-----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, KTlyCgffCCUVGecEgUt5hJXEo1XdZTW5LoXe518S66n2QcVCBHTugvnm6e+F0Grr PDzrynKO02vDxw6BqKAqaA== 0000912057-97-031608.txt : 19970925 0000912057-97-031608.hdr.sgml : 19970925 ACCESSION NUMBER: 0000912057-97-031608 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970924 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: 10-K SEC ACT: SEC FILE NUMBER: 000-11230 FILM NUMBER: 97684985 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 10-K 1 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ----------------- Commission file number 0-11230 ----------- Regis Corporation --------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0749934 - -------------------------------- ------------------- State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 7201 Metro Boulevard, Edina, Minnesota 55439 - ----------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 947-7777 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None - ------------------- ----------------------------------------- Securities registered pursuant to section 12(g) of the Act: Common Stock, Par Value $.05 per share ------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of registrant (based upon closing price of $23.91 per share as of September 15, 1997, as quoted on the NASDAQ), was $395,025,216. The number of outstanding shares of the registrant's common stock, par value $.05 per share, as of September 15, 1997, was 23,338,425. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated September 16, 1997 and Annual Report to Shareholders for the year ended June 30, 1997, are incorporated by reference into Parts I, II and III. 2 PART I ITEM 1. BUSINESS BACKGROUND 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 3,293 hairstyling salons at June 30, 1997 operating in six divisions: Regis Hairstylists, Supercuts, MasterCuts, Trade Secret, Wal-Mart and International. Worldwide operations include 2,484 company-owned salons, 757 franchised Supercuts salons and 52 other franchised salons operating primarily in the Trade Secret division. The Company has more than 25,000 employees worldwide (excluding franchisee operations). INDUSTRY OVERVIEW Management estimates that annual revenues of the haircare industry were $40 billion in the United States and $80 billion worldwide. The industry is highly fragmented with the vast majority of haircare salons independently owned. However, the influence of chains, both franchise and company-owned, has increased substantially, although still accounting for a small percentage of total locations. Management believes that chains will continue to increase their presence. Management also believes that the demand for salon services and products will increase in the next decade as the population ages and desires additional haircare services such as coloring. BUSINESS STRATEGY The Company's goal is to provide high quality haircare services and products to customers in different market groups through physically attractive salons in high traffic shopping mall locations. The key elements of the Company's strategy to achieve these goals are the following: CONSISTENT, QUALITY SERVICE. The Company is committed to meeting its customer's haircare needs by providing competitively priced services and products in convenient locations with professional and knowledgeable hairstylists. The Company's operations and marketing emphasize high-quality services to create customer loyalty, to encourage referrals and to distinguish the Company's salons from its competitors. The major services supplied by the Company's salons are haircutting and styling, hair coloring, shampooing, conditioning and permanent waving. To promote quality and consistency of services provided throughout the Company's salons, Regis has full and part-time artistic directors whose duties are to teach and train salon operators and to instruct the stylists in current styling trends. During fiscal 1997, the Company and its franchisees provided services to more than 70 million customers worldwide. 3 MALL-BASED LOCATIONS. As the largest national mall-based operator in the hair salon industry, the Company has the ability to obtain desirable locations in high-profile, regional malls anchored by major department stores. Mall owners and developers typically seek retailers such as Regis due to the Company's financial strength, successful salon operations and status as a national mall tenant. The Company's locations, which are aesthetically appealing and designed to attract customers from mall shoppers, provide a steady source of new business. STRIP-MALL-BASED LOCATIONS. The merger with Supercuts on October 25, 1996, positions the Company in the rapidly growing strip shopping center segment of the retail haircare market in the United States (see below). Supercuts salons are conveniently located in strip shopping centers with adequate traffic, appropriate trade area demographics, good visibility within the center or from adjoining streets, effective signage, easy access and adequate parking. Supercuts seeks to locate its salons in so-called "power strips", anchored by the number one or two grocery chain in the specific market or alternatively, a major mass merchant. MULTIPLE SALON CONCEPTS. Regis operates primarily six salon concepts; Regis Hairstylists, Supercuts, MasterCuts, Trade Secret, International and Wal-Mart. Regis' various salon concepts in the United States address the major segments of the salon market. The Company's regional mall salon concepts provide the Company with the ability to have multiple locations in a single mall and the flexibility to convert concepts if mall demographics or customer preferences shift. Regis Hairstylists appeal primarily to women and are positioned at the moderate-to-upscale end of the salon market. MasterCuts appeal to the more value-conscious customer with promotional or discount prices and have a higher percentage of men and children as customers. Trade Secret provides hairstyling service and a broad selection of quality haircare and beauty products sold only through professional salons. Because the square footage for each of these concepts is approximately the same, the Company has the ability to determine which salon concept is best suited to a new location and change the concept of existing salons to meet demographic changes in the salon's market. The Company also operates salons outside of the mall concepts, as mentioned previously. Supercuts primarily targets the male population with affordable hair care salons in strip centers. Salons located in Wal-Mart stores and supercenters offer promotionally priced, family-oriented hair care. The International salons are located in department stores, hotels and stand-alone locations and are primarily focused on the moderate-to-upscale market. EXPANSION. The Company has grown through increased revenues from existing salons, constructing additional salons, and mergers and acquisitions. During the five year period ended June 30, 1997, the Company has added 2,094 net units (including franchised salons) to its worldwide salon base from new salon construction and merger and acquisitions. During this same period of time, the Company added new operating divisions, Trade Secret and Wal-Mart, merged with Supercuts (see below), and expanded its Regis Hairstylists, MasterCuts and International salon divisions. In addition to continuing its salon acquisition strategy, the Company expects to construct about 200 new company-owned salons and complete approximately 60 major remodeling and conversion projects during fiscal 1998. 4 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 4,500,000 shares of the Company's common stock. The transaction has been accounted for as a pooling-of-interests. The Company intends to continue to focus 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. HIGH QUALITY HAIRCARE PRODUCTS. Through Trade Secret and the Company's other salons, Regis sells nationally-recognized haircare products such as Joico-Registered Trademark-, KMS-Registered Trademark-, Matrix-Registered Trademark-, Paul Mitchell-Registered Trademark-, Nexxus-Registered Trademark-, Redken-Registered Trademark- and Sebastian-Registered Trademark- and a complete line of products sold under the Regis label, which is the Company's best selling product line. The salon branded products are typically sold only through professional salons and generate higher gross margins than haircutting and other salon services. The Company's stylists are trained to sell haircare products as well as services such as color treatments and manicures to their customers. Sales of haircare products increased nearly 25.5 percent in fiscal 1997 to $188 million and represented 27.3 percent of total revenue. CONTROL OVER SALON OPERATIONS. Regis controls the quality of operations and enjoys certain economies of scale in terms of certain central and store level expenses. Quality control is particularly important in those salon divisions where a greater portion of sales are derived from hairstyling services. The Company has an extensive training program, including the production of training videos for use in the salons, to ensure that hairstylists are knowledgeable and provide consistent quality haircare services. 5 ECONOMIES OF SCALE. Management believes that due to its size and number of locations the Company has certain advantages which are not available to single location salons or small chains. The Company uses its point-of-sale system to track inventory and to monitor service and product sales. This product and customer information is used to evaluate salon productivity and, in some cases, to determine the most appropriate salon use for the location. Additionally, as a result of its volume purchases, the Company is able to purchase haircare products and supplies and salon fixtures on an advantageous basis. The Company is also able to gain national and local market recognition for the Regis name and its salon concepts through national and local advertising and promotional programs. REGIS HAIRSTYLISTS Regis Hairstylists are full-service salons providing complete haircare and beauty services aimed at moderate to upscale, fashion-conscious consumers. The customer mix at Regis Hairstylists salons is approximately 70 percent women and 30 percent men. These salons offer a full range of custom hairstyling, cutting, coloring, permanent wave and manicuring as well as haircare products. The average sale at Regis Hairstylists salons is approximately $20. Regis Hairstylists salons compete in their existing markets primarily by emphasizing the high quality of full services provided. The Company actively monitors the prices charged by its competitors in each area and makes every effort to maintain prices which, although in the higher range of local prices, are not so high as to be uncompetitive with prices of other salons offering similar, high-quality services. At June 30, 1997, the Company operated 811 Regis Hairstylists salons in shopping malls in North America. Revenues from the Regis Hairstylists salons were $275 million, or 38.6 percent of the Company's total revenues, in fiscal 1997. The Company expects to construct about 40 new Regis Hairstylists salons in fiscal 1998. SUPERCUTS The Supercuts concept is to provide consistent high quality haircare services to its customers at convenient times and locations and at a reasonable price. The services offered by Supercuts stores are limited and standardized. The stores are designed for ease of operation and the demand for basic haircare is believed to be recession resistant and non-seasonal. The Supercuts concept appeals to men, women and children, although male customers account for over 70 percent of total haircuts. Consumer research indicates that males get their hair cut slightly more often (8-9 times annually) than females (7-8 times annually) and their haircuts generally take less time. Supercuts targets a male audience. At June 30, 1997, the Company operated 1,176 Supercuts salons in strip centers in North America, including 757 franchised locations. Revenues and income from company-owned Supercuts salons and franchising activity was $96 million and $23 million, respectively, or 16.6 percent of the Company's total revenues in fiscal 1997. The Company expects to construct about 12 new company-owned and add about 55 franchised Supercuts stores in fiscal 1998. 6 MASTERCUTS FAMILY HAIRCUTTERS MasterCuts Family Haircutters salons were introduced in 1985 to serve a broader customer base than Regis Hairstylists and to respond to competitive pressures for lower cost haircare services. MasterCuts salons emphasize quality haircutting, lower prices and time-saving services for the entire family. The customer mix at MasterCuts salons contains a greater percentage of men and children than at Regis Hairstylists salons. MasterCuts salons cater to walk-in customers and provide a warm, inviting atmosphere that is comfortable for all members of the family. Many of the same product lines sold in Regis Hairstylists salons are also available in MasterCuts salons. The average sale at MasterCuts salons is approximately $10. The MasterCuts salons place more emphasis on discount or promotional pricing for the services being offered to compete more effectively with the chains of salons, primarily franchises, now offering such services at discount prices. In certain markets, the Company has been able to improve a salon's performance by converting it to a MasterCuts salon. At June 30, 1997, the Company operated 362 MasterCuts salons in North America. Revenues from MasterCuts salons accounted for $95 million, or 13.3 percent of the Company's total revenues, in fiscal 1997. During fiscal 1998, the Company plans to construct approximately 50 new MasterCuts salons. TRADE SECRET Trade Secret salons emphasize haircare and beauty product sales in a retail setting while providing high-quality haircare services. Trade Secret salons are designed to display and attract sales of haircare and beauty products. Trade Secret salons offer the same products as the Regis Hairstylists and MasterCuts salons, but also have additional haircare items. The average sale at Trade Secret salons is approximately $15. At June 30, 1997, the number of Trade Secret salons totaled 340 in North America, including 38 franchised locations. Revenues and income from company-owned Trade Secret salons and franchising activity during fiscal 1997 was $91 million and $4 million, respectively, or 13.3 percent of the Company's total revenues. The Company anticipates constructing approximately 30 new Trade Secret salons in fiscal 1998. WAL-MART SALONS The Company expanded into the mass merchant retail arena in May 1996 by acquiring 154 salons operating within Wal-Mart stores and supercenters. Wal-Mart salons share many operating characteristics with MasterCuts: pricing is promotional, services are focused on family hair cutting, and product revenues contribute solidly to overall revenues. The Company operated 181 Wal-Mart salons at June 30, 1997. Revenue form Wal-Mart salons totaled $30 million, or 4.2 percent of the Company's total revenue. The Company anticipates constructing about 50 new salons in Wal-Mart supercenters in fiscal 1998. 7 INTERNATIONAL SALON OPERATIONS The Company operated 423 hair care salons in eight countries outside of the United States at June 30, 1997, including 352 salons in the United Kingdom. Canadian salons operate under the Regis Hairstylists, MasterCuts and Trade Secret tradenames, while salons in the remaining seven countries primarily operate in department stores under license arrangements. Revenues from the International salon operations were $99 million, or 13.9 percent of the Company's total revenues, in fiscal 1997. The Company expects to continue to modestly increase its International salon base in fiscal 1998. NEW SALON DEVELOPMENT The table on the following page sets forth the number of Company salons opened at the beginning and end of each of the last five years, as well as the number of salons opened, closed, relocated, converted and acquired during each of these periods. 8
SALON LOCATION SUMMARY 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- REGIS Open at beginning of period 815 802 801 787 797 Salons constructed 34 24 17 31 28 Acquired 6 9 9 18 Less: Relocations 13 11 11 11 10 --- --- --- --- --- Net salon openings 21 19 15 29 36 Conversions (13) (3) (10) (4) (4) Salons closed or sold (21) (17) (19) (15) (18) --- --- --- --- --- Open at end of period 802 801 787 797 811 --- --- --- --- --- --- --- --- --- --- SUPERCUTS Company-Owned: Open at beginning of period 48 185 326 464 507 Salons constructed 62 87 107 44 4 Acquired 27 16 1 --- --- --- --- --- Net salon openings 137 272 449 509 511 Conversions (1) 48 59 21 9 (61) Salon closed or sold - (5) (6) (11) (31) --- --- --- --- --- Open at end of period 185 326 464 507 419 --- --- --- --- --- --- --- --- --- --- Franchised Salons: Open at beginning of period 649 646 617 629 661 Salons added 51 35 41 41 37 Acquired 3 --- --- --- --- --- Net salon openings 700 681 658 673 698 Conversions (1) (48) (59) (21) (9) 61 Salon closed or sold (6) (5) (8) (3) (2) --- --- --- --- --- Open at end of period 646 617 629 661 757 --- --- --- --- --- --- --- --- --- --- MASTERCUTS Open at beginning of period 185 229 257 283 327 Salons constructed 34 25 21 33 36 Acquired 3 1 12 2 Less: Relocations 1 3 2 3 3 --- --- --- --- --- Net salon openings 33 25 20 42 35 Conversions 13 3 10 3 3 Salon closed or sold (2) (4) (1) (3) --- --- --- --- --- Open at end of period 229 257 283 327 362 --- --- --- --- --- --- --- --- --- ---
9
1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- TRADE SECRET Company-Owned: Open at beginning of period 55 106 152 219 Salons constructed 22 28 40 56 Acquired 54 30 19 11 11 Less: Relocations 1 2 1 4 4 ---- ---- ---- ---- --- Net salon openings 55 50 46 47 63 Conversions (1) 1 2 20 24 Salon closed or sold (2) (4) ---- ---- ---- ---- ---- Open at end of period 55 106 152 219 302 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Franchised Salons: Open at beginning of period -0- 64 68 55 Salons added 1 7 8 6 Acquired 64 Less: Relocations 1 ---- ---- ---- ---- ---- Net salon openings 65 7 7 6 Conversions (1) (1) (2) (19) (23) Salon closed or sold (1) (1) ---- ---- ---- ---- ---- Open at end of period 0 64 68 55 38 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- WAL-MART Open at beginning of period -0- 157 Salons constructed 3 24 Acquired 154 ---- ----- Net salon openings 157 24 Open at end of period 157 181 ---- ---- ---- ---- INTERNATIONAL (2) Open at beginning of period 199 225 251 244 408 Salons constructed 18 6 9 9 26 Acquired 21 27 2 178 3 Less: Relocations 4 1 ---- ---- ---- ---- ---- Net salon openings 35 33 11 186 29 Salons closed or sold (9) (7) (18) (22) (14) ---- ---- ---- ---- ---- Open at end of period 225 251 244 408 423 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Grand total, system-wide 2,142 2,422 2,627 3,131 3,293 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Major remodelings & conversions 38 35 46 65 72 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(1) Represents primarily the acquisition of franchise locations. (2) Canadian salons are included in the Regis, MasterCuts and Trade Secret sections and not included in the International salon totals. 10 Of the 174 new company-owned salons constructed in fiscal 1997, 28 were Regis Hairstylists salons, 4 were Supercuts, 36 were MasterCuts, 56 were Trade Secret, 24 were Wal-Mart and 26 were International salons. The Company intends to construct approximately 200 new company-owned salons during fiscal year 1998 and expects that about 40 of these will be Regis Hairstylists salons, about 12 will be Supercuts (in addition to about 55 new franchised locations), about 50 will be MasterCuts, about 30 will be Trade Secret, about 50 will be Wal-Mart salons and there will be a modest increase in International salons. The Company has a program of modernizing its existing salons, ranging from redecoration to substantial reconstruction, in order to raise its older salons to the standards of its newly constructed locations. This program is implemented as management determines that a particular location will benefit from such modernization, or as required by lease renewals. HAIRCARE PRODUCTS In recent years, the Company has placed emphasis on the sales of higher-margin haircare products, with the result that such revenues have become an increasingly important part of the Company's business, having grown from 5.4 percent of total revenues in fiscal 1987 to 27.3 percent in fiscal 1997. A significant portion of this growth has resulted from the introduction of national brand merchandise in 1988 and the acquisition of Beauty Express in November 1992 and Trade Secret in December 1993. The haircare products offered are primarily shampoos, hair conditioners, fixatives and hair sprays. Regis private label products, as well as lines of salon branded products, are sold only through licensed beauty salons, including Joico-Registered Trademark-, KMS-Registered Trademark-, Matrix-Registered Trademark-, Paul Mitchell-Registered Trademark-, Nexxus-Registered Trademark-, Redken-Registered Trademark- and Sebastian-Registered Trademark-. The Regis line continues to be the Company's best selling product line. The Company actively reviews its product line offerings and continuously investigates the quality and sales potential of new products. The Company utilizes its national salon network as a testing ground for new product formulations. There are many potential sources of supply for the types of products used or sold at the salons, and the Company is not dependent upon any single supplier. SITE SELECTION The Company is the largest shopping mall tenant which operates haircare salons in the United States and has attained national tenant status which makes the Company an attractive tenant for shopping mall owners and developers. In the United States, there are approximately 1,800 enclosed malls which meet the Company's performance criteria with several new shopping malls developed each year. At June 30, 1997, the Company's 1,513 United States and Canadian mall-based salons were located in approximately 1,011 shopping malls. Because the Company's different salon concepts target different customer groups depending on the size and location of the shopping malls, more than one of the Company's salon concepts may be located in the same mall. As a result, there are numerous leasing opportunities in shopping malls for its Regis Hairstylists, MasterCuts and Trade Secret salons, of which the Company has penetrated less than fifty percent. 11 The Company generally locates its Regis, MasterCuts and Trade Secret salons in fully enclosed, climate-controlled shopping malls classified as "regional" having 400,000 or more square feet of leasable area and at least two full-line department store anchor tenants. The Company's experience has been that selecting the proper mall and obtaining a favorable, high-traffic location within the mall are important determinants of the success of a new salon. For existing malls, the Company evaluates the current sales per square foot of tenants, the stature and strength of the anchor tenants and the other tenants, the location and traffic patterns within the mall, and the proximity of competitors. In addition, the Company may conduct site surveys and physical observations to assess the location and competitive environment. Several trends have enabled the Company to continue to lease high-profile space in existing malls. Leasing velocity and turnover have increased because the average length of shopping mall lease terms has been steadily declining. Also, many larger tenants are downsizing their leased areas to make better use of costly space, thereby creating available floor space. Also, many existing malls are being expanded, renovated and remerchandised. Because of these factors, the Company believes that it has ample expansion opportunities and therefore can be selective in establishing new locations. In evaluating specific locations for Supercuts Company-owned and franchise stores, the Company seeks conveniently located, highly visible strip shopping centers which allows customers adequate parking and quick and easy store access. The Company believes strip shopping centers anchored by the number one or two grocery chain in the specific market, or a major mass merchant, provide a profitable customer flow. Supercuts' customers are destination shoppers and, as a result, Supercuts is not dependent upon expensive regional shopping mall locations. Various other factors are considered in evaluating sites, including trade area demographics, availability and cost of space, location of competitors, traffic count, visibility, signage and other leasehold factors in a given center or area. All franchisee sites must be approved by the Company. SUPERCUTS FRANCHISING PROGRAM GENERAL The Company provides its Supercuts franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, professional marketing, promotion and advertising programs, and other forms of support designed to help the franchisee build a successful business. The Company employs field staff personnel to assist franchisees in all aspects of operations, training and supervision. 