,000, representing an increase of $70,692,000, or 15.6 percent, over fiscal 1994. This increase was attributable to net salon openings, acquisitions, and increases in same-store sales. Domestic salons accounted for $64,086,000 of the total revenue increase. The balance of the overall revenue increase of $6,606,000 related to the Company's International salons. For fiscal 1995, revenues from Regis Hairstylists were $257,161,000, an increase of 3.6 percent; revenues from Supercuts salons were $102,065,000, an increase of 33.3 percent; revenues from MasterCuts salons were $70,510,000, an increase of 18.6 percent; Trade Secret company-owned revenues were $46,476,000, an increase of 51.8 percent; and International salon revenues were $43,463,000, an increase of 17.9 percent. A total of 58,500,000 customers were served in fiscal 1995, an increase of 10.4 percent, from 53,000,000 customers served in fiscal 1994. SERVICE REVENUES. Service revenues in fiscal 1995 were $378,943,000, an increase of $42,602,000, or 12.7 percent, over fiscal 1994. This increase was primarily due to net salon openings and increases in customers served. PRODUCT REVENUES. Product revenues in fiscal 1995 were $120,381,000, an increase of $25,640,000, or 27.1 percent, over fiscal 1994. The Trade Secret retail product salon operations represented $14,555,000 of this overall increase, reflecting the full year impact of the Trade Secret acquisition, additional acquisitions in the current year and net salon openings. Product revenues for the Company's Regis Hairstylists, Supercuts and MasterCuts salons were $70,947,000, and represented 17.3 percent of their fiscal 1995 revenues, up from 16.9 percent in fiscal 1994, reflecting increased customer awareness and further acceptance of national brand salon merchandise and sales training of Company associates. COST OF SALES Cost of sales in fiscal 1995 was $289,879,000, compared to $251,702,000 in fiscal 1994. The resulting combined gross margin for fiscal 1995 improved to 41.9 percent, compared to 41.6 percent in fiscal 1994. This improvement is due to several factors, the most significant of which is an increase in the percentage of product revenues in Regis Hairstylists and MasterCuts, which generally have a higher gross profit margin than service revenues. Salary and commissions paid to hairstylists, the major component of cost of sales, also favorably improved in fiscal 1995 due to the increase in sales from MasterCuts salons which have lower payroll costs than Regis Hairstylists salons. 40 Service margins of 40.6 percent in fiscal 1995, compared to 40.8 percent in the previous year. Retail product margins improved during fiscal 1995 to 46.2 percent, compared to 44.6 percent during fiscal 1994. The lower margins in fiscal 1994 were due to the Trade Secret acquisition, as Trade Secret salons experienced higher payroll costs due to new store openings and training. In addition, product costs in the Trade Secret division were higher during the transition period immediately following the fiscal 1994 acquisition and did not reflect the full benefit of the Company's purchasing power. RENT EXPENSE Rent expense in fiscal 1995 was $64,439,000, or 12.9 percent of revenues, compared to $55,145,000, or 12.8 percent of revenues, in fiscal 1994. Rent expense as a percent of revenues have remained relatively consistent. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense in fiscal 1995 was $117,396,000, or 23.5 percent of revenues, compared to $100,808,000, or 23.4 percent of revenues, in fiscal 1994. The slight increase is primarily due to an increase in worker's compensation insurance and certain discretionary payments made to employee benefit plans in response to the Company's strong operating performance in fiscal 1995. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense in fiscal 1995 was 4.2 percent of revenues, compared to 4.0 percent in fiscal 1994. Amortization costs have increased due to the increased level of intangible assets associated with the Company's salon acquisition activity. Depreciation expense, the major component within this category, has remained relatively consistent as a percent of revenues. OPERATING INCOME Operating income in fiscal 1995 improved to $26,644,000, an increase of $932,000 over fiscal 1994. Operating income as a percentage of revenues decreased 70 basis points to 5.3 percent in fiscal 1995 compared to 6.0 percent in fiscal 1994. INTEREST EXPENSE Interest expense for fiscal 1995 was $8,774,000, or 1.7 percent of revenues, down from $8,992,000, or 2.1 percent of revenues, in fiscal 1994. This improvement reflects the effect of principal reductions in senior notes and lower average balances on the Company's revolving line of credit facility throughout fiscal 1995. 41 NONRECURRING ITEMS During fiscal 1995, the Company received a $2,500,000 cash settlement associated with its directors' and officers' insurance claim. Certain other negative events also occurred in fiscal 1995 with respect to the Company's investment in and advances to Premier Salons, which caused the Company to re-evaluate and write off the net carrying value ($2,305,000) of all remaining net assets associated with the fiscal 1994 MEI litigation settlement. In addition, during fiscal 1995, the Company issued 93,220 shares on a pre-split basis, of its common stock to the bankruptcy creditors of MEI as final resolution of the stock guarantee. This was fewer shares than the Company originally estimated when the transaction was recorded the previous year, which resulted in a $500,000 pre-tax gain. As a result of these transactions, the Company recorded a $695,000 pre-tax gain during the first and second quarters of the year ended June 30, 1995 and adjusted the amounts previously recorded by decreasing shareholders' equity by $500,000. During the third and fourth quarters of fiscal 1995, the Company received $500,000 of principal payments from Premier Salons under the note agreement. The Company