12 STANDARDS OF OPERATIONS All Supercuts franchisees are required to conform to Company-established operational policies and procedures relating to quality of service, training, design and decor of stores, and trademark usage. The Company's field personnel make periodic visits to franchised stores to ensure that the stores are operating in conformity with Supercuts standards. In addition, to further ensure such conformity, the Company enters into the lease for the store site directly with the landlord, and subsequently subleases the site to the franchisee. The sublease provides the Company with the right to terminate the sublease and gain possession of the store if the franchisee fails to comply with the Company's operational policies and procedures. See Note 6 of "Notes to the consolidated Financial Statements" for further information. FRANCHISE SALES Franchisee expansion is now being encouraged and will continue to be a significant focus of the Company in the future. Existing franchisees and new franchisees who open more than one salon receive a reduction in franchise fees. FRANCHISEE TRAINING The Company provides new Supercuts franchisees with training, focusing on the various aspects of store management, including operations, personnel management, marketing fundamentals and financial controls. Existing franchisees receive training, counseling and information from the Company on a continuous basis. The mechanisms include mail, "800" number information lines and E-mail. In addition, the Company provides store managers and stylists with extensive training. For a further description of the Company's education and training programs, see "Education and Training" below. FRANCHISE TERMS Supercuts franchisees currently pay a monthly royalty to the Company of 10 percent of a store's service revenues and 4 percent of a store's product revenues. In addition, franchisees pay an advertising fee of 5 percent of service revenues, which is held in a separate account and administered by the Company. In calendar 1996, franchisees contributed approximately $10 million to the advertising fund. All royalties and advertising fees are due monthly. For franchise locations opened between the period July 1, 1996 and June 30, 1997 franchisees may choose either (i) a sliding scale service royalty fee, based on monthly revenues combined with the standard 4% product royalty fee or (ii) a combined service and product royalty fee of 6 percent. For franchise locations opened on or after July 1, 1997 the royalty fee is 6 percent of combined service and product revenues. 13 Beginning July 1, 1996, franchise fees for existing franchisees are $10,000 per salon. Franchise fees for a franchisee's initial location are $22,500. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory and certain other items, including initial working capital. New franchisees also must pay an initial fee of $5,000 for franchisee training. The existing franchise agreements have an initial term of 10 years with the option by the franchisee to renew for one additional ten-year period. Upon renewal, franchisees pay a renewal fee of 4 percent of the franchisee's total store revenues for the prior 12 months. During fiscal 1997, all agreements eligible for renewal were renewed. The agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchise. The current franchise agreement is site specific and does not provide any territorial protection to a franchisee, although some older franchise agreements do include limited territorial protection. The Company has a comprehensive impact policy that resolves potential conflicts among franchisees and/or the Company regarding proposed salon sites. The term of the new franchise agreement, which existing franchises may convert to, runs without limitation provided the right to possession of the location does not expire or is not terminated and further provided the franchise agreement is not terminated. The new franchise agreement does not provide for a renewal fee but rather requires a $30,000 investment (in 1997 dollars) every ten years. MARKETS AND MARKETING Approximately half of the Company's North American salons are situated in "middle markets" with service area populations between 80,000 and 800,000. Approximately one-fourth of the Company's salons are located in smaller markets with a service area population below 80,000, and about one-fourth are located in major metropolitan areas with populations in excess of 800,000. The Company believes that the geographic dispersion of its salons throughout the United States may diminish the impact of fluctuations in regional business cycles. The Company maintains various advertising, sales and promotion programs for its salons, budgeting a predetermined percent of revenues for such programs. The Company has developed promotional tactics and institutional sales messages for each of its divisions targeting certain customer types and positioning each concept in the marketplace. Print, radio and television and billboard advertising are developed and supervised at the Company's headquarters, but most advertising is done in the immediate area of the particular salon. The Company has conducted institutional advertising and public relations on a national basis through such magazines as SEVENTEEN, PEOPLE and VOGUE. In addition, the Company conducts seasonal sales promotions in the winter (Christmas merchandising) and late summer (back-to-school). 14 Supercuts maintains an Advertising Fund (the "Fund") that provides comprehensive advertising and sales promotion support for the Supercuts system. All Supercuts stores, Company-owned and franchised, contribute 5 percent of service revenues to the Fund, 80 percent of which is allocated to the contributing market for media placement and local marketing activities and 20 percent of which is allocated for national advertising campaigns and system-wide activities. Each new franchised salon opened by a new franchisee or by an existing franchisee in a new market, contributes $5,000 for grand opening expenses. Additionally, salons may contribute supplemental funds to pay for advertising costs above their total market contributions. The Company's marketing department develops and administers (at no additional cost to the franchisees or the Fund) system-wide advertising and promotion. Market research suggests that customers have a high loyalty to their haircare providers such as Supercuts. This intensive advertising program creates significant consumer awareness, a strong brand image and high loyalty. In calendar 1996, $14.3 million was paid into the Fund, by both franchised and Company-owned Supercuts stores. Supercuts conducts regular, system-wide promotional programs for markets and an initial grand opening program for new stores. Each includes broadcast, print, direct mail and public relations campaigns. The Company's salons also support charitable events. In the annual "Clip for the Cure," many Regis salons worldwide offer haircuts for $10 and all proceeds are donated to the Company's Foundation for Breast Cancer Research which donates money to organizations researching a cure for breast cancer. The Company has reached nearly $2.0 million in fundraising for breast cancer charities. SALON TRAINING PROGRAMS The Company has an extensive hands-on training program for its salon managers and hairstylist associates which emphasizes both technical training in hairstyling and cutting, perming, hair coloring and hair treatment regimes as well as customer service and product sales. The objective of the training programs is to ensure that customers receive professional and quality service which the Company believes will result in more repeat customers, referrals and product sales. The Company has full- and part-time artistic directors who teach and train the salon operators in techniques for providing the salon services and who instruct the stylists in current styling trends. The Company also has an audiovisual based training system in its salons designed to enhance technical skills of hairstylists. The Company has a customer service training program to improve the interaction between employees and customers. Staff members are trained in the proper techniques of customer greeting, telephone courtesy and professional behavior through a series of professionally designed video tapes and instructional seminars. 15 Supercuts provides extensive initial and ongoing training to stylists through its system of field educators. Every stylist must attend a training course at one of the Supercuts designated training centers at which they are taught the Supercuts' haircutting technique and customer service principles. Stylists must be recertified every 6 to 9 months. STAFF RECRUITING AND RETENTION Recruiting quality managers and hairstylists is essential to the establishment and operation of successful salons. The Company's supervisory team seeks to recruit entrepreneurial salon managers who display initiative and imagination. The Company has been successful in recruiting capable managers and stylists for a number of reasons. To employ and retain qualified and productive employees, the Company utilizes a broad compensation system including cash incentives, merchandise awards, Company-sponsored trips and benefit programs. The Company believes that its compensation structure for salon managers and hairstylists is competitive within the industry. Stylists benefit from the Company's high-traffic locations in quality malls, as well as name-recognition from Supercuts, and receive a steady source of new business from walk-in customers. In addition, the Company offers a career path with the opportunity to move into managerial and training positions within the Company. SALON DESIGN The Company's salons are designed, built and operated in accordance with uniform standards and practices developed by the Company based on its experience. New salons are designed and constructed according to the Company's standard specifications, thereby reducing design and construction costs and enhancing operating efficiencies. Salon fixtures and equipment are also uniform, allowing the Company to place large orders for these items with attendant cost savings. The size of the Company's salons ranges from 500 to 2,300 square feet, with the typical salon having about 1,100 square feet. At present, the cost to the Company of constructing and furnishing a new salon, including inventories, averages in the range of approximately $80,000 to $145,000, with about 80 percent of the total construction cost for leasehold improvements and the balance for salon fixtures, equipment, and inventory. 16 The Company maintains its own construction and design department, and designs and supervises the construction, furnishing and fixturing of all new salons. The Company has developed considerable expertise in designing upscale, visually appealing salons. The design and construction staff focuses on aesthetic appeal, efficient use of space, cost and rapid completion times. The Company's salons are airy in appearance with open store fronts and have few, if any, partitions. Haircare products offered for sale are prominently and attractively displayed in the salons. Each of the Company's salon concepts has a different design related to the image to be projected. Regis Hairstylists salons are more upscale in design and utilize marble floors, mirrors and contrasting black and white colors. Supercuts salons are functional in design and tastefully furnished, consistent with its image of a quality provider of affordable haircutting services. MasterCuts salons are family oriented and include extensive use of woodwork and warm, comfortable colors. Trade Secret salons use many of the same design techniques as Regis Hairstylists salons, and also have open and easily accessible product displays. Wal-Mart salons, which are strategically located near the check out counters in the front of Wal-Mart stores and supercenters, are efficiently designed and tastefully furnished to complement the Wal-Mart retail environment. OPERATIONS Company-owned and franchised salons located in the United States, Puerto Rico, Canada, and Mexico are operated and managed as part of the Company's North American operations. All other salons, located in department stores in the United Kingdom, South Africa, Switzerland, Ireland, France and the United Arab Emirates are operated and managed through the Company's United Kingdom subsidiary. For each salon division, the Company's operations are divided into geographic regions throughout the United States. Each region is headed by one of the Company's salon directors, assisted by regional field managers and area supervisors, who coordinate the operations of the salons in the particular region. The area supervisors are responsible for hiring and training the managers for each salon. Over the years the Company has developed uniform procedures for opening new salons in such a manner as to maximize revenues from a new location as rapidly as possible. After opening, all salons are operated according to standard procedures which the Company has learned are desirable for the operation of an efficient, high-quality, profitable salon. 17 MANAGEMENT INFORMATION SYSTEMS The Company utilizes a retail point-of-sale information system in all its salons. This system collects data daily from each salon and consolidates the data into several management reports. The Company's automated system polls terminals nightly and all salon cash receipts are transferred automatically into a centralized bank account, thereby significantly reducing administrative expenses. Point-of-sale information is also used both to monitor salon performance and to generate customer data for use in identifying and anticipating industry trends for purposes of pricing and marketing. The Company has expanded the system to deliver on-line information as to sales of products to improve its inventory and control system, including suggested monthly product purchase recommendations for a salon, a monthly report of sales and a perpetual inventory. Management believes that its information systems provide advantages in planning and analysis which are not available to a majority of its competitors which do not have management information systems. COMPETITION The haircare industry is highly competitive. In every area in which the Company has a salon, there are competitors offering similar haircare services and products at similar prices. The Company faces competition within malls from companies which operate salons as departments within department stores and from smaller chains of salons, independently owned salons and, to a lesser extent, salons which, although independently owned, are operating under franchises from a franchising company that may assist such salons in areas of training, marketing and advertising. Significant entry barriers exist for new chains due to the need to establish brand identification, systems and infrastructure, recruitment of experienced haircare management and adequate store staff, and leasing of quality sites. The principal factors of competition in the affordable haircare category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of difference versus the competition. In order to obtain locations in shopping malls, the Company must be competitive as to rentals and other customary tenant obligations. The Company believes that because of its established relationships with many leading shopping center developers throughout the country, its status in the haircare industry as a national rather than a local tenant, and its financial resources, it will encounter little difficulty in obtaining sufficient shopping center locations to continue its historical pattern of growth. 18 TRADEMARKS The Company holds numerous trademarks, both in the United States and in several foreign countries. The most important are the trademarks "Regis Hairstylists," "Supercuts," "MasterCuts" and "Trade Secret." The Company believes the use of these trademarks is important in establishing and maintaining its reputation as a national operator of high-quality hairstyling salons, and is committed to protecting these trademarks by vigorously challenging any unauthorized use. EMPLOYEES As of June 30, 1997, the Company had approximately 25,000 full- and part-time employees worldwide, of which approximately 21,000 employees were located in the United States. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its employee relations are good. GOVERNMENTAL REGULATIONS The Company is subject to various federal, state and local laws affecting its business as well as a variety of regulatory provisions relating to the conduct of its cosmetology business., including health and safety. As a franchisor, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the "FTC Rule") and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which such registration is required. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees, and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations. The Company believes it is operating in substantial compliance with applicable laws and regulations governing operations. 19 ITEM 1a. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Directors of the Company and Exchange Act Section 16(a) filings is included on pages 3 and 4 of the Registrant's Proxy Statement dated September 16, 1997, and is incorporated herein by reference. Information relating to Executive Officers of the Company follows: Name Age Position - ------------------- --- ----------------------------------------------- Myron Kunin 68 Chairman of the Board of Directors Paul D. Finkelstein 55 President, Chief Executive Officer and Director Christopher A. Fox 47 Executive Vice President and Director Frank E. Evangelist 60 Senior Vice President, Finance, Secretary and Director William E. Halfacre 56 Senior Vice President, Retail and Purchasing Bruce Johnson 44 Senior Vice President, Design and Construction Mark Kartarik 41 Senior Vice President, Operations Gordon Nelson 46 Senior Vice President, Fashion and Education Anthony W.E. Rammelt 60 Senior Vice President, International Bert M. Gross 67 Senior Vice President, General Counsel 20 Myron Kunin has served as Chairman of the Board of Directors of the Company since 1983, as Chief Executive Officer of the Company from 1965 until July 1, 1996, as President of the Company from 1965 to 1987, and as a director of the Company since its formation in 1954. He is also President, Chairman of the Board and holder of the majority voting power of Curtis Squire, Inc., the Company's principal shareholder. He is also a director of Nortech Systems Incorporated, and The Cerplex Group, Inc. Paul D. Finkelstein has served as President, Chief Operating Officer and as a director of the Company since December 1987, as Executive Vice President of the Company from June 1987 to December 1987, and has served as Chief Executive Officer since July 1, 1996. Christopher A. Fox was elected Executive Vice President in 1994, was Senior Vice President, Real Estate of the Company from 1988 to 1994, as Vice President from 1984 to 1988, and has served as a director of the Company since 1989. Frank E. Evangelist has served as Senior Vice President, Finance of the Company since 1988, as Treasurer of the Company from 1968 to 1988, and as Secretary and as a director of the Company since 1986. William E. Halfacre has served as Senior Vice President, Retail and Purchasing of the Company since 1993, and as Vice President from 1990 to 1993. Bruce Johnson was elected a Senior Vice President of Design and Construction in 1997, and has served as Vice President from 1988 to 1997. Mark Kartarik has served as Senior Vice President, Operations of the Company since 1994, and as Vice President from 1989 to 1994. He was elected COO of Supercuts, Inc. in 1997. Gordon Nelson has served as Senior Vice President, Fashion and Education of the Company since 1994, and as Vice President from 1989 to 1994. Anthony W. E. Rammelt has served as Senior Vice President, International of the Company since 1994, and as Vice President from 1993 to 1994. Bert M. Gross was elected Senior Vice President, General Counsel in 1997, and acted as outside legal counsel to the Company from 1957 to 1997. 21 ITEM 2. PROPERTIES The Company's corporate executive and administrative offices are headquartered in a 100,000 square foot building in Edina, Minnesota owned by the Company. The Company also leases warehouse space in Eden Prairie, Minnesota for storing and distributing inventory. The Company is in the process of constructing a new distribution center in Chattanooga, Tennessee scheduled to be completed during fiscal 1998. The Company believes that these spaces will be adequate for inventory storage needs for the near future. The Company operates all of its salon locations under leases or licenses. All of its North American locations opened in regional malls during the past five years are operating under leases with an original term of at least ten years. Salons operating within Wal-Mart stores and supercenters have leases with original terms of at least five years. Salons in the U.K. operations which are located in department stores operate under license agreements with the host department stores. The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration. Future minimum lease payments for the next 5 years, which are reimbursable from the franchisees, are approximately $15,000,000 annually. All additional lease costs are passed through to the franchisees. None of the Company's salon leases is individually material to the operations of the Company, and the Company expects that it will be able to renew its leases on satisfactory terms as they expire. See Note 6 of "Notes to the Consolidated Financial Statements". ITEM 3. LEGAL PROCEEDINGS During fiscal 1997, the Company resolved the litigation brought by David E. Lipson and DEL Holding Corporation (DEL), a corporation controlled by Mr. Lipson, against the Company's wholly-owned Supercuts subsidiary. Mr. Lipson and DEL had brought legal action against Supercuts and certain Supercuts directors and officers seeking damages allegedly due to Mr. Lipson and DEL pursuant to a consulting agreement between DEL and Supercuts, further damages allegedly sustained by Mr. Lipson as a result of a delay in his ability to sell certain shares of Supercuts common stock, and for alleged defamation. Mr. Lipson had also brought legal action in the Delaware Chancery Court to require Supercuts to indemnify him for expenses incurred by him in connection with an SEC investigation into his trading of Supercuts stock in March and April of 1995. The Delaware Court had ruled that Mr. Lipson was entitled to an advance of certain expenses incurred by him, but did not establish the amount of the advancement. The Company paid Mr. Lipson and DEL $6.7 million in complete settlement of all claims of Mr. Lipson, DEL or any other entity controlled by Mr. Lipson. 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. On October 23, 1996, the Company held a special meeting of shareholders. The purpose of the meeting was to approve the issuance by the Company of up to 4,920,590 shares of the Company's common stock in connection with the proposed merger of RGIS Merger Corp., a wholly-owned subsidiary of the Company, into Supercuts, Inc., and the conversion of each outstanding share of Supercuts' common stock into the right to receive 0.40 shares of the Company's common stock pursuant to an agreement and plan of merger dated as of July 14, 1996. At the meeting, 14,441,339 shares of the Company stock was voted in favor of the merger and 208,463 shares voted against the merger. b. 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. 16,086,395 shares were voted in favor of the proposal and no shares were voted against the proposal. 23 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Data relating to Market Stock Data Information and dividends as set forth in the sections included on Page 36 of the Registrant's 1997 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, are incorporated herein by reference. As of June 30, 1997, Regis shares were owned by approximately 12,000 shareholders based on the number of record holders and an estimate of individual participants in security position listings. ITEM 6. SELECTED FINANCIAL DATA Five-Year Summary of Selected Financial Data which is included on page 16 of the Registrant's 1997 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Results of Operations and Financial Condition of the Company on pages 17 to 21 of the Registrant's 1997 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Accountants on page 35, the Consolidated Financial Statements on pages 22 to 35 and the Quarterly Financial Data on page 36 of the Registrant's 1997 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Part I for information regarding Directors and Executive Officers of the Registrant. ITEM 11. EXECUTIVE COMPENSATION Executive compensation included on pages 6 through 8 of the Registrant's Proxy Statement dated September 16, 1997 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial owners and Management on page 13 of the Registrant's Proxy Statement dated September 16, 1997 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included on page 12 of the Registrant's Proxy Statement dated September 16, 1997 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1). The following Consolidated Financial Statements of Regis Corporation, and the Report of Independent Accountants thereon, included on pages 22 to 35 of the Registrant's 1997 Annual Report to Shareholders, are incorporated by reference in Item 8: Report of Independent Accountants Consolidated Balance Sheet as of June 30, 1997 and 1996 Consolidated Statement of Operations for the years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1997, 1996 and 1995 Consolidated Statement of Cash Flows for the years ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 25 (2). The financial statement schedule required to be filed by Item 8 of this form is as follows: Report of Independent Accountants on Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts as of June 30, 1997, 1996 and 1995 All other schedules are inapplicable to the Registrant, or equivalent information has been included in the consolidated financial statements or the notes thereto, and have therefore been excluded. 26 (3). Listing of Exhibits: EXHIBIT NUMBER 3(a) Election of the registrant to become governed by Minnesota Statutes Chapter 302A and Restated Articles of Incorporation of the registrant, dated March 11, 1983; Articles of Amendment to Restated Articles of Incorporation, dated October 29, 1984; Articles of Amendment to Restated Articles of Incorporation, dated August 14, 1987; Articles of Amendment to Restated Articles of Incorporation, dated October 21, 1987. (Filed as Exhibit 3(a) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 3(b) By-Laws of the registrant. (Filed as Exhibit 3(c) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 4(a) Three-for-two stock split. (Incorporated by reference to Exhibit A to May 2, 1996, Form 8-K.) 4(b) Shareholder Rights Agreement dated December 23, 1996 (Incorporated by reference to Exhibit 4 of the Company's report on Form 8-A12G dated February 4, 1997) 10(a) Employment and Deferred Compensation Agreement, Dated August 30, 1995, between the Company and Paul D. Finkelstein. 10(b) Form of Employment and Deferred Compensation Agreement between the Company and six executive officers. 