had previously written off the related receivable, and accordingly, has recorded these recoveries as nonrecurring gains. There is no assurance that such recoveries will continue. INCOME TAXES The Company's effective income tax rate for fiscal 1995 was 41.6 percent of pre-tax income, compared to 43.2 percent in fiscal 1994. The decrease in the effective rate is attributable to the Company's ability to utilize South African losses to offset U.K. taxable income during fiscal 1995. NET INCOME Net income for fiscal 1995 improved to $11,590,000, or $.53 per share on a fully diluted basis, compared to net income for fiscal 1994 of $3,883,000, or $.20 per share. Exclusive of the effect of nonrecurring items, net income for fiscal 1995 would have been $.50 per share on a fully diluted basis, compared to net income for fiscal 1994 of $.20 per share, an increase of 150 percent. EFFECTS OF INFLATION The Company has generally been protected against inflationary increases, as payroll expense and related benefits (the Company's major expense components) for Regis Hairstylists and International salon associates are primarily variable costs of sales. The Company compensates the great majority of its hairstylists with a percentage commission based on the sales they generate, thereby enabling salon payroll expense, as a percentage of sales, to remain relatively constant. The Company does not believe inflation has had a significant impact on the results of operations for the Supercuts, MasterCuts or Trade Secret divisions. 42 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 1996 increased to $38,806,000, compared to $30,038,000 during the same period the previous year. The increase between the two periods was primarily due to improved operating performance in fiscal 1996. During fiscal 1996, the Company had worldwide capital expenditures of $46,407,000, of which $13,802,000 related to acquisitions. The Company constructed 160 new salons (31 Regis Hairstylists, 44 Supercuts, 33 MasterCuts, 40 Trade Secret, 3 Wal-Mart and 9 International) and acquired 383 salons. The Company also completed 65 major remodeling projects, including 10 conversions of existing salons to another salon concept. All capital expenditures during fiscal 1996 were funded by the Company's operations and borrowings under its revolving credit facilities. The Company anticipates its worldwide salon development program for fiscal 1997 will include a minimum of 170 new salons and 60 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $36,000,000 in fiscal 1997. In September 1995, the Company completed the acquisitions of Essanelle Limited (Essanelle) and S&L du Lac. The $6,300,000 aggregate purchase price was paid to the selling shareholder in cash at closing. Additionally, the Company made a $992,000 cash payment at closing to Essanelle to facilitate the payoff of existing debt of Essanelle. The purchase price was funded through a combination of proceeds from the issuance of the Company's common stock and long-term debt issued by banks. In January 1996, the Company completed the acquisitions of Steiner Salons Limited and Steiner Hairdressing Limited. The $2,800,000 aggregate purchase price was paid to the selling shareholder in cash at closing. The purchase price was funded with borrowings under the Company's revolving credit facility and long-term debt from banks. In June 1996, the Company completed the acquisition of National Hair Care Centers, LLC. Of the $12,257,000 aggregate purchase price, $10,364,000 was paid in cash at closing and the balance was settled by the Company's issuance of a note for $1,797,000 and a $96,000 noncompete agreement. The cash portion of the purchase price was funded with proceeds from the sale of 200,000 shares of common stock and a $5,000,000 senior term note. 43 In February 1996, the Company issued a $10,000,000 senior note, bearing interest at 6.94 percent, due in July 2005. Proceeds associated with this borrowing were utilized to refinance the $10,000,000 principal payment on the senior notes paid in June 1996. In June 1996, the Company issued a $5,000,000 senior note, bearing interest at 7.99 percent, due in July 2003. Proceeds associated with this borrowing were utilized to partially fund the acquisition of National Hair Care Centers, LLC. The agreement under which the notes were issued contains financial and restrictive covenants similar to those contained in the Company's existing senior notes. In connection with the U.K. acquisitions, the Company's U.K. subsidiary entered into various term notes, denominated in pounds sterling, primarily with U.K. banks which have interest rates ranging from 4 percent fixed to the LIBOR rate plus 2.5 percent and are subject to annual mandatory principal repayments until July 2000. These U.K. notes contain covenants applicable to the U.K. subsidiary, including limitations on incurring debt, investments, mergers or consolidations and transactions with affiliates. In addition, the U.K. subsidiary must maintain certain interest coverage and debt-to-equity ratios. During fiscal 1996, the Company repaid the outstanding principal amount of $2,187,500 of subordinated debt associated with the financing of the Beauty Express acquisition. In addition, the Company's subordinated convertible debenture of $2,812,500 was also converted to 375,000 shares, on a pre-split basis, of the Company's common stock. The Company has renewed its existing revolving credit facility and cash management program. Under terms of this renewal, the revolving credit facility allows for borrowings of up to $20,000,000, bears interest at the prime rate, and matures in October 1998. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate plus a LIBOR margin up to 1.50 percent. The revolving credit facility requires a quarterly commitment fee of 1/4 percent per annum on the unused portion of the facility. The renewed credit agreement contains certain financial and restrictive covenants similar to those in the Company's senior debt agreement. As of June 30, 1996, borrowings of $9,100,000 were outstanding under this credit facility. At June 30, 1996, the Company had outstanding $24,000,000 of 11.52 percent fixed-rate senior notes after repayments of $10,000,000 and $9,000,000 of the notes during fiscal years 1996 and 1995, respectively. The notes require annual mandatory repayments of $10,000,000 in June 1997 and $14,000,000 in June 1998. The notes contain certain financial and restrictive covenants (see Note 5 of Notes to the Consolidated Financial Statements) and carry a substantial penalty based on yield maintenance in the event of voluntary prepayment. 44 At June 30, 1996, there was $21,200,000 outstanding under the Supercuts revolving credit facility. In October 1996, the Supercuts facility was refinanced under terms and conditions consistent with that of the Company's long-term borrowings with $22,000,000 of additional long-term notes with mandatory repayments of $10,000,000 and $12,000,000 in fiscal years 2005 and 2007, respectively. Also, in October and December 1996, the Company borrowed an additional $10,000,000 and $5,000,000, under long-term senior term notes with mandatory repayment over fiscal years 1999 through 2003 to fund merger related costs and to pay down the Regis revolving credit facility. Although utilized to pay down borrowings under the revolving credit facility, the $5,000,000 borrowing is intended to make available funds to help franchisee expansion. These additional term note borrowings bear interest at fixed rates ranging from 7.16 to 7.8 percent. In April 1997, the Company borrowed $8,000,000 under a long-term senior term note with a fixed interest rate of 8.18 percent due in fiscal 2007, to provide funds to refinance $8,000,000 of the principal payment due on the 11.52 percent senior term notes in June 1997. See restructuring activities discussed in Note 8 to the Consolidated Financial Statements. Transactions by the Company's International salons are invoiced and paid in local currency. Accordingly, the Company is subject to risks associated with fluctuations in currency exchange rates. Management believes that cash generated from operations and amounts available under its revolving credit facility will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. The Company paid dividends of $.07 per share during fiscal 1996. The Company did not pay dividends during fiscal 1995 due to debt covenant restrictions. On August 13, 1996, the Board of Directors of the Company approved the payment of a $.02 per share quarterly dividend payable to shareholders of record on August 23, 1996. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", was issued in March 1995 and is effective for fiscal years beginning after December 15, 1996. The Company believes implementation of this accounting standard in fiscal 1997 will not have a material impact on earnings. On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"), a Nevada corporation, which the Company believes is wholly owned by Mr. Lipson, brought legal action against Supercuts, Inc., ("Supercuts") a wholly owned subsidiary of the Company, and certain Supercuts directors and officers. The initial lawsuit, prior to subsequent amendments, sought payment of $3,000,000, allegedly due to DEL pursuant to a Consulting Agreement dated as of August 22, 1995, between Supercuts and DEL. The initial lawsuit also sought unspecified damages allegedly sustained by Mr. Lipson as a result of a delay in his ability to sell 1,508,220 shares of Supercuts' common stock, which were sold by him between February 20 and February 28, 1996, because of Supercuts' refusal to remove restrictive legends from certificates representing such stock. According to his lawsuit, Mr. Lipson sold the number of shares noted for an 45 aggregate of $7,800,000 or a reported average price of $5.20 per share. Supercuts' common stock price range for the month of February 1996, was a high of 7-3/8, a low of 5-1/8 and a close of 5-1/8. Certain matters relating to this case that were heard in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 96C-0822, are currently on appeal in the United States Court of Appeals for the Seventh Circuit. In August 1996, Mr. Lipson also brought legal action against Supercuts in the Circuit Court of Cook County, Illinois alleging that Supercuts has defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000." Supercuts has denied these allegations. Mr. Lipson has also filed suit against Supercuts in the Court of Chancery of the State of Delaware seeking advancement of expenses incurred by him in certain litigation and other proceedings. On December 10, 1996, the Delaware Court ruled that Mr. Lipson is entitled to an advancement of certain expenses incurred by him, but did not establish the amount of the advancement. The amount to be advanced is under negotiation. On April 17, 1997, the Securities and Exchange Commission charged Mr. Lipson with unlawful insider trading in Supercuts stock during 1995, alleging that he avoided a loss of approximately $621,000 through such trading. Mr. Lipson has stated that he intends to contest the charges. While additional future charges, if any, related to this litigation could have a material adverse impact on the Company's net income in the quarterly period in which they would be recorded, management of the Company believes, based on the advice of counsel, that such additional charges, if any, will not have a material adverse effect on the consolidated financial position or annual results of operations of the Company. 46 EX-99.C 8 EXHIBIT 99.C EXHIBIT C - Unaudited consolidated balance sheet as of September 30, 1996, and the related consolidated statements of operations and cash flows for the three months ended September 30, 1995 and 1996, and related Management's Discussion and Analysis of Financial Condition and Results of Operations. REGIS CORPORATION INDEX EXHIBIT C Page No. -------- Unaudited Consolidated Financial Statements: Balance Sheet as of June 30, 1996 and September 30, 1996 1 Statement of Operations for the three months ended September 30, 1995 and 1996 2 Statement of Cash Flows for the three months ended September 30, 1995 and 1996 3 Notes to Consolidated Financial Statements 4-7 Review Report of Independent Accountants 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Exhibit 15 Letter Re: Unaudited Interim Financial Information 16 REGIS CORPORATION CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 AND SEPTEMBER 30, 1996 (DOLLARS IN THOUSANDS)