10(c) Northwestern Mutual Life Insurance Company Policy Number 10327324, dated June 1, 1987, face amount $400,000 owned by the registrant, insuring the life of Paul D. Finkelstein and providing for division of death proceeds between the registrant and the insured's designated beneficiary (split-dollar plan). (Filed as Exhibit 10(g) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 27 10(d) Schedule of omitted split-dollar insurance policies. (Filed as Exhibit 10(h) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 10(e) Note Agreement dated as of June 21, 1991 between the registrant and The Prudential Insurance Company of America (Incorporated by reference to Exhibit 10(o) as part of the Company's Report on 10-K dated September 26, 1991 for the year ended June 30, 1991). 10(f) Employee Stock Ownership Plan and Trust Agreement dated as of May 15, 1992 between the registrant and Myron Kunin and Paul D. Finkelstein, Trustees (Incorporated by reference to Exhibit 10(q) as part of the Company's Report on 10-K dated September 27, 1993 for the year ended June 30, 1993). 10(g) Executive Stock Award Plan and Trust Agreement dated as of July 1, 1992 between the registrant and Myron Kunin, Trustee (Incorporated by reference to Exhibit 10(r) as part of the Company's Report on 10-K dated September 27, 1993 for the year ended June 30, 1993). 10(h) Revolving Credit Agreement as of June 21, 1994 between the registrant and LaSalle National Bank and Bank Hapoalim. (Incorporated by reference to Exhibit 10(r) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(i) Employee Profit Sharing Plan and Trust agreement, amended June 22, 1994 between the registrant and Myron Kunin, Trustee. (Incorporated by reference to Exhibit 10(t) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(j) Survivor benefit agreement dated June 27, 1994 between the Company and Myron Kunin. (Incorporated by reference to Exhibit 10(t) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(k) Modification to Revolving Credit Agreement in 10(h) dated July 20, 1995. (Incorporated by reference to Exhibit 10(n) part of the Company's report on 10-K dated September 27, 1995 for the year ended June 30, 1995.) 28 10(l) Modification of Note Agreement in 10(e) dated July 21, 1995. (Incorporated by reference to Exhibit 10(g) part of the Company's report on 10-K dated September 27, 1995 for the year ended June 30, 1995.) 10(m) Private Shelf Agreement dated as of July 25, 1995 between the registrant and the Prudential Insurance Company of America. 10(n) Agreements for Sale and Purchase dated as of December 29, 1995, between the Company and Steiner Salons Limited and Steiner Hairdressing Limited. (Incorporated by reference to Exhibit 10(r) of the Company's report on 10-Q dated February 13, 1996, for the quarter ended December 31, 1995.) 10(o) Series A Senior Note drawn from Private Shelf Agreement dated as of February 21, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(s) of the Company's report on 10-Q dated May 3, 1996, for the quarter ended March 31, 1996.) 10(p) Modification to Revolving Credit agreement in 10(k) dated March 19, 1996. (Incorporated by reference to Exhibit 10(t) of the Company's report on 10-Q dated May 3, 1996, for the quarter ended March 31, 1996.) 10(q) Asset purchase agreement between the Company and National Hair Care Centers LLC. (Incorporated by reference to Exhibit B to May 9, 1996, Form 8-K.) 10(r) Series B Senior Note drawn from Private Shelf Agreement dated as of June 10, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(v) of the Company's report on 10-K dated September 16, 1996, for the year ended June 30, 1996.) 10(s) Modification to Revolving Credit agreement in 10(p) dated July 9, 1996. (Incorporated by reference to Exhibit 10(w) of the Company's report on 10-K dated September 16, 1996, for the year ended June 30, 1996.) 10(t) Agreement and plan of merger between the Company and Supercuts, Inc. (Incorporated by reference to Exhibit 2.1 to July 15, 1996, Form 8-K.) 10(u) Series C Senior Note drawn from Private Shelf Agreement dated as of October 28, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(x) of the Company's report on 10-Q dated November 5, 1996, for the quarter ended September 30, 1996.) 10(v) Term Note A Agreement between the registrant and LaSalle National Bank dated October 28, 1996. (Incorporated by reference to Exhibit 10(y) of the Company's report on 10-Q dated November 5, 1996, for the quarter ended September 30, 1996) 29 10(w) Series D Senior Note drawn from Private Shelf Agreement dated as of December 13, 1996, between the registrant and the Prudential Insurance Company of America. 10(x) Modification to Revolving Credit agreement in 10(s) dated March 19, 1997. 10(y) Series E Senior Note drawn from Private Shelf Agreement dated as of April 7, 1997, between the registrant and the Prudential Insurance Company of America. 10(z) Compensation and non-competition agreement dated May 7, 1997, between the Company and Myron Kunin. 10(aa) Term Note B Agreement between the registrant and LaSalle National Bank dated July 11, 1997. 10(bb) Modification of Private Shelf Agreement in 10(m) dated July 11, 1997. 10(cc) Series F Senior Note drawn from Private Shelf Agreement dated as of July 28, 1997, between the registrant and the Prudential Insurance Company of America. 11 Computation of earnings per share. 13 Select pages of the 1997 Annual Report to Shareholders. 23 Consent of Independent Accountants. 27 Financial Data Schedule (b) REPORTS ON FORM 8-K. The following reports on Form 8-K were filed during and subsequent to the last quarter of the period covered by this report: Form 8-K dated May 14, 1997 related to the restatement of the Registrant's Form 10-K Annual Report for the year ended June 30, 1996 and the restatement of the Registrants Form 10-Q for the quarter ended September 30, 1996, restated to reflect the merger with Supercuts, Inc. that occurred on October 25, 1996. The merger was accounted for as a pooling-of-interests. Form 8-K/A dated May 15, 1997 amending Form 8-K dated May 14, 1997. Form 8-K/A, Amendment No. 2, dated May 19, 1997 amending Form 8-K dated May 14, 1997. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGIS CORPORATION By /s/ Myron Kunin ------------------------------------- Myron Kunin, Chairman of the Board of Directors By /s/ Frank E. Evangelist ------------------------------------- Frank E. Evangelist, Sr. Vice President, Finance/Secretary (Principal Financial and Accounting Officer) DATE: September 24, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Myron Kunin ------------------------------------- Myron Kunin, Chairman of the Board of Directors /s/ Paul D. Finkelstein ------------------------------------- Paul D. Finkelstein, Director /s/ Frank E. Evangelist ------------------------------------- Frank E. Evangelist, Director /s/ Christopher A. Fox ------------------------------------- Christopher A. Fox, Director /s/ David Kunin ------------------------------------- David Kunin, Director /s/ Rolf F. Bjelland ------------------------------------- Rolf F. Bjelland, Director /s/ Van Zandt Hawn ------------------------------------- Van Zandt Hawn, Director /s/ Susan Hoyt ------------------------------------- Susan Hoyt, Director /s/ Tom Gregory ------------------------------------- Tom Gregory, Director 31 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Directors of Regis Corporation: Our report on the consolidated financial statements of Regis Corporation has been incorporated by reference in this Form 10-K from page 35 of the 1997 Annual Report to Shareholders of Regis Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota August 22, 1997 32 REGIS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS as of June 30, 1997, 1996 and 1995 (dollars in thousands)
Column A Column B Column C Column D Column E -------- -------- ---------------------------- ---------- ---------- Balance at Charged to Balance at beginning costs and Charged to end of Description of period expenses Other Accounts Deductions period - ----------- --------- --------- -------------- ---------- --------- JUNE 30, 1997: Valuation Account, Receivable from MEI Salons $3,800 $901(1) $2,899 Valuation Account, Receivable from GEMM, Inc. $500 $500 Valuation Account, Allowance for doubtful accounts $344 $236 $380 $200 JUNE 30, 1996: Valuation Account, Receivable from GEMM, Inc. $4,500 $700(1) $3,800 Valuation Account, GEMM, Inc. Preferred Stock $500 $500 Valuation Account, Allowance for doubtful accounts $73 $360 $89 $344 JUNE 30, 1995: Valuation Account, Receivable from GEMM, Inc. $2,850 $1,650(2) $4,500 Valuation Account, GEMM, Inc. Preferred Stock -0- $500 $500 Valuation Account, Allowance for doubtful accounts $159 $33 $119 $73
Notes: - ------ (1) Payments received on previously written off balance. (2) Charge associated with advance to GEMM, Inc. 33 EX-10.(A) 2 EXHIBIT 10(A) EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENT AGREEMENT, made August 30, 1995, between REGIS CORPORATION, hereinafter referred to as the "Corporation," and Paul D. Finkelstein, hereinafter referred to as "Employee." IN CONSIDERATION of the mutual agreements hereinafter contained, the parties hereby agree as follows: 1. EMPLOYMENT. The Corporation agrees to continue to employ Employee, and Employee agrees to continue to serve the Corporation, upon the terms and conditions hereinafter set forth. 2. TERM. The employment of Employee pursuant to this agreement has commenced as of the date of this agreement and shall continue until terminated by either of the parties hereto. 3. DUTIES. Employee agrees to serve the Corporation faithfully and to the best of his or her ability under the direction of the Board of Directors and the President of the Corporation, devoting his or her entire business time, energy and skill to such employment, and to perform from time to time such services and act in such office or capacity as the Board of Directors shall request. 4. COMPENSATION. The Corporation agrees to pay to Employee during the period of the term of his or her employment hereunder as salary for his or her full time active services such compensation as may be mutually agreed upon between the parties. 5. DEFERRED COMPENSATION. The Corporation shall pay to Employee, if living, or to others in the event of his death, the following sums upon the terms and conditions and for the periods hereinafter set forth: a) PAYMENTS UPON RETIREMENT. Commencing upon the last day of the month after Employee retires from employment by the Corporation at or after age 65, or upon the last day of the month in which he or she reaches age 65 if he or she is then disabled within the meaning of Section (c), the Corporation shall pay him or her $8,333.33 and shall continue to pay him or her the same amount monthly on the same date of each succeeding month thereafter until a total of 180 monthly payments have been made. If Employee dies before receiving all of the 180 monthly payments specified herein, the Corporation shall pay to his or her surviving spouse, or such other person as he or she may have designated in writing, the remaining unpaid monthly payments as they become due as provided above. b) PAYMENTS UPON DEATH BEFORE RETIREMENT. If Employee dies while employed by the Corporation, the Corporation shall pay to Employee or to his or her surviving spouse, or to such other person as he or she may have designated in writing, the monthly amount provided in Section 4(a) above for 180 months. The first payment shall be due within thirty (30) days after Employee's death with the remaining payments payable according to the terms of Section 4(a) above. c) PAYMENTS DURING DISABILITY. In addition to the payments provided in Sections (a) and (b), should Employee become disabled while employed by the Corporation, and such disability continues for a period of six months, the Corporation shall pay to Employee the monthly amount provided in Section 4(a) above during each month that Employee remains disabled until he or she attains the age of 65 or until his or her death prior to attaining such age, at which time the payments provided in Sections (a) or (b) shall begin. The first payment under this Section (c) shall be made during the seventh month of such disability, and each succeeding payment shall be made on the same date of each succeeding month thereafter. 2 The Corporation is the owner and beneficiary of certain insurance policies covering Employee, life and insuring against Employee's disability. No payments shall be required under Sections (a), (b) or (c) of this paragraph if because of any act by Employee the applicable policy is canceled by the insurance company issuing such policy or the insurance company refuses to pay the proceeds of said policy. Payments shall be made under Section (c) only if Employee is disabled within the meaning of the disability clause of said policy, as set forth in the waiver of premium provision. 6. EARLY TERMINATION. Anything in this agreement to the contrary notwithstanding, in the event that Employee is terminated by the Corporation other than for cause, and Employee has either (i) completed twenty (20) years of service with the Corporation, or (ii) has attained the age of sixty-five (65), Employee's rights under this agreement will be fully vested and Employee will receive the compensation at such times and in such manner as provided in Section 5 hereof. If Employee voluntarily terminates his or her employment with the Corporation before reaching age 65, or is terminated at any time for cause, all deferred compensation benefits pursuant to this agreement shall be forfeited. For purposes of this agreement "cause" shall mean dishonesty or willful misconduct. 7. RESTRICTIVE COVENANT. Employee expressly agrees, as a condition to the performance by the Corporation of its obligations hereunder, that during the term of this agreement and during the 3 further period for such payments to Employee are provided by this agreement, he or she will not, directly or indirectly, render any services of any nature to or become employed by or participate or engage in any business competitive with the business of the Corporation. Anything in the preceding paragraph to the contrary notwithstanding, the five-year period referred to in said paragraph shall be reduced to one year if both of the following events occur: a] Myron Kunin is no longer Chief Executive Officer or actively engaged in the management of the Corporation, and b] Employee's employment with the Corporation is terminated by the Corporation without cause. 8. PROHIBITION AGAINST ASSIGNMENT. Employee agrees, on behalf of himself or herself and his or her personal representatives, heirs, legatees, distributees, and any other person or persons claiming any benefits under him or her by virtue of this agreement, that this agreement and the rights, interests and benefits hereunder shall not be assigned, transferred or pledged in any way by Employee or any person claiming under Employee by virtue of this agreement, and shall not be subject to execution, attachment, garnishment or similar process. 9. BINDING EFFECT. This agreement shall be binding upon and inure to the benefit of any successor of the Corporation, and any successor shall be deemed substituted for the Corporation under the terms of this agreement. As used in this agreement, the term "successor" shall include any person, firm, corporation or other business entity which at any time, whether by merger, purchase, or 4 otherwise, acquires all or substantially all of the assets or business of the corporation. 10. PRIOR AGREEMENTS. This agreement supersedes all prior Employment and Deferred Compensation Agreements, and any amendments or supplements thereto, between the parties to this agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the day and year first above written. REGIS CORPORATION In the presence of: /s/ Nancy J. Johnson By [ILLEGIBLE] - ------------------------------ ------------------------------ Chair /s/ Nancy J. Johnson /s/ Paul D. Finkelstein - ------------------------------ --------------------------------- PAUL D. FINKELSTEIN 5 EX-10.(B) 3 EXHIBIT 10(B) EMPLOYMENT AND DEFERRED AND COMPENSATION AGREEMENT AGREEMENT, made September 11, 1995, between REGIS CORPORATION, hereinafter referred to as the "Corporation," and hereinafter referred to as "Employee." IN CONSIDERATION of the mutual agreements hereinafter contained, the parties hereby agree as follows: 1. EMPLOYMENT. The Corporation agrees to continue to employ Employee, and Employee agrees to continue to serve the Corporation, upon the terms and conditions hereinafter set forth. 2. TERM. The employment of Employee pursuant to this agreement has commenced as of the date of this agreement and shall continue until terminated by either of the parties hereto. 3. DUTIES. Employee agrees to serve the Corporation faithfully and to the best of his or her ability under the direction of the Board of Directors and the President of the Corporation, devoting his or her entire business time, energy and skill to such employment, and to perform from time to time such services and act in such office or capacity as the Board of Directors shall request. 4. COMPENSATION. The Corporation agrees to pay to Employee during the period of the term of his or her employment hereunder as salary for his or her full time active services such compensation as may be mutually agreed upon between the parties. 5. DEFERRED COMPENSATION. The Corporation shall pay to Employee, if living, or to others in the event of his death, the following sums upon the terms and conditions and for the periods hereinafter set forth: a) PAYMENTS UPON RETIREMENT. Commencing upon the last day of the month after Employee retires from employment by the Corporation at or after age 65, or upon the last day of the month in which he or she reaches age 65 if he or she is then disabled within the meaning of Section (c), the Corporation shall pay him or her $5,000.00 and shall continue to pay him or her the same amount monthly on the same date of each succeeding month thereafter until a total of 180 monthly payments have been made. If Employee dies before receiving all of the 180 monthly payments specified herein, the Corporation shall pay to his or her surviving spouse, or such other person as he or she may have designated in writing, the remaining unpaid monthly payments as they become due as provided above. b) PAYMENTS UPON DEATH BEFORE RETIREMENT. If Employee dies while employed by the Corporation, the Corporation shall pay to Employee or to his or her surviving spouse, or to such other person as he or she may have designated in writing, the monthly amount provided in Section 4(a) above for 180 months. The first payment shall be due within thirty (30) days after Employee's death with the remaining payments payable according to the terms of Section 4(a) above. c) PAYMENTS DURING DISABILITY. In addition to the payments provided in Sections (a) and (b), should Employee become disabled while employed by the Corporation, and such disability continues for a period of six months, the Corporation shall pay to Employee the monthly amount provided in Section 4(a) above during each month that Employee remains disabled until he or she attains the age of 65 or until his or her death prior to attaining such age, at which time the payments provided in Sections (a) or (b) shall begin. The first payment under this Section (c) shall be made during the seventh month of such disability, and each succeeding payment shall be made on the same date of each succeeding month thereafter. 2 The Corporation is the owner and beneficiary of certain insurance policies covering the Employee's life and insuring against Employee's disability. No payments shall be required under Sections (a), (b) or (c) of this paragraph if because of any act by Employee the applicable policy is canceled by the insurance company issuing such policy or the insurance company refuses to pay the proceeds of said policy. Payments shall be made under Section (c) only if Employee is disabled within the meaning of the disability clause of said policy, as set forth in the waiver of premium provision. 6. EARLY TERMINATION. Anything in this agreement to the contrary notwithstanding, in the event that Employee is terminated by the Corporation other than for cause, and Employee has either (i) completed twenty (20) years of service with the Corporation, or (ii) has attained the age of sixty-five (65), Employee's rights under this agreement will be fully vested and Employee will receive the compensation at such times and in such manner as provided in Section 5 hereof. If Employee voluntarily terminates his or her employment with the Corporation before reaching age 65, or is terminated at any time for cause, all deferred compensation benefits pursuant to this agreement shall be forfeited. For purposes of this agreement "cause" shall mean dishonesty or willful misconduct. 7. RESTRICTIVE COVENANT. Employee expressly agrees, as a condition to the performance by the Corporation of its obligations hereunder, that during the term of this agreement and during the 3 further period for such payments to Employee are provided by this agreement, he or she will not, directly or indirectly, render any services of any nature to or become employed by or participate or engage in any business competitive with the business of the Corporation. 8. PROHIBITION AGAINST ASSIGNMENT. Employee agrees, on behalf of himself or herself and his or her personal representatives, heirs, legatees, distributees, and any other person or persons claiming any benefits under him or her by virtue of this agreement, that this agreement and the rights, interests and benefits hereunder shall not be assigned, transferred or pledged in any way by Employee or any person claiming under Employee by virtue of this agreement, and shall not be subject to execution, attachment, garnishment or similar process. 9. BINDING EFFECT. This agreement shall be binding upon and inure to the benefit of any successor of the Corporation, and any successor shall be deemed substituted for the Corporation under the terms of this agreement. As used in this agreement, the term "successor" shall include any person, firm, corporation or other business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the assets or business of the corporation. 10. PRIOR AGREEMENTS. This agreement supersedes all prior Employment and Deferred Compensation Agreements, and any amendments or supplements thereto, between the parties to this agreement. 4 IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the day and year first above written. REGIS CORPORATION In the presence of: By [ILLEGIBLE] ------------------------------- President ---------------------------------- 5 EX-10.(M) 4 EXHIBIT 10(M) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- REGIS CORPORATION $50,000,000 PRIVATE SHELF AGREEMENT Dated as of July 25, 1995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS (Not Part of Agreement) Page ---- 1. AUTHORIZATION OF ISSUE OF NOTES......................................... 1 2. PURCHASE AND SALE OF NOTES.............................................. 2 3. CONDITIONS OF CLOSING................................................... 6 4. PREPAYMENTS............................................................. 8 5. AFFIRMATIVE COVENANTS................................................... 9 6. NEGATIVE COVENANTS......................................................15 7. EVENTS OF DEFAULT.......................................................19 8. REPRESENTATIONS, COVENANTS AND WARRANTIES...............................23 9. REPRESENTATIONS OF THE PURCHASERS.......................................27 10. DEFINITIONS.............................................................28 11. MISCELLANEOUS...........................................................38 INFORMATION SCHEDULE EXHIBIT A -- FORM OF NOTE EXHIBIT B -- FORM OF REQUEST FOR PURCHASE EXHIBIT C -- FORM OF CONFIRMATION OF ACCEPTANCE EXHIBIT D -- FORM OF OPINION OF COMPANY'S COUNSEL SCHEDULE 8A -- LIST OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES SCHEDULE 8G -- LIST OF AGREEMENTS RESTRICTING DEBT REGIS CORPORATION 7201 Metro Boulevard Minneapolis, Minnesota 55439 As of July 25, 1995 The Prudential Insurance Company of America ("PRUDENTIAL") Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter provided (together with Prudential, the "PURCHASERS") c/o Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Ladies and Gentlemen: The undersigned, Regis Corporation (herein called the "COMPANY"), hereby agrees with you as follows: 1. AUTHORIZATION OF ISSUE OF NOTES. The Company will authorize the issue of its senior promissory notes (the "NOTES") in the aggregate principal amount of $50,000,000, to be dated the date of issue thereof, to mature, in the case of each Note so issued, no less than five and no more than ten years after the date of original issuance thereof, to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Note so issued, in the Confirmation of Acceptance with respect to such Note delivered pursuant to paragraph 2E and to be substantially in the form of EXHIBIT A attached hereto. The terms "NOTE" and "NOTES" as used herein shall include each Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, (v) the same interest payment periods and (vi) the same date of issuance (which, in the case of a Note issued in exchange for another Note, shall be deemed for these purposes the date on which such Note's ultimate predecessor Note was issued), are herein called a "SERIES" of Notes. 2. PURCHASE AND SALE OF NOTES. 2A. Facility. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential and Prudential Affiliates from time to time, the purchase of Notes pursuant to this Agreement The willingness of Prudential to consider such purchase of Notes is herein called the "FACILITY". At any time, the aggregate principal amount of Notes stated in paragraph 1, minus the aggregate principal amount of Notes purchased and sold pursuant to this Agreement prior to such time, MINUS the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time, MINUS the aggregate principal amount of notes of the Company issued pursuant to the 1991 Agreement which are outstanding and held by Prudential and Prudential Affiliates at such time is herein called the "AVAILABLE FACILITY AMOUNT" at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER PURCHASES OF NOTES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE. 2B. ISSUANCE PERIOD. Notes may be issued and sold pursuant to this Agreement commencing July 1, 1995, and until the earlier of (i) June 30, 1998 and (ii) the thirtieth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, a notice stating that it elects to terminate the issuance and sale of Notes pursuant to this Agreement (or if such thirtieth day is not a Business Day, the Business Day next preceding such thirtieth day). The period during which Notes may be issued and sold pursuant to this Agreement is herein called the "ISSUANCE PERIOD". 2C. REQUEST FOR PURCHASE. The Company may from time to time during the Issuance Period make requests for purchases of Notes (each such request being herein called a "REQUEST FOR PURCHASE"). Each Request for Purchase shall be made to Prudential by telecopier or overnight delivery service, and shall (i) specify the aggregate principal amount of Notes covered thereby, which shall not be less than $5,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities, and principal prepayment dates and amounts of the Notes covered thereby, (iii) specify the use of proceeds of such Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Notes, which shall be a Business Day during the Issuance Period not less than 10 days and not more than 25 days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Notes are to be transferred on the Closing Day for such purchase and sale, (vi) certify that the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase and that there exists on the date of such Request for Purchase no Event of Default or Default, and 2 (vii) be substantially in the form of EXHIBIT B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential. 2D. RATE QUOTES. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2C, Prudential may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:30 P.M. New York City local time (or such later time as Prudential may elect) interest rate quotes for the several principal amounts, maturities, principal prepayment schedules, and interest payment periods of Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Notes at which Prudential or a Prudential Affiliate would be willing to purchase such Notes at 100% of the principal amount thereof. * Based on the equivelance of Treasuries to Aug. Life of Loan plus 125 basis points. 2E. Acceptance. Within 30 minutes after Prudential shall have provided any interest rate quotes pursuant to paragraph 2D or such shorter period as Prudential may specify to the Company (such period herein called the "ACCEPTANCE WINDOW"), the Company may, subject to paragraph 2F, elect lo accept such interest rate quotes as to not less than $5,000,000 aggregate principal amount of the Notes specified in the related Request for Purchase. Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window that the Company elects to accept such interest rate quotes, specifying the Notes (each such Note being herein called an "ACCEPTED NOTES") as to which such acceptance (herein called an "ACCEPTANCE".) relates. The day the Company notifies an Acceptance with respect to any Accepted Notes is herein called the "ACCEPTANCE DAY" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2F and the other terms and conditions hereof, the Company agrees to sell to Prudential or a Prudential Affiliate, and Prudential agrees to purchase, or to cause the purchase by a Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of EXHIBIT C attached hereto (herein called a "CONFIRMATION OF ACCEPTANCE"). If the Company should fail to execute and return to Prudential within three Business Days following receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Prudential may at its election at any time prior to its receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing. 2F. MARKET DISRUPTION. Notwithstanding the provisions of paragraph 2E, if Prudential shall have provided interest rate quotes pursuant to paragraph 2D and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in accordance with paragraph 2E the domestic market for U.S. Treasury securities or derivatives shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock 3 Exchange or in the domestic market for U.S. Treasury securities or derivatives, then such interest rate quotes shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2F are applicable with respect to such Acceptance. 2G. NOTE CLOSINGS. Not later than 11:30 A.M. (New York City local time) on the Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of the Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, the Accepted Notes to be purchased by such Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Closing Day, dated the Closing Day and registered in such Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Notes. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Closing Day for such Accepted Notes as provided above in this paragraph 2G, or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Closing Day notify Prudential (which notification shall be deemed received by each Purchaser) in writing whether (i) such closing is to be rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 10 Business Days after such scheduled Closing Day (the "RESCHEDULED CLOSING DAY".) and certify to Prudential (which certification shall be for the benefit of each Purchaser) that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2H(iv) or (ii) such closing is to be canceled. In the event that the Company shall fail to give such notice referred to in the preceding sentence, Prudential (on behalf of each Purchaser) may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Closing Day, notify the Company in writing that such closing is to be canceled. Notwithstanding anything to the contrary appearing in this Agreement, the Company may elect to reschedule a closing with respect to any given Accepted Notes on not more than one occasion, unless Prudential shall have otherwise consented in writing. 2H. FEES. 2H(i). STRUCTURING FEE. In consideration for the time, effort and expense involved in the preparation, negotiation and execution of this Agreement, at the time of the execution and delivery of this Agreement the Company will pay to Prudential in immediately available funds a fee (the "STRUCTURING FEE".) in the amount of $100,000. 4 2H(ii). FACILITY FEE. At the time of the execution and delivery of this Agreement by the Company and Prudential, the Company will pay to Prudential in immediately available funds a fee (the "FACILITY FEE") in the amount of $50,000. If following payment of the Facility Fee a Refund Event shall occur, Prudential shall refund to the Company the Refundable Portion of the Facility Fee. 2H(iii). ISSUANCE FEE. The Company will pay to Prudential in immediately available funds a fee (herein called the "ISSUANCE FEE") on each Closing Day in an amount equal to 0.15% of the aggregate principal amount of Notes sold on such Closing Day. 2H(iv). DELAYED DELIVERY FEE. If the closing of the purchase and sale of any Accepted Note is delayed for any reason beyond the original Closing Day for such Accepted Note, the Company will pay to Prudential (a) on the Cancellation Date or actual closing date of such purchase and sale and (b) if earlier, the next Business Day following 90 days after the Acceptance Day for such Accepted Note and on each Business Day following 90 days after the prior payment hereunder, a fee (herein called the "DELAYED DELIVERY FEE") calculated as follows: (BEY - MMY) X DTS/360 X PA where "BEY" means Bond Equivalent Yield, I.E., the bond equivalent yield per annum of such Accepted Note, "MMY" means Money Market Yield, I.E., the yield per annum on a commercial paper investment of the highest quality selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Note having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, I.E., the number of actual days elapsed from and including the original Closing Day with respect to such Accepted Note (in the case of the first such payment with respect to such Accepted Note) or from and including the date of the next preceding payment (in the case of any subsequent delayed delivery fee payment with respect to such Accepted Note) to but excluding the date of such payment; and "PA" means Principal Amount, I.E., the principal amount of the Accepted Note for which such calculation is being made. In no case shall the Delayed Delivery Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2G. 2H(v). CANCELLATION FEE. If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the last sentence of paragraph 2E or the penultimate sentence of paragraph 2G that the closing of the purchase and sale of such Accepted Note is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case 5 may be, being herein called the "CANCELLATION DATE"), the Company will pay to Prudential in immediately available funds an amount (the "CANCELLATION FEE") calculated as follows: PI X PA where "PI" means Price Increase, I.E., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as determined by Prudential) of the Hedge Treasury Notes(s) on the Acceptance Day for such Accepted Note by (b) such bid price; and "PA" has the meaning ascribed to it in paragraph 2H(iv). The foregoing bid and ask prices shall be as reported by Telerate Systems, Inc. (or, if such data for any reason ceases to be available through Telerate Systems, Inc., any publicly available source of similar market data). Each price shall be based on a U.S. Treasury security having a par value of $100.00 and shall be rounded to the second decimal place. In no case shall the Cancellation Fee be less than zero. 3. CONDITIONS OF CLOSING. The obligation of any Purchaser to purchase and pay for any Notes is subject to the satisfaction, on or before the Closing Day for such Notes, of the following conditions: 3A. CERTAIN DOCUMENTS. Such Purchaser shall have received the following, each dated the date of the applicable Closing Day: (i) The Note(s) to be purchased by such Purchaser. (ii) Certified copies of the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes. (iii) A certificate of the Secretary or an Assistant Secretary and one other officer of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder. (iv) Certified copies of the Certificate of Incorporation and By-laws of the Company. (v) A favorable opinion of Phillips & Gross, P.A., special counsel to the Company (or such other counsel designated by the Company and acceptable to the Purchaser(s)) satisfactory to such Purchaser and substantially in the form of EXHIBIT D attached hereto and as to such other matters as such Purchaser may reasonably request. The Company hereby directs such counsel to deliver such opinion, agrees that the issuance and sale of any Notes will constitute a reconfirmation of such direction, and understands and agrees that each Purchaser receiving such an opinion will and is hereby authorized to rely on such opinion. 6 (vi) A good standing certificate for the Company from the Secretary of State of Minnesota dated of a recent date and such other evidence of the status of the Company as such Purchaser may reasonably request. (vii) Certified copies of Requests for Information or Copies (Form UCC-11) or equivalent reports listing all effective financing statements which name the Company or any Restricted Subsidiary (under their present names and previous names) as debtor and which are filed in the offices of the Secretaries of State of Minnesota and Colorado together with copies of such financing statements. (viii) Additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may be reasonably requested by such Purchaser. 3B. OPINION OF PURCHASER'S SPECIAL COUNSEL. Such Purchaser shall have received from James F. Evert, Assistant General Counsel of Prudential, or such other counsel who is acting as counsel for it in connection with this transaction, a favorable opinion satisfactory to such Purchaser as to such matters incident to the matters herein contemplated as it may reasonably request. 3C. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The representations and warranties contained in paragraph 8 shall be true on and as of such Closing Day; there shall exist on such Closing Day no Event of Default or Default; and the Company shall have delivered to such Purchaser an Officer's Certificate, dated such Closing Day, to both such effects. 3D. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G, T or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as it may request to establish compliance with this condition. 3E. PAYMENT OF FEES. The Company shall have paid to Prudential any fees due it pursuant to or in connection with this Agreement, including any Issuance Fee due pursuant to paragraph 2H(iii) and any Delayed Delivery Fee due pursuant to paragraph 2H(iv). 3F. OFFSET SHARING AGREEMENT. The Offset Sharing Agreement shall have been amended so as to apply to the Notes pursuant to a document in form and content satisfactory to the Purchaser. 7 3G. SUBORDINATION AGREEMENT. The terms of the Subordinated Debt shall have been amended so as to subordinate the Subordinated Debt to the Notes pursuant to a document in form and content satisfactory to the Purchaser. 3H. OTHER LOAN AGREEMENTS. The Company shall have demonstrated its compliance with the penultimate sentence of paragraph 8G to the satisfaction of the Purchaser. 4. PREPAYMENTS. The Notes shall be subject to required prepayment as and to the extent provided in paragraph 4A. The Notes shall also be subject to prepayment under the circumstances set forth in paragraph 4B. Any prepayment made by the Company pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any required prepayment as specified in paragraph 4A. 4A. REQUIRED PREPAYMENTS OF NOTES. Each Series of Notes shall be subject to required prepayments, if any, set forth in the Notes of such Series. 4B(1). OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT. The Notes of each Series shall be subject to prepayment, in whole at any time or from time to time in part (in integral multiples of $500,000) at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note. Any partial prepayment of a Series of Notes pursuant to this paragraph 4B(1) shall be applied in satisfaction of required payments of principal in inverse order of their scheduled due dates. 4B(2). PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT PURSUANT TO OFFSET SHARING AGREEMENT. If amounts are to be applied to the principal of the Notes pursuant to the terms of an Offset Sharing Agreement, interest owing thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each Note shall be due and payable on such date. Any partial prepayment of the Notes pursuant to this paragraph 4B(2) shall be applied in satisfaction of required payments of principal in inverse order of their scheduled due dates. 4C. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give the holder of each Note of a Series to be prepaid pursuant to paragraph 4B(1) irrevocable written notice of such prepayment not less than 10 Business Days prior to the prepayment date, specifying such prepayment date, the aggregate principal amount of the Notes of such Series to be prepaid on such date, the principal amount of the Notes of such Series held by such holder to be prepaid on that date and that such prepayment is to be made pursuant to paragraph 4B(1). Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date. The Company shall, on or before the day on which it gives written notice of any prepayment pursuant to paragraph 4B(1), give telephonic notice of the principal amount of the Notes to be prepaid and the prepayment date to each Significant Holder which 8 shall have designated a recipient for such notices in the Purchaser Schedule attached to the applicable Confirmation of Acceptance or by notice in writing to the Company. 4D. APPLICATION OF PREPAYMENTS. In the case of each prepayment of less than the entire unpaid principal amount of all outstanding Notes or all outstanding Notes of any Series, as the case may be, pursuant to paragraphs 4A, 4B(1) or 4B(2), the amount to be prepaid shall be applied pro rata to all outstanding Notes or all outstanding Notes of such Series, as the case may be (including, for the purpose of this paragraph 4D only, all Notes prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A or 4B), according to the respective unpaid principal amounts thereof. 4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraphs 4A or 4B or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes of any Series held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes of such Series held by each other holder of Notes of such Series at the time outstanding upon the same terms and conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, EXCEPT as provided in paragraph 4D. 5. AFFIRMATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note is outstanding and unpaid, the Company covenants as follows: 5A. FINANCIAL STATEMENTS; NOTICE OF DEFAULTS. The Company covenants that it will deliver to Prudential and each Significant Holder in triplicate: (i) as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, a consolidated balance sheet of the Company and its Subsidiaries and of the Company and its Restricted Subsidiaries as at the end of such quarterly period and the related consolidated statements of income and cash flows of the Company and its Subsidiaries and of the Company and its Restricted Subsidiaries for such period setting forth, in each case in comparative form, figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by the chief financial officer or chief accounting officer of the Company as fairly presenting the consolidated financial position of the Company and its Subsidiaries and of the Company and its Restricted Subsidiaries as at the dates indicated and the consolidated results of their respective operations and cash flows, in each case for the periods indicated, in conformity with generally accepted accounting principles applied on a basis consistent with prior 9 periods (except as disclosed in such certificate), subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, a consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated and consolidating statements of income and cash flows of the Company and its Subsidiaries for such year, all in reasonable detail and satisfactory in scope to the Required Holder(s), and (a) in the case of such consolidated financial statements, setting forth in each case in comparative form corresponding consolidated figures for the preceding fiscal year, and accompanied by a report thereon of independent public accountants of recognized national standing selected by the Company, which report shall state that, subject only to standard qualifications and limitations generally contained in an unqualified audit report, such consolidated financial statements present fairly the consolidated financial position of the Company and its Subsidiaries as at the dates indicated and the consolidated results of their operations and cash flows for the periods indicated in conformity with generally accepted accounting principles applied on a basis consistent with prior years (except as otherwise specified in such report) and that the audit by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards, and (b) in the case of such consolidating financial statements, (w) setting forth on supplemental schedules, in one column, the total amounts for the Company and its Restricted Subsidiaries, and, in a second column, the total amounts for the Company's other Subsidiaries, and showing all eliminations and adjustments made in aggregating the amounts of such columns to arrive at the Company's consolidated financial statements, (x) setting forth in comparative form the corresponding consolidated figures for the Company and its Restricted Subsidiaries for the preceding fiscal year, (y) certified by the chief financial officer or chief accounting officer of the Company as fairly presenting the respective financial positions of the separate entities reported on as at the dates indicated and the results of their respective operations and cash flows for the period indicated, in conformity with generally accepted accounting principles applied on a basis consistent with prior periods (except as otherwise specified in such certificate), and (z) accompanied by a report thereon of the independent public accountants reporting on the consolidated financial statements of the Company and its Subsidiaries for such fiscal year, which report shall state that, subject to the qualifications and limitations contained in their report on the consolidated financial statements of the Company and its Subsidiaries, and to the further qualification that the principles of consolidation followed in the preparation of such consolidated figures for the Company and its Restricted Subsidiaries conform to the provisions of this Agreement rather than to generally accepted accounting principles, such consolidated figures for the Company and its Restricted Subsidiaries present fairly the consolidated financial position of the Company and its Restricted Subsidiaries as at the dates indicated and the consolidated results of their operations and cash flows for the periods indicated in conformity with generally accepted accounting principles applied on a basis consistent with prior periods (except as otherwise specified in such report); 10 (iii) as soon as practicable and in any event within (a) 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year and (b) 120 days after the end of each fiscal year, balance sheets (which in the case of the fiscal year end shall be audited) of each Unrestricted Subsidiary as at the end of such period and the related statements of income and cash flows of each such Unrestricted Subsidiary for such period (which in the case of annual statements shall be audited); (iv) together with each delivery of financial statements pursuant to clauses (i) and (ii) of this paragraph 5A, an Officer's Certificate (a) stating that the signer has reviewed the terms of this Agreement and the Notes and has made, or caused to be made under his or her supervision, a review in reasonable detail of the transactions and condition of the Company and its Restricted Subsidiaries during the fiscal period covered by such financial statements and that such review has not disclosed the existence during or at the end of such fiscal period, and that the signer does not have knowledge of the existence as at the date of the Officer's Certificate, of any condition or event which constitutes a Default or Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or is taking or proposes to take with respect thereto, and (b) demonstrating (with computations in reasonable detail) compliance by the Company with the provisions of paragraphs 6A, 6B, 6C(1), 6C(2), 6C(3), 6C(4), 6C(6) and 6C(8) of this Agreement (herein called the "COMPUTATION PARAGRAPHS"); (v) together with each delivery of financial statements of the Company and its Subsidiaries pursuant to clause (ii) of this paragraph 5A, a certificate by the Company's independent public accountants stating (a) that their audit examination has included a review of the terms of this Agreement and of the Notes as they relate to accounting matters and that such review is sufficient to enable them to make the statement referred to in subclause (c) of this clause (v), (b) whether in the course of their audit examination there has been disclosed the existence during the fiscal year covered by such financial statements (and whether they have knowledge of the existence as of the date of such accountants' certificate) of any condition or event which constitutes a Default or Event of Default and if during their audit examination there has been disclosed (or if they have knowledge of) such a condition or event, specifying the nature and period of existence thereof (it being understood, however, that such accountants shall not be liable to any Person by reason of their failure to obtain knowledge of any Default or Event of Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards), and (c) that based on their annual audit examination, including a review of the Computation Paragraphs, nothing came to their attention which causes them to believe that the information relating to the Computation Paragraphs contained in the Officer's Certificate delivered therewith pursuant to clause (iv) of this paragraph 5A is not correct or that the matters set forth in such Officer's Certificate are not stated in accordance with the terms of this Agreement; 11 (vi) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company and its Restricted Subsidiaries to its security holders (other than the Company in the case of Restricted Subsidiaries), of all regular and periodic reports and all registration statements and prospectuses, if any, filed by the Company or any of its Restricted Subsidiaries with any securities exchange or with the Securities and Exchange Commission or with NASDAQ, and of all press releases and other written statements made available generally by the Company or any of its Restricted Subsidiaries to the public concerning material developments in the business of the Company and its Restricted Subsidiaries; (vii) promptly upon receipt thereof by the Company, copies of all reports submitted to the Company by independent public accountants in connection with each annual, interim or special audit of the books of the Company or any of its Restricted Subsidiaries made by such accountants; (viii) promptly upon any Responsible Officer obtaining knowledge (a) that a condition or event exists that constitutes a Default or Event of Default, (b) that the holder of any Note has given any notice or taken any other action with respect to a claimed Default or Event of Default under this Agreement, (c) of any condition or event which could reasonably be expected to have a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Company or the Company and its Restricted Subsidiaries taken as a whole (other than matters of a general economic or political nature which do not affect the Company or its Restricted Subsidiaries uniquely), (d) that any Person has given any notice to the Company or any Restricted Subsidiary or taken any other action with respect to a claimed default or event or condition of the type referred to in clause (iii) of paragraph 7A, (e) of the institution of any litigation involving claims against the Company or any Restricted Subsidiary in excess of the coverage provided under the Company's or such Restricted Subsidiary's insurance policies (treating any portion of such coverage which is subject to self-insurance or deductibles as a part of such excess) if the amount of the excess of such claims individually exceeds $500,000, or, when aggregated with the excess over insurance coverage of all other outstanding claims, exceeds $1,000,000, (f) of the initiation by the Securities and Exchange Commission of any proceeding against the Company or any Restricted Subsidiary or of any investigation of the Company or any Restricted Subsidiary or (g) of the initiation by any other governmental agency of any proceeding against the Company or any Restricted Subsidiary or of any investigation of the Company or any Restricted Subsidiary involving allegations (or which could reasonably be expected to result in allegations) of material illegal activities or misconduct on the part of the Company or any Restricted Subsidiary, an Officer's Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed Default, Event of Default, event or condition, or specifying the nature of such litigation, proceeding or 12 investigation, and what action the Company has taken, is taking or proposes to take with respect thereto; and (ix) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested by such Significant Holder. 