JUNE 30, 1996 SEPTEMBER 30, 1996 (UNAUDITED) ------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 7,558 $ 3,228 Accounts receivable 10,640 8,990 Inventories 32,507 35,069 Deferred income taxes 6,687 8,518 Other current assets 9,691 8,939 ------- ------- Total current assets 67,083 64,744 Property and equipment, net 126,821 128,902 Goodwill 93,352 95,796 Other assets 16,698 16,065 ------- ------- Total assets $303,954 $305,507 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt and capital lease obligations, current portion $ 19,168 $ 19,293 Accounts payable 20,369 23,413 Accrued expenses 40,768 36,989 Restructuring accruals 6,493 5,714 ------- ------- Total current liabilities 86,798 85,409 Long-term debt and capital lease obligations 83,213 81,214 Other noncurrent liabilities 6,308 6,227 Contingencies (Note 5) Shareholders' equity: Capital stock, $.05 par value; authorized, 25,000,000 shares; issued and outstanding, 22,537,161 common shares at June 30, 1996 and 22,589,455 common shares at September 30, 1996 1,127 1,128 Additional paid-in capital 104,634 105,114 Retained earnings 21,874 26,415 ------- ------- Total shareholders' equity 127,635 132,657 ------- ------- Total liabilities and shareholders' equity $303,954 $305,507 ------- ------- ------- -------
See accompanying notes to unaudited consolidated financial statements. 1 REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1996 ---- ---- Revenues: Company-owned operations: Service $ 100,410 $121,540 Product 33,476 42,381 ------- ------- 133,886 163,921 Franchise revenues 6,689 6,684 ------- ------- 140,575 170,605 ------- ------- Operating expenses: Cost of sales: Service 58,427 70,011 Product 18,134 23,393 Rent 17,569 23,069 Selling, general and administrative 29,839 34,019 Depreciation and amortization 5,722 6,889 Other, primarily franchise expenses 1,831 864 ------- ------- 131,522 158,245 ------- ------- Operating income 9,053 12,360 Other income (expense): Interest (2,236) (2,450) Nonrecurring gains 137 218 Other, net 35 210 ------- ------- Income before income taxes 6,989 10,338 Income taxes (2,971) (5,797) ------- ------- Net income $ 4,018 $ 4,541 ------- ------- ------- ------- Net income per share $ .18 $ .20 ------- ------- ------- ------- Common and common equivalent shares outstanding 22,421 23,316 ------- ------- ------- ------- See accompanying notes to unaudited consolidated financial statements. 2 REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (DOLLARS IN THOUSANDS) 1995 1996 ---- ---- Cash flows from operating activities: Net income $ 4,018 $ 4,541 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,829 6,970 Deferred income taxes 577 (1,182) Changes in assets and liabilities, exclusive of investing and financing activities (1,677) (1,283) Other 312 1,150 --------- --------- Net cash provided by operating activities 9,059 10,196 --------- --------- Cash flows from investing activities: Capital expenditures (8,866) (8,319) Purchases of salon assets, net of cash acquired and certain obligations assumed (9,152) (4,611) --------- --------- Net cash used in investing activities (18,018) (12,930) --------- --------- Cash flows from financing activities: Borrowings on line of credit 47,766 44,983 Payments on line of credit (40,817) (44,700) Proceeds from issuance of long-term debt 6,222 Repayment of long-term debt (496) (2,236) Dividends paid (285) (361) Proceeds from issuance of common stock 212 711 --------- --------- Net cash provided by (used in) financing activities 12,602 (1,603) --------- --------- Effect of exchange rate changes on cash (17) 7 --------- --------- Increase (decrease) in cash and cash equivalents 3,626 (4,330) Cash and cash equivalents: Beginning of period 2,335 6,562 --------- --------- End of period $ 5,961 $ 2,232 --------- --------- --------- --------- Changes in assets and liabilities, exclusive of investing and financing activities: Accounts receivable $ 402 $ 1,676 Inventories 501 (2,161) Other current assets (2,899) 745 Restructuring accrual (779) Accounts payable 412 3,046 Accrued expenses (93) (3,810) --------- --------- $ (1,677) $(1,283) --------- --------- --------- --------- See accompanying notes to unaudited consolidated financial statements. 3 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS: The unaudited consolidated statement of operations for the three months ended September 30, 1995 and 1996, reflects, in the opinion of management, all adjustments (which, with the exception of the matters discussed in Notes 3 and 4 herein, include only normal recurring adjustments) necessary to fairly present the results of operations for the interim periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended June 30, 1996, which are included herein in Exhibit A to the Company's May 14, 1997 report on Form 8-K. Financial data for all periods presented reflect the retroactive effects of the October 1996 merger with Supercuts, Inc. (Supercuts) which has been accounted for as a pooling-of-interests (see Note 3). The financial statements have been prepared by combining the current and historical financial statements of Regis Corporation with those of Supercuts for the periods presented. COST OF PRODUCT SALES. On an interim basis, product costs are determined by applying an estimated gross profit margin. ASSET IMPAIRMENT ASSESSMENTS. On a quarterly basis, the Company measures and evaluates the recoverability of its tangible and intangible noncurrent assets using undiscounted cash flow analyses. Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of" was adopted effective July 1, 1996, and did not have a significant effect on the consolidated financial statement. 2. NONRECURRING GAINS: During the first quarter of fiscal 1997 and 1996, the company received $218,000 and $137,000, respectively, of principal payments from premier salons. The company had previously written off the related receivable, and accordingly, is recording all subsequent principal payments as nonrecurring gains. 4 3. MERGERS AND ACQUISITIONS: SUPERCUTS, INC. Effective October 25, 1996, the Company received shareholder approval for the merger agreement with Supercuts, Inc. (Supercuts) in a stock-for-stock merger transaction. Supercuts is a national operator of approximately 450 company owned/managed and franchisor of over 700 affordable hair care salons. Each Supercuts shareholder received 0.40 shares of the Company's common stock in exchange for each Supercuts common share, or approximately 4,550,000 shares of the Company's common stock on a fully diluted basis. The Supercuts transaction was accounted for as a pooling-of-interests; therefore, prior financial statements have been restated to reflect this merger. To effect the restatement, significant accounting adjustments were necessary to conform the accounting practices of Supercuts to those of Regis. A detailed description of the nature of these conforming accounting adjustments has been included in the notes to the Company's consolidated financial statements for the year ended June 30, 1996, which are included in Exhibit A to the Company's May 14, 1997 Report on Form 8-K filed with the Securities and Exchange Commission. The conforming accounting adjustments included adjustments to previously reported Supercuts net income (loss) and shareholders' equity due to consolidation of previously unconsolidated investor/franchisee stores, change in goodwill amortization periods and reversal of the capitalization of certain development costs. Prior to the merger, Supercuts' fiscal year for financial reporting purposes ended on December 31. No material adjustment to retained earnings was necessary to conform with Regis' year end. In addition, for periods preceding the merger, there were no intercompany transactions which required elimination from the combined consolidated results. OTHER ACQUISITIONS The following represents the unaudited pro forma results of operations of the Company (restated for the inclusion of Supercuts results) as if acquisitions occurring in fiscal 1996, primarily the U.K. and the Wal-mart acquisitions, as more fully described under Management's Discussion and Analysis of Financial Condition and Results of Operations, and the related common stock activity had occurred at the beginning of fiscal 1996. (Dollars in thousands, except per share amounts) ------------------------------------------------ Three months ended September 30, 1995 ------------------ Revenues $162,172 Income before income taxes 7,490 Net income 4,402 Net income per share $.20 5 These pro forma results may not be indicative of results that actually would have occurred had the acquisitions taken place at the beginning of the periods presented or of results which may occur in the future. 4. INCOME TAXES: As reflected in the Statement of Operations for Supercuts for the quarter ended September 30, 1996, Supercuts recorded as part of its September 30, 1996 income tax provision, a $1,500,000 change in estimate associated with income tax matters related to years prior to 1996. this change in estimate includes tax changes resulting from the completion of an Internal Revenue Service examination in the quarter ended September 30, 1996. Accordingly, this change in estimate is included in the financial results for the combined companies of Regis and Supercuts for the three months ended September 30, 1996. The Company's effective income tax rate, exclusive of the impact of nondeductible merger and transaction costs and the $1,500,000 change in estimate, for fiscal 1997 is estimated to be approximately 42 percent, consistent with that incurred for fiscal 1996. 5. 1996 RESTRUCTURING CHARGE: At September 30, 1996, of the Company's 1996 restructuring charge, $5,714,000 remained in accrued expenses in the balance sheet primarily associated with related litigation and salon closures and dispositions. 6. CONTINGENCIES: On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"), a Nevada corporation, which the Company believes is wholly owned by Mr. Lipson, brought legal action against Supercuts, a wholly owned subsidiary of the Company, and certain Supercuts directors and officers. The initial lawsuit, prior to subsequent amendments, sought payment of $3,000,000, allegedly due to DEL pursuant to a Consulting Agreement dated as of August 22, 1995, between Supercuts and DEL. The initial lawsuit also sought unspecified damages allegedly sustained by Mr. Lipson as a result of a delay in his ability to sell 1,508,220 shares of Supercuts' common stock, which were sold by him between February 20 and February 28, 1996, because of Supercuts' refusal to remove restrictive legends from certificates representing such stock. according to his lawsuit, Mr. Lipson sold the number of shares noted for an aggregate of $7,800,000, or a reported average price of $5.20 per share. Supercuts' common stock price range for the month of February 1996, was a high of 7-3/8, a low of 5-1/8 and a close of 5-1/8. All matters that were heard in the United States District Court for the Northern District of Illinois, Eastern Division, Case No. 96C-0822, are currently on appeal in the United States Court Of Appeals for the Seventh Circuit. 