5B. INFORMATION REQUIRED BY RULE 144A. The Company covenants that it will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to and in compliance with the reporting requirements of section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term "QUALIFIED INSTITUTIONAL BUYER" shall have the meaning specified in Rule 144A under the Securities Act. 5C. INSPECTION OF PROPERTY. The Company covenants that it will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense (unless a Default or Event of Default shall have occurred and be continuing, in which case at the Company's expense), to visit and inspect any of the properties of the Company and its Restricted Subsidiaries, to examine the corporate books and financial records of the Company and its Restricted Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as such Significant Holder may reasonably request. 5D. COVENANT TO SECURE NOTES EQUALLY. The Company covenants that, if it or any Restricted Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired, other than Liens permitted by the provisions of paragraph 6C(1) (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 11C), it will make or cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other obligations thereby secured so long as any such other obligations shall be so secured. 5E. KEEPING OF BOOKS AND BANK ACCOUNTS. The Company covenants that it will, and will cause each of its Restricted Subsidiaries to (i) keep separate and proper books of record and account in which full and correct entries shall be made of all transactions, including any transactions between the Company or any Restricted Subsidiary and any Affiliate, all in accordance with generally accepted accounting principles, and (ii) maintain bank accounts which are separate and segregated from the bank accounts of any Unrestricted Subsidiary or Affiliate. 5F. INCORPORATION OF OTHER DEBT COVENANTS. The Company covenants that if it is or shall become subject to any operational or financial covenant in any document evidencing 13 or pertaining to Debt of the Company which is more favorable to a lender or other beneficiary than those set forth in paragraph 6 hereof, then (i) this Agreement shall be deemed to be automatically amended to include such more favorable covenant, (ii) the Company shall promptly give each holder of Notes notice thereof and (iii) if requested by Prudential or the Required Holder(s) of the Notes, the Company shall promptly execute and deliver a written amendment to this Agreement specifically incorporating such covenant herein. Once any such covenant has been included in this Agreement (whether or not pursuant to a written amendment), it may only be modified or eliminated by an amendment hereto entered into as contemplated by paragraph 11C hereof. 5G. CORPORATE EXISTENCE. The Company covenants that it will at all times preserve and keep in full force and effect its corporate existence, and rights and franchises material to its business, and those of each of its Restricted Subsidiaries, except as otherwise specifically permitted by paragraphs 6C(4) and 6C(5), and will qualify, and cause each of its Restricted Subsidiaries to qualify, to do business in any jurisdiction where the failure to do so would have a material adverse effect on the business, condition (financial and other), assets, properties, prospects or operations of the Company or the Company and its Restricted Subsidiaries taken as a whole, PROVIDED that the corporate existence of any Restricted Subsidiary may be terminated if, in the good faith judgment of the Board of Directors of the Company, such termination is in the best interests of the Company. 5H. PAYMENT OF TAXES AND CLAIMS. The Company covenants that it will, and will cause each of its Subsidiaries to, pay all income taxes before the same shall become delinquent, except where such income taxes are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, if adequate reserves therefor have been established on the books of the Company or its Subsidiaries in accordance with generally accepted accounting principles. The Company covenants that it will, and will cause each of its Subsidiaries to, pay all other taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or profits before any penalty accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien upon any of its properties or assets, PROVIDED that no such tax, assessment, charge or claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such accrual or other appropriate provision, if any, as shall be required by generally accepted accounting principles shall have been made therefor. 5I. COMPLIANCE WITH LAWS, ETC. The Company covenants that it will, and will cause each of its Restricted Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, the noncompliance with which would materially adversely affect the business, condition (financial or other), assets, properties, operations or prospects of the Company or the Company and its Restricted Subsidiaries taken as a whole. 14 5J. MAINTENANCE OF PROPERTIES; INSURANCE. The Company covenants that it will, and will cause each of its Restricted Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the business of the Company and its Restricted Subsidiaries and from time to time make or cause to be made all appropriate repairs, renewals and replacements thereof. The Company will maintain or cause to be maintained, with financially sound and reputable insurers, (i) insurance with respect to its properties and business and the properties and business of its Restricted Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations, and (ii) life insurance, with the Company as the owner and named beneficiary, on the life of Myron Kunin in the amount (net of any premium loans thereon and interest due in connection therewith) of not less than $2,700,000, and on the life of Paul Finkelstein in the amount (net of any premium loans thereon and interest due in connection therewith) of not less than $2,400,000, each of which life insurance policies shall be free of premium loans (except as specifically provided herein) and other Liens on or offsets against proceeds payable to the Company. 5K. AFFILIATE TRANSACTIONS, KEEPING OF BOOKS, BANK ACCOUNTS. The Company covenants that it will (i) keep and cause each of its Restricted Subsidiaries to keep separate and proper books of record and account, in which full and correct entries shall be made of all transactions including any transactions between the Company or any Restricted Subsidiary and any Affiliate, all in accordance with generally accepted accounting principles, and (ii) maintain and cause each of its Subsidiaries to maintain bank accounts which are separate and segregated from the bank accounts of any Affiliate. 6. NEGATIVE COVENANTS. During the Issuance Period and so long thereafter as any Note or other amount due hereunder is outstanding and unpaid, the Company covenants as follows: 6A. INTEREST COVERAGE RATIO. The Company will not permit the Interest Coverage Ratio to be less than 2.0 to 1.0 at the end of any fiscal quarter. 6B. CONSOLIDATED NET WORTH. The Company will not permit: (i) Consolidated Net Worth at any time to be less than $60,000,000 plus, to the extent positive, 50% of Consolidated Net Income for the period (taken as one accounting period) commencing July 1, 1995, and ending on the last day of the fiscal quarter most recently ended as of any date of determination; or (ii) Tangible Net Worth at the end of any fiscal quarter to be less than $10,000,000. 6C. LIEN, DEBT AND OTHER RESTRICTIONS. The Company will not and will not permit any Restricted Subsidiary to: 15 6C(1). LIENS. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Notes in accordance with the provisions of paragraph 5D), EXCEPT: (i) Liens for taxes, assessments or governmental charges not yet due or which are being actively contested in good faith by appropriate proceedings, (ii) Liens incidental to the conduct of its business or the ownership of its property and assets which do not secure Debt and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business, (iii) Liens on property or assets of a Restricted Subsidiary to secure obligations of such Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary, (iv) Liens which are the subject of an Offset Sharing Agreement, and (v) other Liens securing Debt permitted by paragraph 6C(2), PROVIDED that Priority Debt shall at no time exceed 15% of Consolidated Net Worth; 6C(2). DEBT. Create, incur, assume or suffer to exist any Debt, EXCEPT: (i) Funded Debt evidenced by the Notes, (ii) Funded Debt which is outstanding under the 1991 Agreement, (iii) Current Debt the aggregate principal amount of which at no time exceeds $20,000,000, PROVIDED that any holder of such Current Debt is party to an Offset Sharing Agreement, and (iv) other Funded Debt, provided that at no time shall (a) the ratio of Total Debt to the sum of Total Debt and Consolidated Net Worth exceed .50 to 1.00 or (b) Priority Debt exceed 15% of Consolidated Net Worth; 6C(3). INVESTMENTS. Make or permit to remain outstanding any loan or advance to, or extend credit to, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person (all of the foregoing being referred to herein as "Investments"), EXCEPT that the Company or any Restricted Subsidiary may: 16 (i) make or permit to remain outstanding Investments to or in any Restricted Subsidiary or any corporation which immediately following such Investment will be a Restricted Subsidiary, (ii) own, purchase or acquire marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof and maturing within one year from the date of acquisition thereof, (iii) make demand deposits in banks in the ordinary course of business, and make deposits or own certificates of deposit of United States dollars maturing within one year from the date of acquisition thereof issued by commercial banks chartered under the laws of the United States of America or any state thereof or the District of Columbia, each having as at any date of determination combined capital, surplus and undivided profits of not less than $100,000,000 (determined in accordance with generally accepted accounting principles), (iv) own, purchase or acquire commercial paper maturing no more than 270 days from the date of acquisition thereof and rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (v) make and own Investments in mutual funds which invest at least 95% of their assets in instruments described in clauses (ii), (iii) and (iv) of this paragraph 6C(3), (vi) endorse negotiable instruments for collection in the ordinary course of business, (vii) make or permit to remain outstanding Investments to or in any Unrestricted Subsidiary, PROVIDED that (a) the aggregate amount (at original cost) of all Investments in Unrestricted Subsidiaries (excluding up to a $4,000,000 equity contribution to a single United Kingdom based corporation if made after June 23, 1995 and prior to October 1, 1995) shall at no time exceed 10% of Consolidated Net Worth and (b) any Investment made in an Unrestricted Subsidiary subsequent to June 30, 1995, shall only be deemed an Investment for purposes of this paragraph 6C(3) to the extent it involves a cash or other asset contribution or advance (net of any return thereof), and (viii) make or permit to remain outstanding other Investments (exclusive of Investments in Unrestricted Subsidiaries), PROVIDED that the aggregate amount thereof shall at no time exceed 5% of Consolidated Net Worth. 6C(4). SALE OF STOCK AND DEBT OF SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock or Debt of any Restricted Subsidiary, except to the Company or a Wholly-Owned Restricted Subsidiary, and except that all shares of stock and Debt of any Restricted Subsidiary at the time owned by or owed to the Company and all 17 Restricted Subsidiaries may be sold as an entirety for a cash consideration which represents the fair value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock and Debt so sold; PROVIDED that (i) such sale or other disposition, if treated as a Transfer of assets of such Restricted Subsidiary, would be permitted by paragraph 6C(6) and (ii) at the time of such sale, such Restricted Subsidiary shall not own, directly or indirectly, any shares of stock or Debt of any other Restricted Subsidiary (unless all of the shares of stock and Debt of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by this paragraph 6C(4)); 6C(5). MERGER AND CONSOLIDATION. Merge or consolidate with or into any other Person, EXCEPT that: (i) any Restricted Subsidiary may merge or consolidate with or into the Company, PROVIDED that the Company is the continuing or surviving corporation, (ii) any Restricted Subsidiary may merge or consolidate with or into another Restricted Subsidiary, PROVIDED that a Wholly-Owned Restricted Subsidiary shall be the continuing or surviving corporation, and (iii) the Company may merge or consolidate with any other corporation, PROVIDED that (a) either (x) the Company shall be the continuing or surviving corporation, or (y) the successor or acquiring corporation shall be a corporation organized under the laws of any state of the United States of America and shall expressly assume in writing all of the obligations of the Company under this Agreement and on the Notes, including all covenants herein and therein contained, and such successor or acquiring corporation shall succeed to and be substituted for the Company with the same effect as if it had been named herein as a party hereto and (b) immediately after giving effect to such transaction, no Default or Event of Default would exist hereunder (including a Default or Event of Default under clause (iii) of paragraph 6C(2)); 6C(6). TRANSFER OF ASSETS. Transfer any of its assets EXCEPT that: (i) any Restricted Subsidiary may Transfer assets to the Company or a Wholly-Owned Restricted Subsidiary, (ii) the Company or any Restricted Subsidiary may sell inventory in the ordinary course of business, and (iii) the Company or any Restricted Subsidiary may otherwise Transfer assets, PROVIDED that after giving effect thereto (a) the Aggregate Percentage of Earnings Capacity Transferred pursuant to this clause (iii) shall not exceed 10% and (b) the Aggregate Percentage of Total Assets Transferred pursuant to this clause (iii) shall not exceed 10%; 18 6C(7). SALE OR DISCOUNT OF RECEIVABLES. Sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable; 6C(8). TRANSACTIONS WITH AFFILIATES. Directly or indirectly, engage in any transaction (including, without limitation, the purchase, sale or exchange of assets or the rendering of any service) with any Affiliate, unless (i) such transaction is in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms that are comparable to those which might be obtained in an arm's-length transaction between unaffiliated parties, and (ii) in the case of any such transaction in which the aggregate value of the assets or services involved, or of the payments made, exceeds $1,000,000, such transaction is authorized by a majority of the independent members of the Board of Directors of the Company; 6C(9). RESTRICTED SUBSIDIARY DIVIDEND RESTRICTIONS. Enter into, or otherwise be subject to, any contract or agreement (including its certificate or articles of incorporation), which limits the amount of, or otherwise imposes restrictions on the payment of, dividends by any Restricted Subsidiary; or 6C(10). TAX CONSOLIDATION. Consent to or permit the filing of or be a party to any consolidated income tax return with any Person, other than a consolidated tax return of the Company and its Subsidiaries. 6D. TRANSACTIONS BY RESTRICTED SUBSIDIARIES. The Company covenants that it will not permit any Restricted Subsidiary (either directly, or indirectly by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of (i) any shares of any class of its stock (other than Common Stock) except to the Company or another Restricted Subsidiary or (ii) any shares of its Common Stock except (a) to the Company or another Restricted Subsidiary and (b) concurrently with dispositions under (a) above, to any minority shareholders of such Restricted Subsidiary to the extent necessary to maintain such minority shareholders' percentage ownership of outstanding shares of Common Stock of such Restricted Subsidiary. 7. EVENTS OF DEFAULT. 7A. ACCELERATION. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of, or Yield-Maintenance Amount payable with respect to, any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than 5 days after the date due; or 19 (iii) the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due (or to be repurchased by the Company or any Subsidiary) prior to any stated maturity, PROVIDED that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration (or resale to the Company or any Subsidiary) shall occur and be continuing exceeds $500,000; or (iv) any representation or warranty made by the Company herein or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or (v) the Company fails to perform or observe any covenant or agreement contained in paragraph 6 or incorporated by reference into this Agreement pursuant to paragraph 5F; or (vi) the Company fails to perform or observe any other agreement, term or condition contained herein and such failure shall not be remedied within 30 days after any Responsible Officer obtains actual knowledge thereof; or (vii) the Company or any Restricted Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Restricted Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "BANKRUPTCY LAW"), of any jurisdiction; or (ix) the Company or any Restricted Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Restricted Subsidiary, or of any substantial part of the assets of the Company or any Restricted Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United 20 States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Restricted Subsidiary) relating to the Company or any Restricted Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Restricted Subsidiary and the Company or such Restricted Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xii) any order, judgment or decree is entered in any proceedings against the Company or any Restricted Subsidiary decreeing a split-up of the Company or such Restricted Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Restricted Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Restricted Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Restricted Subsidiary, which shall have contributed a substantial part of Consolidated Net Income for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) one or more final judgments in an aggregate amount in excess of $500,000 is rendered against the Company or any Subsidiary and, within 60 days after entry thereof, any such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or (xiv) (a) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (b) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of such proceedings, (c) the aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $500,000, (d) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax 21 provisions of the Code relating to employee benefit plans, (e) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (f) the Company or any Restricted Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Restricted Subsidiary thereunder; and any such event or events described in clauses (a) through (f) above, either individually or together with any other such event or events, could reasonably be expected to have a material adverse effect on the business or condition (financial or otherwise) of the Company and the Restricted Subsidiaries, taken as a whole; then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, any holder of any Note may at its option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes held by such holder to be, and all of the Notes held by such holder shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) with respect to any event constituting an Event of Default, the Required Holder(s) of the Notes of any Series may at its or their option during the continuance of such Event of Default, by notice in writing to the Company, declare all of the Notes of such Series to be, and all of the Notes of such Series shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note of such Series, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company. 7B. RESCISSION OF ACCELERATION. At any time after any or all of the Notes of any Series shall have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s) of the Notes of such Series may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the Notes of such Series, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes of such Series which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield-Maintenance Amount at the rate specified in the Notes of such Series, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes of such Series or this Agreement. No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom. 22 7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the holder of each Note of each Series at the time outstanding. 7D. OTHER REMEDIES. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 8. REPRESENTATIONS, COVENANTS AND WARRANTIES. The Company represents, covenants and warrants as follows: 8A. ORGANIZATION. The Company is a corporation duly organized and existing in good standing under the laws of the State of Minnesota, each Subsidiary is duly organized and existing in good standing under the laws of the jurisdiction in which it is incorporated, and the Company has and each Restricted Subsidiary has the corporate power to own its respective property and to carry on its respective business as now being conducted. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company and, when executed and delivered by the Company, will constitute legal, valid and binding obligations of the Company. SCHEDULE 8A attached hereto lists all Restricted Subsidiaries and all Unrestricted Subsidiaries. All of the outstanding stock (and all outstanding warrants, options and similar rights to acquire stock) of each Restricted Subsidiary is owned by the Company or a Restricted Subsidiary, except as otherwise disclosed in SCHEDULE 8A. 8B. FINANCIAL STATEMENTS. The Company has furnished each Purchaser of any Accepted Notes with the following financial statements, identified by a principal financial officer of the Company: (i) consolidating and consolidated balance sheets of the Company and its Subsidiaries as at June 30 in each of the three fiscal years of the Company most recently completed prior to the date as of which this representation is made or repeated to such Purchaser (other than fiscal years completed within 90 days prior to such date for which audited financial statements have not been released) and consolidating and consolidated statements of income, cash flows and a consolidated statement of shareholders' equity of the Company and its Subsidiaries for each such year, all reported on by Coopers & Lybrand L.L.P. and (ii) a consolidated balance sheet of the Company and its Subsidiaries and of the Company and its Restricted Subsidiaries as at the end of the quarterly period (if any) most recently completed prior to such date and after the end of such fiscal year (other than quarterly periods completed within 45 days prior to such date for which financial statements 23 have not been released) and the comparable quarterly period in the preceding fiscal year and consolidated statements of income and cash flows of the Company and Subsidiaries and of the Company and its Restricted Subsidiaries for the periods from the beginning of the fiscal years in which such quarterly periods are included to the end of such quarterly periods, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments), have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries or the Company and its Restricted Subsidiaries (as the case may be) required to be shown in accordance with such principles. The balance sheets fairly present the condition of the Company and its Subsidiaries or the Company and its Restricted Subsidiaries (as the case may be) as at the dates thereof, and the statements of income, stockholders' equity and cash flows fairly present the results of the operations of the Company and its Subsidiaries or the Company and its Restricted Subsidiaries (as the case may be) and their cash flows for the periods indicated. There has been no material adverse change in the business, property or assets, condition (financial or otherwise), operations or prospects of the Company and its Subsidiaries or the Company and its Restricted Subsidiaries, in each case taken as a whole, since the end of the most recent fiscal year for which such audited financial statements have been furnished. 8C. ACTIONS PENDING. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Restricted Subsidiaries, or any properties or rights of the Company or any of its Restricted Subsidiaries, by or before any court, arbitrator or administrative or governmental body which might result in any material adverse change in the business, property or assets, condition (financial or otherwise) or operations of the Company and its Restricted Subsidiaries taken as a whole. 8D. OUTSTANDING DEBT. Neither the Company nor any of its Restricted Subsidiaries has outstanding any Debt except as permitted by paragraph 6C(2). There exists no default under the provisions of any instrument evidencing such Debt or of any agreement relating thereto. 8E. TITLE TO PROPERTIES. The Company has and each of its Restricted Subsidiaries has good and indefeasible title to its respective real properties (other than properties which it leases) and good title to all of its other respective properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B (other than properties and assets disposed of in the ordinary course of business), subject to no Lien of any kind except Liens permitted by paragraph 6C(1). All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Restricted Subsidiaries are valid and subsisting and are in full force and effect. 8F. TAXES. The Company has and each of its Subsidiaries has filed all federal, state and other income tax returns which are required to be filed, and each has paid all taxes 24 as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles. 8G. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the Company nor any of its Restricted Subsidiaries is a party to any contract or agreement or subject to any charter or other corporate restriction which materially and adversely affects its business, property or assets, condition (financial or otherwise) or operations. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Restricted Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Restricted Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Restricted Subsidiaries is subject. Neither the Company nor any of its Restricted Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Debt of the Company or such Restricted Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in SCHEDULE 8G attached hereto. The Company is not party to any agreement evidencing or pertaining to Debt of the Company which includes any operational or financial covenant which is more favorable to a lender or other beneficiary than those set forth in paragraph 6 hereof. For purposes of the preceding sentence, no effect shall be given to paragraph 5F hereof. 8H. OFFERING OF NOTES. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes or any similar security of the Company for sale to, or solicited any offers to buy the Notes or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of Section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction. 8I. USE OF PROCEEDS. None of the proceeds of the sale of any Notes will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System (herein called "MARGIN STOCK") or for the purpose of maintaining, reducing or retiring any indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock or for any other purpose which might constitute the purchase of such Notes a "purpose credit" within the meaning of such Regulation G, unless the Company shall have delivered to the Purchaser 25 which is purchasing such Notes, on the Closing Day for such Notes, an opinion of counsel satisfactory to such Purchaser stating that the purchase of such Notes does not constitute a violation of such Regulation G. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G. Regulation T or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. 8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the Pension Benefit Guaranty Corporation has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Restricted Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, property or assets, condition (financial or otherwise) or operations of the Company and its Restricted Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9B as to the source of funds to be used by it to purchase any Notes. 8K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any Restricted Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Restricted Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental body (other than routine filings after the Closing Day for any Notes with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes. 8L. ENVIRONMENTAL COMPLIANCE. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all foreign, federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment EXCEPT, in any such case, where failure to comply would not result in a material 26 adverse effect on the business, condition (financial or otherwise) or operations of the Company and its Restricted Subsidiaries taken as a whole. 8M. DISCLOSURE. Neither this Agreement nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, property or assets, condition (financial or otherwise) or operations of the Company or any of its Restricted Subsidiaries and which has not been set forth in this Agreement. 8N. HOSTILE TENDER OFFERS. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer. 80. RULE 144A. The Notes are not of the same class as securities of the Company, if any, listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. 8P. FOREIGN ENEMIES AND REGULATIONS. Neither the issue and sale of the Notes by the Company, its use of the proceeds thereof nor any of the transactions contemplated by this Agreement will violate (i) any regulations promulgated or administered by the Office of Foreign Assets Control, United States Department of the Treasury, including, without limitation, the Foreign Assets Control Regulations, the Transaction Control Regulations, the Cuban Assets Control Regulations, the Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the Nicaraguan Trade Control Regulations, the South African Transaction Regulations, the Iranian Transactions Regulations, the Iraqi Sanctions Regulations, the Soviet Gold Coin Regulations, the Panamanian Transaction Regulations or the Libyan Sanctions Regulations of the United States Treasury Department, 31 C.F.R., Subtitle B, Chapter V, as amended, (ii) the Trading with the Enemy Act, as amended, (iii) Executive Orders 8389, 9095, 9193, 12543 (Libya), 12544 (Libya), 12722 (Iraq) or 12724 (Iraq), 12775 (Haiti) or 12779 (Haiti), as amended, of the President of the United States, (iv) the Comprehensive Anti-Apartheid Act of 1986 or (v) any rule, regulation or executive order issued or promulgated pursuant to the laws or regulations described in the foregoing clauses (i) through (iv). 9. REPRESENTATIONS OF THE PURCHASERS. Each Purchaser represents as follows: 9A. NATURE OF PURCHASE. Such Purchaser is not acquiring the Notes purchased by it hereunder with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the disposition of such Purchaser's property shall at all times be and remain within its control. 27 9B. SOURCE OF FUNDS. No part of the funds used by such Purchaser to pay the purchase price of the Notes purchased by such Purchaser hereunder constitutes assets allocated to any separate account maintained by such Purchaser in which any employee benefit plan, other than employee benefit plans identified on a list which has been furnished by such Purchaser to the Company, participates to the extent of 10% or more. For the purpose of this paragraph 9B, the terms "SEPARATE ACCOUNT" and "EMPLOYEE BENEFIT PLAN" shall have the respective meanings specified in section 3 of ERISA. 10. DEFINITIONS; ACCOUNTING MATTERS. For the purpose of this Agreement, the terms defined in paragraphs 10A and 10B (or within the text of any other paragraph) shall have the respective meanings specified therein and all accounting matters shall be subject to determination as provided in paragraph 10C. 10A. YIELD-MAINTENANCE TERMS. "CALLED PRINCIPAL" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "DISCOUNTED VALUE" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (as converted to reflect the periodic basis on which interest on such Note is payable, if payable other than on a semi-annual basis) equal to the Reinvestment Yield with respect to such Called Principal. "REINVESTMENT YIELD" shall mean, with respect to the Called Principal of any Note, the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City local time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities. 28 "REMAINING AVERAGE LIFE" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. "SETTLEMENT DATE" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires. "YIELD-MAINTENANCE AMOUNT" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero. 10B. OTHER TERMS. "ACCEPTANCE" shall have the meaning specified in paragraph 2E. "ACCEPTANCE DAY" shall have the meaning specified in paragraph 2E. "ACCEPTANCE WINDOW" shall have the meaning specified in paragraph 2E. "ACCEPTED NOTE" shall have the meaning specified in paragraph 2E. "AFFILIATE" shall mean (i) any Responsible Officer or member of the Board of Directors of the Company, (ii) any holder of at least 10% of the total combined voting power of all classes of Voting Stock (or the equivalent) of the Company or of any corporation or other entity which directly or indirectly controls the Company, (iii) the spouse, any sibling (by blood or adoption) or any descendant (by blood or adoption) of any individual referred to in clause (i) or (ii) above, or any spouse of any such sibling or descendant or any descendant of any such sibling, (iv) any trust in which any Person referred to in clause (i), (ii) or (iii) above has a substantial beneficial interest, (v) any corporation or other entity (a) of which the Company or any Person referred to in clause (i), (ii), (iii) or (iv) above holds at least 10% of the total combined economic interest of all classes of Common Stock (or the equivalent) or at least 10% of the total combined voting power of all classes of Voting Stock (or the equivalent) or (b) directly or indirectly controlled by any Person referred to in clause (i), (ii), 29 (iii) or (iv) above, and (vi) any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, PROVIDED that a Restricted Subsidiary shall not be an Affiliate. A Person shall be deemed to control a corporation or other entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation or other entity, whether through the ownership of voting securities, by contract or otherwise. "AGGREGATE PERCENTAGE OF EARNINGS CAPACITY TRANSFERRED" shall mean, with respect to any eight consecutive fiscal quarter period, the sum of the Percentages of Earnings Capacity Transferred for each asset of the Company and its Restricted Subsidiaries that is Transferred during such period. "AGGREGATE PERCENTAGE OF TOTAL ASSETS TRANSFERRED" shall mean, with respect to any eight consecutive fiscal quarter period, the sum of the Percentages of Total Assets Transferred for each asset of the Company and its Restricted Subsidiaries that is Transferred during such period. "AUTHORIZED OFFICER" shall mean (i) in the case of the Company, its chief executive officer, its chief financial officer, any vice president of the Company designated as an "Authorized Officer" of the Company in the Information Schedule attached hereto or any vice president of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in an Officer's Certificate executed by the Company's chief executive officer or chief financial officer and delivered to Prudential, and (ii) in the case of Prudential, any officer of Prudential designated as its "Authorized Officer" in the Information Schedule or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential. "AVAILABLE FACILITY AMOUNT" shall have the meaning specified in paragraph 2A. "AVERAGE CONSOLIDATED NET INCOME" shall mean, as of any time of determination thereof, the average Consolidated Net Income of the Company and Restricted Subsidiaries for the three complete fiscal years of the Company then most recently ended. "BANKRUPTCY LAW" shall have the meaning specified in clause (viii) of paragraph 7A. 30 "BUSINESS DAY" shall mean any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks in New York City are required or authorized to be closed and (iii) for purposes of paragraph 2C hereof only, a day on which The Prudential Insurance Company of America is not open for business. "CANCELLATION DATE" shall have the meaning specified in paragraph 2H(v). "CANCELLATION FEE" shall have the meaning specified in paragraph 2H(v). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under generally accepted accounting principles, is or will be required to be capitalized on the books of the Company or any Restricted Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expenses) in accordance with such principles. "CLOSING DAY" shall mean, with respect to any Accepted Note, the Business Day specified for the closing of the purchase and sale of such Accepted Note in the Request for Purchase of such Accepted Note, PROVIDED that (i) if the Company and the Purchaser which is obligated to purchase such Accepted Note agree on an earlier Business Day for such closing, the "CLOSING DAY" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2G, the Closing Day for such Accepted Note, for all purposes of this Agreement except references to "original Closing Day" in paragraph 2H(iv), shall mean the Rescheduled Closing Day with respect to such Accepted Note. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMON STOCK" shall mean, as applied to any corporation, shares of such corporation which shall not be entitled to preference or priority over any other shares of such corporation in respect of either the payment of dividends or the distribution of assets upon liquidation. "COMPUTATION PARAGRAPHS" shall have the meaning specified in paragraph 5A(iv). "CONFIRMATION OF ACCEPTANCE" shall have the meaning specified in paragraph 2E. "CONSOLIDATED INTEREST EXPENSE" shall mean, as to any period, consolidated interest expense of the Company and Restricted Subsidiaries for such period, calculated to (i) include imputed interest on Capitalized Lease Obligations and (ii) exclude amortization of debt discount to the extent not actually paid in cash. "CONSOLIDATED NET INCOME" shall mean, as to any period, the net income of the Company and Restricted Subsidiaries on a consolidated basis; provided that for periods ended on or prior to June 30, 1994, there shall be excluded from the determination of such net income any non-recurring charges related to MEI Diversified, Inc. 31 "CONSOLIDATED NET WORTH" shall mean, as of any time of determination thereof, (i) the shareholders' equity (or deficit) of the Company and its Restricted Subsidiaries, as the same would be shown on a consolidated balance sheet of the Company and its Restricted Subsidiaries, PLUS (ii) to the extent that (a) the convertible debenture of the Company issued to T. Rowe Price Strategic Partners II, L.P. remains outstanding and (b) the public market price of the Company's Common Stock is in excess of the conversion price set forth in such convertible debenture, the conversion price of such convertible debenture, MINUS (iii) the aggregate amount of Investments in Unrestricted Subsidiaries which are deemed not to be Investments for purposes of paragraph 6C(3) as a result of clause (vii)(b) thereof. "CURRENT DEBT" shall mean, with respect to any Person, all Indebtedness of such Person for borrowed money which by its terms or by the terms of any instrument or agreement relating thereto matures on demand or within one year from the date of the creation thereof, PROVIDED that Indebtedness outstanding under a revolving credit or similar agreement which obligates the lender or lenders to extend credit over a period of more than one year shall constitute Current Debt and not Funded Debt. "DEBT" shall mean Current Debt and Funded Debt. "DELAYED DELIVERY FEE" shall have the meaning specified in paragraph 2H(iv). "EBIT" shall mean, as to any period, Consolidated Net Income for such period PLUS (i) Consolidated Interest Expense for such period, PLUS or MINUS (as appropriate) (ii) any provision for income taxes for such period. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code. "EVENT OF DEFAULT" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "DEFAULT" shall mean any of such events, whether or not any such requirement has been satisfied. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FACILITY" shall have the meaning specified in paragraph 2A. "FACILITY FEE" shall have the meaning specified in paragraph 2H(ii). 32 "FUNDED DEBT" shall mean with respect to any Person, all Indebtedness of such Person which by it terms or by the terms of any instrument or agreement relating thereto matures, or which is otherwise payable or unpaid, more than one year from, or is directly or indirectly renewable or extendible at the option of the debtor to a date more than one year from, the date of the creation thereof, PROVIDED that Indebtedness outstanding under a revolving credit or similar agreement which obligates the lender or lenders to extend credit over a period of more than one year shall constitute Current Debt and not Funded Debt. "GENERAL INTANGIBLES" shall mean all choses in action, causes of action and all other intangible property of the Company and its Restricted Subsidiaries of every kind and nature now owned or hereafter acquired, including, without limitation, corporate and other business records, deposit accounts, inventions, designs, patents, patent and trademark registrations and applications, trademarks, trade names, trade secrets, goodwill, copyrights registrations, licenses, franchises, deferred tax benefits, tax refund claims, prepaid expenses, computer programs not included in Capital, Property and Equipment on the annual audited consolidated financial statements of the Company and its Restricted Subsidiaries, covenants not to compete, customer lists and mailing lists, contract rights, indemnification rights, and any letters of credit, guarantee claims, security interests or other security held by or granted to the Company or its Restricted Subsidiaries. "GUARANTEE" shall mean, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obliger of such obligation, or to make payment for any products, materials or supplies or for any transportation or service, regardless of the non-delivery or non-furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. "HEDGE TREASURY NOTE(S)" shall mean, with respect to any Accepted Note, the United States Treasury Note or Notes whose duration (as determined by Prudential) most closely matches the duration of such Accepted Note. 33 "HOSTILE TENDER OFFER" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note. "INCLUDING" shall mean, unless the context clearly requires otherwise, "including without limitation". "INDEBTEDNESS" shall mean, with respect to any Person, without duplication, (i) all items (excluding items of (a) contingency reserves, (b) reserves for deferred income taxes, (c) deferred compensation to the extent that such deferred compensation items are fully funded by life insurance policies, (d) deferred rent, (e) post-retirement benefit liabilities determined in accordance with Financial Accounting Standards Board Statement No. 106 and (f) current liabilities for trade payables, tax and payroll obligations) which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed, and (iii) all indebtedness and other obligations of others with respect to which such Person has become liable by way of Guarantee. "INTEREST COVERAGE RATIO" shall mean, as to any period, the ratio of (i) EBIT for such period to (ii) Consolidated Interest Expense for such period. "ISSUANCE PERIOD" shall have the meaning specified in paragraph 2B. "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA. 34 "1991 AGREEMENT" shall mean the note agreement dated as of June 21, 1991 pursuant to which the Company issued its 11.52% promissory notes due June 30, 1998 in the original principal amount of $55,000,000. "NOTES" shall have the meaning specified in paragraph 1. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company. "OFFSET SHARING AGREEMENT" shall mean the offset sharing agreement dated as of June 21, 1994, among Prudential, LaSalle National Bank, Bank Hapoalin and the other lenders named as parties thereto (as such agreement has been and may be amended from time to time) as well as any similar agreement which hereafter may be entered into by Prudential, other holders of the Notes and other lenders to the Company. "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor or replacement entity thereto under ERISA. "PERCENTAGE(S) OF EARNINGS CAPACITY TRANSFERRED" shall mean, with respect to each asset Transferred pursuant to clause (iii) of paragraph 6C(6), the ratio (expressed as a percentage) of (i) Consolidated Net Income produced by, or attributable to, such asset during the four fiscal quarter period most recently ended prior to the effective date of such Transfer to (ii) Average Consolidated Net Income. "PERCENTAGE(S) OF TOTAL ASSETS TRANSFERRED" shall mean, with respect to each asset Transferred pursuant to clause (iii) of paragraph 6C(6), the ratio (expressed as a percentage) of (i) the greater of such asset's fair market value or net book value on the date of Transfer to (ii) the book value of the consolidated assets of the Company and Restricted Subsidiaries as of the last day of the fiscal quarter immediately preceding the day of Transfer. "PERSON" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "PLAN" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. "PRIORITY DEBT" shall mean, as of any time of determination thereof, (i) Debt of any Restricted Subsidiary, other than Debt owed to the Company or a Wholly-Owned Restricted Subsidiary and (ii) Debt of the Company secured by any Lien. "PRUDENTIAL" shall mean The Prudential Insurance Company of America. 35 "PRUDENTIAL AFFILIATE" shall mean any corporation or other entity all of the Voting Stock (or equivalent voting securities or interests) of which is owned by Prudential either directly or through Prudential Affiliates. "PURCHASERS" shall mean with respect to any Accepted Notes, Prudential and/or the Prudential Affiliate(s), which are purchasing such Accepted Notes. "REFUND EVENT" shall mean (i) a termination of the Facility resulting from Prudential's provision of a notice of termination as contemplated by clause (ii) of paragraph 2B or (ii) a termination of the Facility resulting from the Company's provision of a notice of termination as contemplated by clause (ii) of paragraph 2B, if such notice is provided by the Company within five Business Days following Prudential's failure to provide an interest rate quote (as contemplated by paragraph 2D), unless (a) the applicable Request for Purchase failed to conform in all respects with the requirements of paragraph 2C, (b) a Default or Event of Default existed at the time the applicable Request for Purchase was received or would have existed upon the issuance of the Notes described in the applicable Request for Purchase, (c) a market disrupting event described in paragraph 2F existed at any time during the five Business Day period following receipt of the applicable Request for Purchase, or (d) upon the issuance of the Notes described in the applicable Request for Purchase the Company's credit quality, as determined by Prudential, would have been below investment grade. "REFUNDABLE PORTION" shall mean, with respect to the Facility Fee, that portion thereof determined by multiplying the amount of such fee by a fraction, the denominator of which shall be 1,095 and the numerator of which shall be the difference between 1,095 and the number of days elapsed between the date of the Agreement and the date of the Refund Event. "REQUEST FOR PURCHASE" shall have the meaning specified in paragraph 2C. "REQUIRED HOLDER(S)" shall mean the holder or holders of at least 51% of the aggregate principal amount of the Notes or of a Series of Notes, as the context may require, from time to time outstanding. "RESCHEDULED CLOSING DAY" shall have the meaning specified in paragraph 2G. "RESPONSIBLE OFFICER" shall mean the chief executive officer, chief operating officer, chief financial officer or chief accounting officer of the Company, general counsel of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. "RESTRICTED SUBSIDIARY" shall mean any Subsidiary organized under the laws of any state of the United States of America, Puerto Rico, Canada, or any province of Canada, which conducts substantially all of its business in the United States of America, Puerto Rico or Canada, and at least 80% of the total combined voting power of all classes of Voting Stock 36 of which shall, at the time as of which any determination is being made, be owned by the Company either directly or through Restricted Subsidiaries, PROVIDED that no such Subsidiary shall be a Restricted Subsidiary unless (i) it is listed as a Restricted Subsidiary in Schedule 8A attached hereto or (ii) (a) the Board of Directors of the Company hereafter designates such Subsidiary a Restricted Subsidiary, (b) notice of such designation is given by the Company to the holders of the Notes with the next succeeding delivery of financial statements pursuant to paragraph 5A, and (c) on the date of and immediately after giving effect to such designation, no Event of Default shall have occurred and be continuing. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SERIES" shall have the meaning specified in paragraph 1. "SIGNIFICANT HOLDER" shall mean (i) Prudential, so long as Prudential or any Prudential Affiliate shall hold (or be committed under this Agreement to purchase) any Note, or (ii) any other holder of at least 5% of the aggregate principal amount of the Notes of any Series from time to time outstanding. "SUBORDINATED DEBT" shall mean (i) that certain 7.25% promissory note of the Company due December 31, 1998 and (ii) that certain 7.25% convertible debenture of the Company due December 31, 1998, in each case originally issued to T. Rowe Price Strategic Partners II, L.P. "SUBSIDIARY" shall mean any corporation, association or other business entity which is required to be consolidated in the financial statements of the Company. "TANGIBLE NET WORTH" shall mean, as of any time of determination thereof, the net worth of the Company and its Restricted Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles, plus the amount of the cash surrender value of life insurance policies maintained by the Company on the lives of executive officers plus the amount of Debt permitted by this Agreement which is subordinate in right of payment to the Notes minus the sum of (i) the amount of any General Intangibles, (ii) amounts due from Affiliates and (iii) the amount of investments in Unrestricted Subsidiaries. "TOTAL DEBT" shall mean, as of any time of determination thereof, the aggregate amount of (i) all Funded Debt of the Company and Restricted Subsidiaries, PLUS (ii) the average outstanding daily balance of all Current Debt of the Company and Restricted Subsidiaries during the twelve calendar month period most recently ended as of any time of determination, MINUS (iii) Debt of Restricted Subsidiaries owed to the Company or a Wholly-Owned Subsidiary, MINUS (iv) to the extent that (a) the convertible debenture of the Company originally issued December 31, 1992, to T. Rowe Price Strategic Partners II, L.P. remains outstanding and (b) the public market price of the Company's Common Stock is in excess of the conversion price set forth in such convertible debenture, the conversion price of such convertible debenture. 