6 In August 1996, Mr. Lipson also brought legal action against Supercuts in the Circuit Court of Cook County, Illinois alleging that Supercuts has defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000." Supercuts has denied these allegations. Mr. Lipson has also filed suit against Supercuts in the Court of Chancery of the State of Delaware seeking advancement of expenses incurred by him in certain litigation and other proceedings. On December 10, 1996, the Delaware Court ruled that Mr. Lipson is entitled to an advancement of certain expenses incurred by him, but did not establish the amount of the advancement. The amount to be advanced is under negotiation. On April 17, 1997, the Securities and Exchange Commission charged Mr. Lipson with unlawful insider trading in Supercuts stock during 1995, alleging that he avoided a loss of approximately $621,000 through such trading. Mr. Lipson has stated that he intends to contest the charges. While additional future charges, if any, related to this litigation could have a material adverse impact on the Company's net income in the quarterly period in which they would be recorded, management of the Company believes, based on the advice of counsel, that such additional charges, if any, will not have a material adverse effect on the consolidated financial position or annual results of operations of the Company. 7 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Regis Corporation: We have reviewed the accompanying consolidated balance sheet of Regis Corporation as of September 30, 1996, and the related consolidated statements of operations and cash flows for the three months ended September 30, 1995 and 1996. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of June 30, 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended (not fully presented herein); and in our report dated May 9, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 1996, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota May 14, 1997 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Regis Corporation, based in Minneapolis, is the largest owner, operator and franchisor of mall-based hair and retail product salons in the world. The Regis worldwide operations include 3,177 hairstyling salons at September 30, 1996 operating in six divisions: Regis Hairstylists, Supercuts, MasterCuts, Trade Secret, Wal-Mart and International. Worldwide operations include 730 franchised Supercuts salons and 61 other franchised salons operating primarily in the Trade Secret division. The Company has more than 25,000 employees worldwide. During the first quarter of fiscal 1997, the Company's consolidated sales increased 21.4 percent to a record $170,605,000 and operating income grew 36.5 percent to $12,360,000. Exclusive of nonrecurring gains, earnings per share increased 38.9 percent in the first quarter of fiscal 1997 to $.25 per share, compared to $.18 per share in the same period the prior year. Effective October 25, 1996, the Company received shareholder approval for the merger agreement with Supercuts in a stock-for-stock merger transaction. Supercuts is a national operator of approximately 450 company owned/managed and franchisor of over 700 affordable hair care salons. Each Supercuts shareholder received 0.40 shares of the Company's common stock in exchange for each Supercuts, Inc. common share, or approximately 4,550,000 shares of the Company's common stock on a fully diluted basis. Financial data for all periods presented reflect the retroactive effects of the October 1996 merger with Supercuts which has been accounted for as a pooling-of-interests. The financial statements have been prepared by combining the current and historical financial statements of Regis Corporation with those of Supercuts for each of the periods presented. The Company expects to record a nonrecurring pretax charge in the second quarter ended December 31, 1996 in the range of approximately $18 million for transaction, restructuring and other nonrecurring costs associated with the merger. A significant portion of this charge will be nondeductible for income tax purposes. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percentage of revenues. All percentages were computed as a percentage of total revenue from company-owned salon operations. For purposes of this analysis, revenues from the Company's franchise operations have been netted against the related franchise expenses, as included in the cost category "Other, including franchise revenues and expenses". This was done to facilitate a meaningful comparison of the historical expense ratios of the Company. Franchise revenues are not material to the Company as they represent less than 5 percent of total revenues. 9 WORLDWIDE OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, ---------------------------------------- 1995 1996 ---- ---- Revenues 100.0% 100.0% Operating expenses: Cost of sales 57.2 57.0 Rent 13.1 14.1 Selling, general and administrative 22.3 20.8 Depreciation and amortization 4.3 4.2 Other, including franchise revenues and expenses (3.7) (3.6) ----- ----- 93.2 92.5 ----- ----- Operating income 6.8 7.5 Other income (expense): Interest (1.7) (1.4) Nonrecurring gains 0.1 0.1 Other, net 0.1 ----- ----- Income before income taxes 5.2 6.3 Income taxes (2.2) (3.5) ----- ----- Net income 3.0% 2.8% ----- ----- ----- ----- THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995: REVENUES. Revenues for the first quarter of fiscal 1997 grew to a record $170,605,000, representing an increase of $30,030,000, or 21.4 percent, over the same period in fiscal 1996. Approximately 75 percent of the increase is attributable to salon acquisitions occurring subsequent to the first quarter of fiscal 1996, with the remaining increase due to net salon openings, and increases in customers served and product sales. Regis Hairstylists, Supercuts, MasterCuts, Trade Secret and Wal-Mart salons in the United States and Canada (Domestic salons) accounted for $18,360,000 of the total revenue increase. The remainder of the revenue increase of $11,670,000 was related to the Company's salon operations in the United Kingdom, South Africa, Switzerland and Mexico (International salons) and was largely influenced by the Company's salon acquisitions subsequent to the first quarter of fiscal 1996 in the United Kingdom. For the first quarter of fiscal 1997, revenues from Regis Hairstylists were $67,172,000, an increase of 2.1 percent, and revenues from Supercuts were $30,747,000, an increase of 6.6 percent. Revenues from MasterCuts were $22,783,000, an increase of 16.1 percent; Trade Secret company-owned revenues were $19,180,000, an increase of 35.1 percent; revenues from Wal-Mart salons were $7,427,000, a newly acquired division compared to the same period a year ago; 10 and International salon sales were $22,335,000, an increase of more than 100 percent, principally due to acquisitions subsequent to the first quarter of fiscal 1996. During the first quarter of fiscal 1997, same-store sales from Domestic salons open more than twelve months increased 2.5 percent, compared to a 4.1 percent same-store sales increase during the same period the previous year. Same-store sales for the United Kingdom salons (U.K. salons), the primary component of International salons, increased 4.4 percent during the quarter. Same-store sales increases achieved during the first quarter of fiscal 1997 are primarily due to an increase in the number of customers served. 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. SERVICE REVENUES. Service revenues in the first quarter of fiscal 1997 were $121,540,000, an increase of $21,130,000, or 21.0 percent, over the same period in fiscal 1996. This increase was primarily due to acquisitions, net salon openings and same-store sales growth. PRODUCT REVENUES. Product revenues in the first quarter of fiscal 1997 were $42,381,000, an increase of $8,905,000, or 26.6 percent, over the same period in fiscal 1996. The Trade Secret retail product salon operations represented $3,854,000 of this overall increase, reflecting salon acquisitions occurring subsequent to the first quarter of fiscal 1996, net salon openings, and same-store sales growth. Product revenues for the Company's Regis Hairstylists, Supercuts, MasterCuts and Wal-Mart salons increased $3,453,000. This increase in product revenue mix reflects the impact of the Wal-Mart salons acquisition, which have a higher percentage of product sales, increased customer awareness, further acceptance of national brand salon merchandise, and sales training of Company employees. The balance of the product revenues increase relates to International salons, largely caused by fiscal 1996 salon acquisitions. COST OF REVENUES Cost of both service and product revenues in the first quarter of fiscal 1997 was $93,404,000, compared to $76,561,000, in the same period the previous year. The resulting combined gross margin percentage for the first quarter of fiscal 1997 was 43.0 percent of revenues compared to 42.8 percent of revenues in the same period the previous year. As further discussed below, this slight improvement in gross margin was primarily due to Supercuts partially offset by declines caused by the impact of the Wal-Mart salons acquired in June 1996. Service margins were 42.4 percent in the first quarter of fiscal 1997, compared to 41.8 percent in the same period the previous year. This increase in margin was primarily due to the continued sales maturation of Supercuts. This was partially offset by decline in margins for the Wal-Mart salon division, which had higher fixed cost payrolls as a percentage of revenues due to lower average revenue volume for these maturing salons. Retail product margins declined to 44.8 percent in the first quarter of fiscal 1997, compared to 45.9 percent in the same period the previous year. The Wal-Mart salon division was 11 the major factor for the difference in margins between the comparable periods. The operating statement reflects the sale of higher cost inventories purchased in connection with the Wal-Mart salons acquisition. RENT EXPENSE Rent expense in the first quarter of fiscal 1997 was $23,069,000, or 14.1 percent of revenues, compared to $17,569,000, or 13.1 percent of revenues, in the same period the previous year. The primary reason for the increase as a percentage of revenues is due to fiscal 1996 department store salon acquisitions in the U.K., causing the International salon division to now comprise a larger percentage of the overall results. When compared to Domestic salon operations, the U.K. salon operations have higher rent expenses, offset by lower selling and administrative expenses, because certain costs are absorbed by department stores and passed on as rent. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative (SG&A) expense in the first quarter of fiscal 1997 was $34,019,000, or 20.8 percent of revenues, compared to $29,839,000, or 22.3 percent of revenues, in the same period the previous year. Such expenses include costs directly related to salon operations (such as advertising, promotion, insurance, telephone and utilities), field supervision costs (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). As previously discussed, the fiscal 1996 U.K. department store salon acquisitions had a favorable effect on SG&A expense. The balance of the rate improvement was due to continued sales leveraging of fixed and semi-fixed costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense in the first quarter of fiscal 1997 decreased to 4.2 percent from 4.3 percent of revenues last year. Depreciation expense, the major component within this category, has remained relatively consistent as a percentage of sales. OPERATING INCOME Operating income in the first quarter of fiscal 1997 improved to $12,360,000, an increase of $3,307,000, or 36.5 percent, over the same period the previous year. Operating income as a percentage of revenues was 7.5 percent in the first quarter of fiscal 1997 compared to 6.8 percent in the same period the previous year. As a percent of revenues, the improvement is attributable primarily to Supercuts due to salon maturation. 