37 "TRANSFER" shall mean, with respect to any item, the sale, exchange, conveyance, lease, transfer or other disposition of such item. "TRANSFEREE" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement. "UNRESTRICTED SUBSIDIARY" shall mean any Subsidiary other than a Restricted Subsidiary. No Subsidiary which is or becomes a Restricted Subsidiary shall at any time thereafter become or be an Unrestricted Subsidiary. Notwithstanding the foregoing, solely for the purposes of clause (iii) of paragraph 5A, Regis Mexico, S.A. shall not be deemed an Unrestricted Subsidiary unless and until either it contributes greater than 5% of the consolidated revenues of the Company and Subsidiaries for any fiscal year of the Company or its assets constitute greater than 5% of the consolidated assets of the Company and Subsidiaries as at the end of any fiscal year of the Company. "VOTING STOCK" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "WHOLLY-OWNED RESTRICTED SUBSIDIARY" shall mean a Restricted Subsidiary all the outstanding shares (other than directors' qualifying shares, if required by law) of every class of stock of which are at the time owned by the Company or by one or more Wholly-Owned Restricted Subsidiaries. 10C. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in this Agreement to "generally accepted accounting principles" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles applied on a basis consistent with the most recent audited financial statements delivered pursuant to clause (ii) of paragraph 5A or, if no such statements have been so delivered, the most recent audited financial statements referred to in clause (i) of paragraph 8B. 11. MISCELLANEOUS. 11A. NOTE PAYMENTS. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Yield-Maintenance Amount payable with respect to, such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 12:00 noon, New York City local time, on the date due) to the account or accounts of such Purchaser specified 38 in the Purchaser Schedule specified in the Confirmation of Acceptance with respect to such Note or such other account or accounts in the United States as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as the Purchasers have made in this paragraph 11A. 11B. EXPENSES. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges and the fees and expenses of any special counsel engaged by the Purchasers or any Transferee in connection with this Agreement, the transactions contemplated hereby and any subsequent proposed modification of, or proposed consent under, this Agreement, whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including attorneys' fees, incurred by any Purchaser or any Transferee in enforcing (or determining whether or how to enforce) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the transactions contemplated hereby or by reason of any Purchaser's or any Transferee's having acquired any Note, including without limitation costs and expenses incurred in any bankruptcy case. The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or any Transferee and the payment of any Note. 11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) of the Notes of each Series except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the rate or time of payment of interest on or any Yield-Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential (and not without the written consent of Prudential) the provisions of paragraph 2 may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted 39 Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2 and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The Notes are issuable as registered notes without coupons in denominations of at least $1,000,000, except as may be necessary to reflect any principal amount not evenly divisible by $1,000,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Each installment of principal payable on each installment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the installment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any installment or installments of principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. 40 11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield-Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion. 11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. 11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. 11H. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is prohibited by any one of such covenants, the fact that it would be permitted by an exception to, or otherwise be in compliance within the limitations of, another covenant shall not (i) avoid the occurrence of an Event of Default or Default if such action is taken or such condition exists or (ii) in any way prejudice an attempt by a holder or the holders of the Notes to prohibit (through equitable action or otherwise) the taking of any action by the Company or a Restricted Subsidiary which would result in an Event of Default or Default. 11I. NOTICES. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached to the applicable Confirmation of Acceptance or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at 7201 Metro Boulevard, Minneapolis, Minnesota 55439, Attention: Chief Financial Officer, PROVIDED, HOWEVER, that any such communication to the 41 Company may also, at the option of the Person sending such communication, be delivered by any other means either to the Company at its address specified above or to any Authorized Officer of the Company. Any communication pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which is listed for the party receiving the communication in the Information Schedule or at such other telecopier terminal as the party receiving the information shall have specified in writing to the party sending such information. 11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, or Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day. If the date for any payment is extended to the next succeeding Business Day by reason of the preceding sentence, the period of such extension shall be included in the computation of the interest payable on such Business Day. 11K. SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11L. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 11M. SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any Purchaser, to any holder of Notes or to the Required Holder(s), the determination of such satisfaction shall be made by such Purchaser, such holder or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 11N. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE INTERNAL LAW OF THE STATE OF ILLINOIS. 11O. SEVERALTY OF OBLIGATIONS. The sales of Notes to the Purchasers are to be several sales, and the obligations of Prudential and the Purchasers under this Agreement are 42 several obligations. No failure by Prudential or any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder, and neither Prudential nor any Purchaser shall be responsible for the obligations of, or any action taken or omitted by, any other such Person hereunder. 11P. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 11Q. BINDING AGREEMENT. When this Agreement is executed and delivered by the Company and Prudential, it shall become a binding agreement between the Company and Prudential. This Agreement shall also inure to the benefit of each Purchaser which shall have executed and delivered a Confirmation of Acceptance, and each such Purchaser shall be bound by this Agreement to the extent provided in such Confirmation of Acceptance. Very truly yours, REGIS CORPORATION By: /s/ Paul D. Finkelstein ------------------------------ Name: PAUL D. FINKELSTEIN Title: PRESIDENT The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ P. Scott [ILLEGIBLE] ------------------------------ Vice President 43 INFORMATION SCHEDULE AUTHORIZED OFFICERS FOR PRUDENTIAL Allen A. Weaver P. Scott von Fischer Managing Director Senior Vice President Prudential Capital Group Prudential Capital Group Two Prudential Plaza Two Prudential Plaza Suite 5600 Suite 5600 Chicago, Illinois 60601 Chicago, Illinois 60601 Telephone: (312) 540-4211 Telephone: (312) 540-4225 Facsimile: (312) 540-4222 Facsimile: (312) 540-4222 Mark A. Hoffmeister Leonard H. Lillard IV Senior Vice President Vice President Prudential Capital Group Prudential Capital Group Two Prudential Plaza Two Prudential Plaza Suite 5600 Suite 5600 Chicago, Illinois 60601 Chicago, Illinois 60601 Telephone: (312) 540-4215 Telephone: (312) 540-4216 Facsimile: (312) 540-4222 Facsimile: (312) 540-4222 Jeffrey L. Dickson Vice President Prudential Capital Group Two Prudential Plaza Suite 5600 Chicago, Illinois 60601 Telephone: (312) 540-4214 Facsimile: (312) 540-4222 AUTHORIZED OFFICERS FOR THE COMPANY Paul Finkelstein Randy Pearce Chief Operating Officer & President Vice President, Finance Regis Corporation Regis Corporation 7201 Metro Boulevard 7201 Metro Boulevard Minneapolis, Minnesota 55439 Minneapolis, Minnesota 55439 Telephone: (612) 947-7911 Telephone: (612) 947-7603 Facsimile: (612) 947-7900 Facsimile: (612) 947-7600 Frank Evangelist Senior Vice President, Finance Regis Corporation 7201 Metro Boulevard Minneapolis, Minnesota 55439 Telephone: (612) 947-7699 Facsimile: (612) 947-7600 EXHIBIT A [FORM OF NOTE] REGIS CORPORATION SENIOR SERIES NOTE -- No. -- ORIGINAL PRINCIPAL AMOUNT: ORIGINAL ISSUE DATE: INTEREST RATE: INTEREST PAYMENT DATES: FINAL MATURITY DATE: PRINCIPAL PREPAYMENT DATES AND AMOUNTS: FOR VALUE RECEIVED, the undersigned, Regis Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Minnesota, hereby promises to pay to , or registered assigns, the principal sum of DOLLARS [on the Final Maturity Date specified above] [, payable on the Principal Prepayment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield-Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its Prime Rate. Payments of principal, Yield-Maintenance Amount, if any, and interest are to be made at the main office of Morgan Guaranty Trust Company of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. A-1 This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Private Shelf Agreement, dated as of July 25, 1995 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. REGIS CORPORATION By: ----------------------- Title: -------------------- A-2 EXHIBIT B [FORM OF REQUEST FOR PURCHASE] REGIS CORPORATION Reference is made to the Private Shelf Agreement (the "Agreement"), dated as of July 25, 1995 between Regis Corporation (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. Capitalized terms used and not otherwise defined herein shall have the respective meanings specified in the Agreement. Pursuant to Paragraph 2C of the Agreement, the Company hereby makes the following Request for Purchase: 1. Aggregate principal amount of the Notes covered hereby (the "Notes")................... $__________ 2. Individual specifications of the Notes: Principal Final Prepayment Interest Principal Maturity Dates and Payment Amount(1) Dater(2) Amounts Period ---------- --------- ----------- ---------- Quarterly 3. Use of proceeds of the Notes: 4. Proposed day for the closing of the purchase and sale of the Notes: - ----------------- (1) Minimum principal amount of $5,000,000. (2) No less than five and no more than ten years from the date of original issuance. B-1 5. The purchase price of the Notes is to be transferred to: Name, Address and ABA Routing Number of Number of Bank Account --------------- --------- 6. The Company certifies (a) that the representations and warranties contained in paragraph 8 of the Agreement are true on and as of the date of this Request for Purchase except to the extent of changes caused by the transactions contemplated in the Agreement and (b) that there exists on the date of this Request for Purchase no Event of Default or Default. Dated: REGIS CORPORATION By: ---------------------------- Authorized Officer B-2 EXHIBIT C [FORM OF CONFIRMATION OF ACCEPTANCE] REGIS CORPORATION Reference is made to the Private Shelf Agreement (the "Agreement"), dated as of July 25, 1995 between Regis Corporation (the "Company"), on the one hand, and The Prudential Insurance Company of America ("Prudential") and each Prudential Affiliate which becomes party thereto, on the other hand. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement. Prudential or the Prudential Affiliate which is named below as a Purchaser of Notes hereby confirms the representations as to such Notes set forth in paragraph 9 of the Agreement, and agrees to be bound by the provisions of paragraphs 2E and 2G of the Agreement relating to the purchase and sale of such Notes and by the provisions of the penultimate sentence of paragraph 11A of the Agreement. Pursuant to paragraph 2E of the Agreement, an Acceptance with respect to the following Accepted Notes is hereby confirmed: I. Accepted Notes: Aggregate principal amount $_____________ (A) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal prepayment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule (B) (a) Name of Purchaser: (b) Principal amount: (c) Final maturity date: (d) Principal prepayment dates and amounts: (e) Interest rate: (f) Interest payment period: (g) Payment and notice instructions: As set forth on attached Purchaser Schedule [(C), (D).. same information as above.] C-1 11. Closing Day: Dated: REGIS CORPORATION By: ---------------------- Title: ------------------- [THE PRUDENTIAL INSURANCE COMPANY OF AMERICA] By: ---------------------- Vice President [PRUDENTIAL AFFILIATE] By: ---------------------- Vice President C-2 EXHIBIT D [FORM OF OPINION OF COMPANY'S COUNSEL] [Date of Closing] [Name(s) and address(es) of purchaser(s)] Ladies and Gentlemen: We have acted as counsel for Regis Corporation (the "Company") in connection with the Private Shelf Agreement, dated as of July 25, 1995 (the "Agreement") between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate which becomes a party thereto, on the other hand, pursuant to which the Company has issued to you today Senior Series __ Notes of the Company in the aggregate principal amount of $______ (the "Notes"). Capitalized terms used and not otherwise defined herein shall have the meanings provided in the Agreement. This letter is being delivered to you in satisfaction of the condition set forth in paragraph 3A(v) of the Agreement and with the understanding that you are purchasing the Notes in reliance on the opinions expressed herein. In this connection, we have examined such certificates of public officials, certificates of officers of the Company and copies certified to our satisfaction of corporate documents and records of the Company and of other papers, and have made such other investigations, as we have deemed relevant and necessary as a basis for our opinion hereinafter set forth. We have relied upon such certificates of public officials and of officers of the Company with respect to the accuracy of material factual matters contained therein which were not independently established. With respect to the opinion expressed in paragraph 3 below, we have also relied upon the representation made by [each of] you in paragraph 9A of the Agreement. Based on the foregoing, it is our opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Minnesota. Each Subsidiary is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation. The Company and its Restricted Subsidiaries have the corporate power to carry on its their respective businesses as now being conducted. D-1 2. The Agreement and the Notes have been duly authorized by all requisite corporate action and duly executed and delivered by authorized officers of the Company, and are valid obligations of the Company, legally binding upon and enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and (b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3. It is not necessary in connection with the offering, issuance, sale and delivery of the Notes under the circumstances contemplated by the Agreement to register the Notes under the Securities Act or to qualify an indenture in respect of the Notes under the Trust Indenture Act of 1939, as amended. 4. The extension, arranging and obtaining of the credit represented by the Notes do not result in any violation of regulation G, T or X of the Board of Governors of the Federal Reserve System. 5. The execution and delivery of the Agreement and the Notes, the offering, issuance and sale of the Notes and fulfillment of and compliance with the respective provisions of the Agreement and the Notes do not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Restricted Subsidiaries pursuant to, or require any authorization, consent, approval, exemption, or other action by or notice to or filing with any court, administrative or governmental body or other Person (other than routine filings after the date hereof with the Securities and Exchange Commission and/or state Blue Sky authorities) pursuant to, the charter or by-laws of the Company or any of its Restricted Subsidiaries, any applicable law (including any securities or Blue Sky law), statute, rule or regulation or (insofar as is known to us after having made due inquiry with respect thereto) any agreement (including, without limitation, any agreement listed in Schedule 8G to the Agreement), instrument, order, judgment or decree to which the Company or any of its Restricted Subsidiaries is a party or otherwise subject. Very truly yours, D-2 SCHEDULE 8A REGIS CORPORATION SCHEDULE OF SUBSIDIARIES - ------------------------------------------------------------------------------- Regis Hairstylists, Ltd. Restricted 100% Trade Secret, Inc. Restricted 100% Wilson Salons, Inc. Restricted 100% Regis Europe, Ltd. Unrestricted 99%* Regis Mexico, S.A. Unrestricted 100% Regis South Africa (Proprietary) Limited Unrestricted 100% Regis Hairstylists (Proprietary) Limited Unrestricted 100% - ---------------------- * Borrower owns 9,998 shares of the 10,000 shares which are outstanding. The two shares not controlled by Borrower are owned by two employees of Regis Europe, Ltd. SCHEDULE 8G LISTING OF AGREEMENTS WHICH RESTRICT THE ABILITY OF REGIS TO INCUR DEBT 1. 11.52% Senior Note Agreement, dated June 21, 1991 (as amended) 2. Bank Credit Agreement, dated June 21, 1994 (as amended) 3. Note and Convertible Debenture Purchase Agreement with T. Rowe Price Strategic Partners Fund II, L.P., dated December 31, 1992 (as amended) EX-10.(W) 5 EXHIBIT 10(W) REGIS CORPORATION SERIES D SENIOR NOTE No. D-1 ORIGINAL PRINCIPAL AMOUNT: $5,000.000 ORIGINAL ISSUE DATE: December 13, 1996 INTEREST RATE: 7.16% per annum INTEREST PAYMENT DATES: January 2, April 2, July 2 and October 2 FINAL MATURITY DATE: January 2, 2002 FOR VALUE RECEIVED, the undersigned, Regis Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Minnesota, hereby promises to pay to The Prudential Insurance Company of America, or registered assigns, the principal sum of FIVE MILLION DOLLARS on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing April 2, 1997, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield-Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its prime rate. Payments of principal, Yield-Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Private Shelf Agreement, dated as of July 25. 1995 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. 1 This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. REGIS CORPORATION By: /s/ Frank Evangelist --------------------------------- Frank Evangelist Senior Vice President-Finance and Secretary 2 EX-10.(X) 6 EXHIBIT 10(X) SEVENTH AMENDMENT TO CREDIT AGREEMENT THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of the 11th day of July, 1997, by and between REGIS CORPORATION, a Minnesota corporation ("Borrower"), and LASALLE NATIONAL BANK, a national banking association (the "Bank"). W I T N E S S E T H: WHEREAS, Bank, Bank Hapoalim B.M. and Borrower entered into that certain Credit Agreement dated as of June 21, 1994, as amended by that certain Amendment to Credit Agreement dated as of March 10, 1995, that certain Second Amendment to Credit Agreement dated as of July 20, 1995, and that certain Third Amendment to Credit Agreement dated as of March 19, 1996, and as further amended by that certain Fourth Amendment to Credit Agreement dated as of July 9, 1996, by and between Borrower and Bank (the entire interest of Bank Hapoalim B.M. in the Commitment, Loan and Note having been transferred and assigned to the Bank pursuant to that certain Assignment of Note, Credit Agreement and Other Documents and Materials dated as of June 30, 1996), that certain Fifth Amendment to Credit Agreement dated as of October 28, 1996, and that certain Sixth Amendment to Credit Agreement dated as of March 19, 1997 (collectively, the "Original Credit Agreement"); and WHEREAS, Borrower desires to borrow additional funds from the Bank in connection with the construction of Borrower's Tennessee distribution center, and the Bank is willing to loan additional funds to Borrower in connection with the construction of Borrower's Tennessee distribution center; and WHEREAS, the parties hereto now desire to further amend the Original Credit Agreement pursuant to this Amendment; NOW, THEREFORE, for and in consideration of the premises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows: 1. INCORPORATION OF THE AGREEMENT. All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Original Credit Agreement, and the Original Credit Agreement, to the extent not inconsistent with this Amendment, is incorporated herein by this reference as though the same were set forth in its entirety. To the extent any terms and provisions of the Original Credit Agreement are inconsistent with the amendments set forth in PARAGRAPH 2 below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Original Credit Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. AMENDMENT OF THE ORIGINAL CREDIT AGREEMENT. The Original Credit Agreement is hereby amended as follows: (a) The definition of the terms "BASE RATE LOAN", "DEFAULT RATE", "EXCESS INTEREST", "LIBOR LOAN", "LOAN" or "LOANS", "MATURITY DATE", and "MAXIMUM RATE" in PARAGRAPH 1A are hereby amended and restated to read as follows: "BASE RATE LOAN" shall mean a Loan bearing interest as specified in PARAGRAPHS 3C(i) AND 4-2C(i). "DEFAULT RATE" shall have the meaning assigned to such term in PARAGRAPHS 3C(iii) AND 4-2C(iii) hereof. "EXCESS INTEREST" shall have the meaning assigned to such term in PARAGRAPHS 3K AND 4-2K hereof. "LIBOR LOAN" means a Loan bearing interest as specified in PARAGRAPHS 3C(ii) AND 4-2C(ii). "LOAN" or "LOANS" means and includes all Base Rate Loans and LIBOR Loans made under the Credit Commitment and under the Term Loan B, and also means and includes the Term Loan, unless the context in which such term is used shall otherwise require. "MATURITY DATE" means October 31, 1998 with respect to the Credit Commitment, July 1, 2000 with respect to the Term Loan, and December 31, 1998 with respect to the Term Loan B. "MAXIMUM RATE" shall have the meaning assigned to such term in PARAGRAPHS 3K AND 4-2K hereof. (b) The definition of the terms "CASH EQUIVALENTS", "CREDIT AVAILABILITY", "LETTER OF CREDIT OBLIGATIONS", "LETTERS OF CREDIT", "LNB", "TERM LOAN B", and "TERM B NOTE" are hereby appended to PARAGRAPH 1A as follows: "CASH EQUIVALENTS" shall mean, at any time, any assets of Borrower which are readily convertible into money, including, without limitation, checks, and other negotiable instruments, deposits with any bank or financial institution (whether as demand deposits or time deposits, and whether or not evidenced by certificates of deposit), and readily marketable securities of any type. "CREDIT AVAILABILITY" shall mean the positive difference, if any, between (i) $25,000,000 and (ii) the sum of the aggregate principal amounts outstanding in respect of the Credit Commitment plus the outstanding Letter of Credit Obligations. "LETTER OF CREDIT OBLIGATIONS" shall mean all outstanding obligations incurred by LNB at the request of Borrower, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance by LNB of Letters of Credit. 