12 INTEREST EXPENSE Interest expense for the first quarter of fiscal 1997 was $2,450,000, or 1.4 percent of revenues, compared to $2,236,000, or 1.7 percent of revenues in the same period the previous year. The slight improvement as a percent of revenues is due to sales leveraging as the expense amount remains relatively consistent. NONRECURRING GAINS During the first quarters of fiscal 1997 and 1996, the Company received $218,000 and $137,000, respectively, of principal payments from Premier Salons. The Company had previously written off the related receivable, and accordingly, is recording all subsequent principal payments as a nonrecurring gain. INCOME TAXES As reflected in the Statement of Operations for Supercuts for the quarter ended September 30, 1996, Supercuts recorded as part of its September 30, 1996 income tax provision, a $1,500,000 change in estimate associated with income tax matters related to years prior to 1996. This change in estimate includes tax changes resulting from the completion of an Internal Revenue Service examination in the quarter ended September 30, 1996. Accordingly, this change in estimate is included in the financial results for the combined companies of Regis and Supercuts for the three months ended September 30, 1996. The Company's effective income tax rate, exclusive of the impact of nondeductible merger and transaction costs and the $1,500,000 change in estimate, during fiscal 1997 is estimated to be approximately 42 percent, consistent with that incurred during fiscal 1996. NET INCOME Net income for the first quarter of fiscal 1997 increased to $4,541,000, or $.20 per share, compared to net income of $4,018,000, or $.18 per share in the same period the previous year. Exclusive of the effect of the nonrecurring income items in both periods, net income for the first quarter fiscal 1997 would have been $5,911,000 or $.25 per share, compared to net income for the first quarter of fiscal 1996 of $3,936,000, or $.18 per share. LIQUIDITY AND CAPITAL RESOURCES Customers generally pay for salon services and merchandise in cash at the time of sale, which reduces the Company's working capital requirements. Net cash provided by operating activities in the first quarter of fiscal 1997 was $10,196,000, compared to $9,059,000 during the same period the previous year. The increase between the two periods is mainly due to improved operating performance. 13 During the first quarter of fiscal 1997, the Company had worldwide new salon capital expenditures of $9,214,000, $895,000 of which relates to acquisitions. The Company constructed 5 new Regis Hairstylists salons, 2 new Supercuts salons, 9 new MasterCuts salons, 16 new Trade Secret salons, 6 new Wal-Mart salons and 4 new International salons, and completed 9 major remodeling projects. All capital expenditures during the first quarter of fiscal 1997 were funded by cash flow from the Company's operations and borrowings under its revolving credit facilities. The Company anticipates its worldwide salon development program for fiscal 1997 will include a minimum of 170 new salons, and 60 major remodeling and conversion projects (including the 42 new salons opened and 9 remodeling projects completed during the first quarter of fiscal 1997). It is expected that expenditures for these new salons and other projects will be approximately $36,000,000 in fiscal 1997, excluding acquisition activity. The Company has a $20,000,000 revolving credit facility which bears interest at the prime rate, and matures in October 1998. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate plus a LIBOR margin up to 1.50 percent. The revolving credit facility requires a quarterly commitment fee of 1/4 percent per annum on the unused portion of the facility. As of September 30, 1996, borrowings of $8,700,000 were outstanding under this credit facility. At September 30, 1996, the Company had three outstanding senior term notes: a $24,000,000 note bearing interest at a fixed rate of 11.52 percent which is subject to annual mandatory payments of $10,000,000 on June 30, 1997 and $14,000,000 on June 30, 1998; a $10,000,000 note, bearing interest at a fixed 6.94 percent, which is due in July 2005; and a $5,000,000 note bearing interest at a fixed 7.99 percent which is due in July 2003. The senior term notes and the revolving credit facility 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. At September 30, 1996, there was $21,300,000 outstanding under the Supercuts revolving credit facility. In October 1996, the Supercuts facility was refinanced under terms and conditions consistent with that of the Company's long-term borrowings with $22,000,000 of additional long-term notes with mandatory repayments of $10,000,000 and $12,000,000 in fiscal years 2005 and 2007. Also, in October and December 1996, the Company borrowed an additional $10,000,000 and $5,000,000, under long-term senior term notes with mandatory repayment over fiscal years 1999 through 2005 to fund merger related costs and to pay down the Regis revolving credit facility. Although utilized to pay down borrowings under the revolving credit facility, the $5,000,000 borrowing is intended to make available funds to help franchisee expansion. These additional term note borrowings bear interest at fixed rates ranging from 7.16 to 7.8 percent. At September 30, 1996, of the Company's 1996 restructuring charge, $5,714,000 remained in accrued expenses in the balance sheet primarily associated with related litigation and salon closures and dispositions. Transactions by the Company's International salons are invoiced and paid in local currency. Accordingly, the Company is subject to risks associated with fluctuations in currency exchange rates. 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. In September 1996, the Company paid a quarterly dividend of $361,000 or 2 cents per share. See contingencies discussed in Note 6 to the unaudited consolidated financial statements. 14 -----END PRIVACY-ENHANCED MESSAGE-----