2 (c) In the event that any Letter of Credit Obligation, whether or not then due and payable, shall for any reason be outstanding on the Credit Termination Date, Borrower will pay to LNB cash or Cash Equivalents in an amount equal to the outstanding Letter of Credit Obligations. Such funds or Cash Equivalents shall be held by LNB in a cash collateral account (the "Cash Collateral Account"). The Cash Collateral Account shall be in the name of LNB (as a cash collateral account), and shall be under the sole dominion and control of LNB and subject to the terms of this PARAGRAPH 3L. Borrower hereby pledges, and grants to LNB a security interest in, all such funds or Cash Equivalents held in the Cash Collateral Account from time to time and all proceeds thereof, as security for the payment of all amounts due in respect of the Letter of Credit Obligations, whether or not then due. From time to time after funds are deposited in the Cash Collateral Account, LNB may apply such funds or Cash Equivalents then held in the Cash Collateral Account to the payment of any amounts, in such order as LNB may elect, as shall be or shall become due and payable by Borrower to LNB with respect to such Letter of Credit Obligations. Neither Borrower nor any person or entity claiming on behalf of or through Borrower shall have any right to withdraw any of the funds or Cash Equivalents held in the Cash Collateral Account, except that upon the expiration or the termination of any Letter of Credit Obligation in accordance with its terms and the payment of all amounts payable by Borrower to LNB in respect thereof, any funds or Cash Equivalents remaining in the Cash Collateral Account in excess of the then remaining Letter of Credit Obligations shall be returned to Borrower. LNB shall not have any obligation to invest the funds in the Cash Collateral Account or deposit such funds in an interest-bearing account, and interest and earnings thereon, if any, shall be the property of LNB. Interest and earnings on the Cash Equivalents in the Cash Collateral Account shall be the property of Borrower. (d) In the event that LNB shall incur any Letter of Credit Obligations pursuant hereto with respect to standby Letters of Credit at the request of Borrower or on behalf of Borrower hereunder, Borrower agrees to pay (i) to LNB, solely for its account, as compensation to LNB for incurring such Letter of Credit Obligations, all customary issuance and administrative fees and charges customarily imposed by LNB for the issuance and administration of standby Letters of Credit, and (ii) commencing with the calendar quarter in which such Letter of Credit Obligations are incurred by LNB and quarterly thereafter for each calendar quarter during which such Letter of Credit Obligations shall remain outstanding, to Agent for the ratable benefit of the Banks, a fee in 4 an amount equal to the quotient of (x) the sum of the products of the daily outstanding amount of such Letter of Credit Obligations on each day during the previous calendar quarter, multiplied by a rate equal to 0.625 percent, divided by (y) 360. Fees payable in respect of Letter of Credit Obligations shall be paid in arrears, on the first day of each calendar quarter and on the Credit Termination Date. (e) In the event that LNB shall incur any Letter of Credit Obligations pursuant hereto with respect to commercial Letters of Credit at the request of Borrower or on behalf of Borrower hereunder, Borrower agrees to pay (i) to LNB, solely for its account, as compensation to LNB for incurring such Letter of Credit Obligations, all customary issuance and administrative fees and charges customarily imposed by LNB for the issuance and administration of commercial Letters of Credit, and (ii) on the date on which such Letter of Credit Obligations are incurred by LNB, to Agent for the ratable benefit of the Banks, an issuance fee in an amount equal to such percentage of the face amount of such Letter of Credit as shall be designated from time to time by LNB. (f) The reimbursement obligation of Borrower under this PARAGRAPH 3L with respect to each Letter of Credit Obligation shall be absolute, unconditional and irrevocable and shall remain in full force and effect until all such obligations of Borrower to the Banks and Agent with respect to such Letter of Credit Obligations shall have been satisfied, and such obligations of Borrower shall not be affected, modified or impaired upon the happening of any of the following events, whether or not with notice to, or the consent of, Borrower: (i) Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the "Letter of Credit Documents"); (ii) Any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents; (iii) The existence of any claim, setoff, defense or other right which Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), LNB, Agent or any Bank or any other Person, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any unrelated transactions; 5 (iv) Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) Payment by LNB to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (vi) Any failure, omission, delay or lack on the part of LNB, Agent or any Bank or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon LNB, Agent, any Bank or any such party; or (vii) Any other event or circumstance that would, in the absence of this clause, result in the release or discharge by operation of law or otherwise of Borrower from the performance or observance of any obligation, covenant or agreement contained in this PARAGRAPH 3L. No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which Borrower has or may have against the beneficiary of any Letter of Credit shall be available hereunder to Borrower against LNB, Agent or any Bank. Nothing in this PARAGRAPH 3L shall limit the liability, if any, of LNB, Agent or any Bank to Borrower pursuant to PARAGRAPH 3L(g) hereof. (viii) Borrower hereby indemnifies and agrees to hold harmless the Banks, LNB, Agent, and their respective officers, directors, employees and agents, harmless from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever which the Banks, LNB, Agent or any such Person may incur or which may be claimed against any of them by reason of or in connection with any Letter of Credit, and neither any Bank, LNB, Agent or any of their respective officers, directors, employees or agents shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary in connection therewith; (ii) the validity, sufficiency or genuineness of documents or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) except as set forth below, payment by LNB to the beneficiary under any Letter of Credit against presentation of documents which do not comply with 6 the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (iv) any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit; or (v) any other event or circumstance whatsoever arising in connection with any Letter of Credit; PROVIDED, HOWEVER, that Borrower shall not be required to indemnify LNB and LNB shall be liable to Borrower to the extent, but only to the extent, of any direct, as opposed to consequential or incidental, damages suffered by Borrower which were caused by (A) LNB's wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary thereunder of a draft or other demand for payment and other documentation strictly complying with the terms and conditions of such Letter of Credit, or (B) the payment by LNB to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit to the extent, but only to the extent, that such payment constitutes gross negligence or willful misconduct of LNB. It is understood that in making any payment under a Letter of Credit LNB will rely on documents presented to it under such Letter of Credit as to any and all matters set forth therein without further investigation and regardless of any notice or information to the contrary, and such reliance and payment against documents presented under a Letter of Credit substantially complying with the terms thereof shall not be deemed gross negligence or willful misconduct of LNB in connection with such payment. (d) Paragraph 4A(ll) is hereby amended and restated to read as follows: 4A(11) OVER-ADVANCES. If, at any time and for any reason, the aggregate amount of Borrower's Liabilities outstanding in respect of the Credit Commitment plus the outstanding Letter of Credit Obligations exceeds the amount of the Total Credit Commitment set forth in PARAGRAPH 2A (an "Over-Advance"), then Borrower, upon Agent's election and demand, shall immediately pay to Agent, in cash, the amount of such Over-Advance. If such Over-Advance remains outstanding for more than one (1) day, and Agent has demanded payment thereof, until such Over-Advance is so repaid to Agent, the amount of such Over-Advance shall bear interest at the applicable Default Rate. (e) The following ARTICLE 4-2 is hereby appended to the Original Credit Agreement: 7 4-2 TERM LOAN B 4-2A. TERM LOAN B COMMITMENT. On the terms and subject to the conditions set forth in this Agreement, LaSalle National Bank ("LNB") agrees to make an additional term loan ("Term Loan B") to Borrower in the maximum principal amount of Fifteen Million Dollars ($15,000,000). Term Loan B shall be available to Borrower by means of one or more Loans, it being understood that Term Loan B may be repaid in whole or in part at any time, subject to PARAGRAPH 4-2I, but no amount repaid may be reborrowed. Term Loan B shall be evidenced by a promissory note to be executed and delivered by Borrower at or before the initial Loan thereunder substantially in the form set forth in EXHIBIT 4-2A hereto (the "Term B Note"). Payments to be made by Borrower under the Term B Note shall be made at the time, in the amounts and upon the terms set forth herein and therein. 4-2B. BORROWING PROCEDURES UNDER THE TERM LOAN B COMMITMENT. Borrower shall give LNB irrevocable telephonic notice, written notice or telecopied notice by no later than 12:00 p.m., Chicago time, on the date it requests to make a Loan under Term Loan B. Each such notice shall be effective upon receipt by LNB and shall specify the date of the Loan (which shall be a Business Day), the amount of such Loan, whether the Loan is a Base Rate Loan or LIBOR Loan and, with respect to a LIBOR Loan, the Interest Period applicable thereto. Borrower shall give LNB irrevocable telephonic notice (which notice shall be promptly confirmed in writing) no later than 10:00 a.m., Chicago time, three (3) Business Days prior to the date that it requests LNB to effect a conversion from a Base Rate Loan to a LIBOR Loan, including a reborrowing as provided in PARAGRAPH 4-2E. Borrower agrees that LNB may rely on any notice given by any person it reasonably believes to be an authorized officer of Borrower without the necessity of independent investigation. Each borrowing shall be on a Business Day. 4-2C. INTEREST RATES; LOAN AMOUNTS; DEFAULT RATE. (i) Borrower hereby promises to pay interest on the unpaid principal amount of each Loan under Term Loan B at a rate per annum equal to the Base Rate from time to time in effect for the period commencing on the date of such Loan until such Base Rate Loan is (A) converted to a LIBOR Loan pursuant to PARAGRAPH 4-2E hereof, or (B) paid in full. Accrued interest on the outstanding principal amount of Loans shall be payable (i) monthly in arrears on the last Business Day of each calendar month in the case of a Base Rate Loan, (ii) on the last day of the Interest Period therefor in the case of a LIBOR Loan, (iii) upon conversion of any Loan into a LIBOR Loan (such amount of 8 accrued interest then coming due to be calculated based on the principal amount of the Loan so converted), and (iv) upon the Maturity Date. After the Maturity Date or Conversion Date, as applicable, accrued interest on such Loans shall be payable on demand. (ii) Each LIBOR Loan shall be in a minimum amount of $100,000 or such greater amount which is an integral multiple of $100,000 and shall bear interest (computed on the basis of a year of 360 days and actual days elapsed) on the unpaid principal amount thereof from the date such LIBOR Loan is effected by conversion or continued until maturity (whether by acceleration or otherwise) at a rate per annum equal to the sum of the LIBOR Margin plus the Adjusted LIBOR Rate, with such interest payable in accordance with PARAGRAPH 4-2C(i) above. (iii) If any payment of principal on any Loan is not made when due, such Loan shall bear interest from the date such payment was due until paid in full, payable on demand, at a rate per annum (the "Default Rate") equal to the sum of three percent (3%) plus the applicable interest rate from time to time in effect (computed on the basis of a 360 day year and actual days elapsed). 4-2D. COMPUTATION OF INTEREST. Interest on each Loan shall be computed for the actual number of days elapsed on the basis of a 360-day year. The interest rate applicable to each Base Rate Loan shall change simultaneously with each change in such Base Rate. Upon conversion of less than all the aggregate principal amount of Base Rate Loans outstanding at any one time to a LIBOR Loan, interest on the remaining principal amount of Base Rate Loans outstanding after such conversion shall be calculated assuming such LIBOR Loan replaced a corresponding amount of Base Rate Loans bearing interest at the Base Rate applicable thereto immediately prior to such conversion such that the remaining principal amount of Base Rate Loans outstanding after such conversion shall bear interest at the Base Rate which would have been applicable to such Base Rate Loans had no such conversion been effected. 4-2E. CONVERSION AND REBORROWING OF LOANS. (i) Provided that no Event of Default has occurred and is continuing, Base Rate Loans may, subject to PARAGRAPHS 4-2B AND 4-2C(ii) hereof, at any time be converted by Borrower to LIBOR Loans, which LIBOR Loans shall mature and become due and payable on the last day of the Interest Period applicable thereto. Provided that no Event of Default has occurred and is continuing, Borrower shall have the right, subject to the terms and 9 conditions of this Agreement, to reborrow through a new LIBOR Loan in whole or in part, subject to PARAGRAPH 4-2C(ii), any LIBOR Loan from any current Interest Period into a subsequent Interest Period, provided that Borrower shall give LNB notice of the reborrowing of any such LIBOR Loan as provided in PARAGRAPH 4-2B hereof. (ii) In the event that (x) Borrower fails to give notice pursuant to PARAGRAPH 4-2B hereof of the reborrowing of any LIBOR Loan or fails to specify the Interest Period applicable to such reborrowing or (y) an Event of Default has occurred and is continuing at the time any such LIBOR Loan is to be reborrowed hereunder, then such LIBOR Loan shall be automatically reborrowed as a Base Rate Loan, subject to PARAGRAPHS 4-2C(ii) (IN THE CASE OF SUBPART (y) OF THIS PARAGRAPH 4-2E(ii) AND 8B hereof if an Event of Default has occurred and is continuing, whichever is applicable, unless the relevant LIBOR Loan is paid in full on the last day of the then applicable Interest Period. 4-2F. CHANGE OF LAW. Notwithstanding any other provisions of this Agreement or the Term B Note, if at any time LNB shall determine in good faith that any change in applicable law or regulation or in the interpretation thereof makes it unlawful or impossible for LNB to effect a conversion of a Base Rate Loan into a LIBOR Loan or to continue to maintain any LIBOR Loan, LNB shall promptly give notice thereof (together with an explanation of the reasons therefor) to Borrower, and the obligation of LNB to effect by conversion or continue such LIBOR Loan under this Agreement shall terminate until it is no longer unlawful or impossible for LNB to effect by conversion or maintain such LIBOR Loan. Upon the receipt of such notice, Borrower may elect to either (i) pay or prepay, as the case may be, the outstanding principal amount of any such LIBOR Loan, together with all interest accrued thereon, or (ii) convert the principal amount of such affected LIBOR Loan to a Base Rate Loan available hereunder, subject to the terms and conditions of this Agreement. 4-2G. UNAVAILABILITY OF DEPOSITS OR INABILITY TO ASCERTAIN THE LIBOR RATE OR ADJUSTED LIBOR RATE. Notwithstanding any other provision of this Agreement or the Term B Note to the contrary, if prior to the commencement of any Interest Period LNB shall determine in good faith (i) that deposits in the amount of any LIBOR Loan scheduled to be outstanding are not available to LNB in the relevant market or (ii) by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR rate or Adjusted LIBOR Rate, then LNB shall promptly give notice thereof to Borrower, and the obligation of LNB to effect by conversion or continue any such 10 LIBOR Loan in such amount and for such Interest Period shall terminate until deposits in such amount and for the Interest Period selected by Borrower shall again be readily available in the relevant market and adequate and reasonable means exist for ascertaining the LIBOR rate or Adjusted LIBOR Rate, as the case may be. Upon the giving of such notice, Borrower may elect to either (i) pay or prepay, as the case may be, the outstanding principal amount of any such LIBOR Loan, together with all interest accrued thereon, or (ii) convert the principal amount of such affected LIBOR Loan to a Base Rate Loan available hereunder, subject to all the terms and conditions of this Agreement. 4-2H. YIELD PROTECTION ETC. (i) INCREASED COSTS. If (x) Regulation D of the Board of Governors of the Federal Reserve System, or (y) the adoption of any applicable law, treaty, rule, regulation or guideline, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by LNB or its lending branch with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, (A) shall subject LNB, its lending branch or any Loan to any tax, duty, change, stamp tax, fee, deduction, withholding or other charge in respect of this Agreement, any Loan, the Term B Note or the obligation of LNB to make or maintain any Loan, or shall change the basis of taxation of payments to LNB of the principal of or interest on any Loan or any other amounts due under this Agreement in respect of any Loan or its obligation to make or maintain any Loan (except for changes in the rate of tax on the overall net income of LNB imposed by the federal, state or local jurisdiction in which LNB's principal executive office or its lending branch is located); (B) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, LNB; or (C) shall impose on LNB any penalty with respect to the foregoing or any other condition affecting 11 this Agreement, any Loan, the Term B Note or the obligation of LNB to make or maintain any Loan; and the result of any of the foregoing is to increase the cost to (or to impose a cost on) LNB of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by LNB under this Agreement or under the Term B Note with respect thereto, then LNB shall notify Borrower after it receives final notice of any of the foregoing and, within 45 days after demand by LNB (which demand shall be accompanied by a statement setting forth the basis of such demand), Borrower shall pay directly to LNB for such additional amount or amounts as will compensate LNB for such increased cost or such reduction. (ii) CAPITAL ADEQUACY. If either (i) the introduction of or any change in or change in the interpretation of any law or regulation or (ii) compliance by LNB with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by LNB or any corporation controlling LNB and LNB determines that the amount of such capital is increased solely by or solely based upon the existence of LNB's commitment to lend hereunder and other commitments of this type, then, upon demand by LNB, Borrower shall immediately pay to LNB, from time to time as specified by LNB, additional amounts sufficient to compensate LNB in the light of such circumstances, to the extent that LNB reasonably determines such increase in capital to be allocable to the existence of LNB's commitment to lend hereunder. 4-2I. FUNDING INDEMNITY. In the event LNB shall incur any loss, cost or expense (including, without limitation, any loss of profit and any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by LNB to fund or maintain any LIBOR Loan or the relending or reinvesting of such deposits or amounts paid or prepaid to LNB) as a result of: (i) any payment of a LIBOR Loan on a date other than the last day of the then applicable Interest Period; (ii) any failure by Borrower to effect by conversion or continue any LIBOR Loan on the date specified in the notice given pursuant to PARAGRAPH 4-2B hereof; 12 (iii) any failure by Borrower to make any payment of principal or interest when due on any LIBOR Loan, whether at stated maturity, by acceleration or otherwise; or (iv) the occurrence of any Event of Default; then, upon the demand by LNB, Borrower shall pay to LNB such amount as will reimburse LNB for such loss, cost or expense. If LNB makes such a claim for compensation under this PARAGRAPH 4-2I, LNB shall provide to Borrower a certificate setting forth the amount of such loss, cost or expense in reasonable detail and such certificate shall be conclusive and binding on Borrower as to the amount thereof except in the case of manifest error. 4-2J. DISCRETION OF LNB AS TO MANNER OF FUNDING. Notwithstanding any provision of this Agreement to the contrary other than PARAGRAPH 4-2G, LNB shall be entitled to fund and maintain its funding of all or any part of the Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if LNB had actually funded and maintained each LIBOR Loan during each Interest Period for such LIBOR Loan through the purchase of deposits in the London Interbank Market having a maturity corresponding to such Interest Period and bearing an interest rate equal to the Adjusted LIBOR Rate for such Interest Period. 4-2K. INTEREST LAWS. Notwithstanding any provision to the contrary contained in this Agreement or the Other Agreements, Borrower shall not be required to pay, and LNB shall not be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Agreement or in any of the Other Agreements, then in such event: (a) the provisions of this Paragraph shall govern and control; (b) Borrower shall not be obligated to pay any Excess Interest; (c) any Excess Interest that LNB may have received hereunder shall be, at LNB's option, (i) applied as a credit against the outstanding principal balance of Term Loan B, or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (ii) refunded to the payor thereof, or (iii) any combination of the foregoing; (d) the interest rate(s) provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Agreement and the Other Agreements shall be deemed to have been and shall be reformed and modified to reflect such reduction; and (e) Borrower shall not have any action against LNB for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on Term Loan B is 13 calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on Term Loan B shall remain at the Maximum Rate until LNB shall have received the amount of interest which LNB would have received during such period on Term Loan B had the rate of interest not been limited to the Maximum Rate during such period. 4-2L. UNUSED TERM LOAN B COMMITMENT FEE. From and after July 11, 1997, Borrower shall pay to LNB a fee in an amount equal to the product of the average daily unborrowed amount of the Term Loan B Commitment during the preceding quarter, multiplied by one-quarter of one percent (0.25%) per annum, such fee to be calculated on the basis of a 360-day year for the actual number of days elapsed and to be payable quarterly in arrears on the first Business Day of October, 1997, and on the first Business Day of each calendar quarter thereafter and on the maturity date of Term Loan B. 3. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in ARTICLE 7 and all covenants set forth in ARTICLES 5 AND 6 of the Original Credit Agreement shall be deemed remade and affirmed as of the date hereof by Borrower, except that any and all references to the Original Credit Agreement in such representations, warranties and covenants shall be deemed to include this Amendment. 4. NO BREACH OR DEFAULT. Borrower hereby represents and warrants that no Event of Default, breach or default has occurred under the Original Credit Agreement. Borrower further represents and affirms that there are no defenses, setoffs, claims or counterclaims which could be asserted against the Bank related to the Original Credit Agreement. 5. EFFECTUATION. The amendments to the Original Credit Agreement contemplated by this Amendment shall be deemed effective upon the satisfaction of the following conditions precedent: (a) This Amendment or counterparts thereof shall have been duly executed and delivered to Borrower and the Bank. (b) Borrower shall have executed and delivered to the Bank a Term B Note in the form attached hereto as EXHIBIT 4-2A. (c) Bank shall have received the opinion of Bert M. Gross, Esq., addressed to the Bank, in the form attached hereto as EXHIBIT 1. 6. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 14 IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. REGIS CORPORATION ATTEST: By: --------------------------------- Name: ----------------------------- Title: - ---------------------------------- ---------------------------- Name: ----------------------------- Title: ---------------------------- LASALLE NATIONAL BANK By: --------------------------------- Name: ----------------------------- Title: ---------------------------- 15 EX-10.(Y) 7 EXHIBIT 10(Y) REGIS CORPORATION SERIES E SENIOR NOTE No. E-1 ORIGINAL PRINCIPAL AMOUNT: $8,000,000 ORIGINAL ISSUE DATE: April 7, 1997 INTEREST RATE: 8.18% per annum INTEREST PAYMENT DATES: January 2, April 2, July 2 and October 2 FINAL MATURITY DATE: July 2, 2006 FOR VALUE RECEIVED, the undersigned, Regis Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Minnesota, hereby promises to pay to The Prudential Insurance Company of America, or registered assigns, the principal sum of EIGHT MILLION DOLLARS ($8,000,000) on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing July 2, 1997, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its prime rate. Payments of principal, Yield-Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Private Shelf Agreement, dated as of July 25, 1995 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. 1 This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. REGIS CORPORATION By: /s/ Frank Evangelist ------------------------- Frank Evangelist Senior Vice President-Finance and Secretary 2 EX-10.(Z) 8 EXHIBIT 10(Z) COMPENSATION AND NON-COMPETITION AGREEMENT THIS AGREEMENT made and entered into this 7th day of May, 1997, by and between Regis Corporation, a Minnesota corporation (the "Corporation"), and Myron Kunin ("Kunin"). Whereas, Kunin has served as an officer of the Corporation continuously since 1954, and served as Chief Executive Officer of the Corporation from 1965 until June 30, 1996, and Whereas, Kunin continues to serve the Corporation as Chairman of the Board of Directors, and Whereas, it is anticipated that Kunin will continue to provide valuable services to the Corporation, and Whereas, the Board of Directors of the Corporation has determined that it is appropriate and in the best interests of the Corporation to enter into this agreement to retain Kunin's services and as a condition of further engaging Kunin's services as set forth in this Agreement to insure that Kunin will not engage in any businesses competitive with the business carried on by the Corporation, either during the period services are provided under this Agreement, or so long as payments are made to Kunin under this Agreement. NOW, THEREFORE, in consideration of the above premises and the mutual agreements hereinafter contained, the parties hereby agree as follows: 1. SERVICES. Kunin shall continue to render services to the Corporation in an executive capacity, including but not limited to serving as the Corporation's Chairman (subject to election to such office by the Corporation's Board of Directors), actively participating in the Corporation's growth and acquisition strategies and transactions consistent with such services as are presently being rendered by Kunin, and performing such other duties as may be mutually agreed upon between Kunin and the Corporation's Board of Directors from time to time. Kunin's services will continue for not less than ten (10) years and for such further period of time as may be mutually agreed upon between Kunin and the Corporation (hereafter referred to as the "Service Period"). 2. COMPENSATION. The Corporation, in consideration of Kunin's services and his covenant not to compete as hereinafter set forth, shall pay Kunin an annual amount of $600,000 (adjusted as provided in Paragraph 3 below), payable monthly or at such other times as may be agreed upon between the parties. The sums payable to Kunin as provided herein shall, subsequent to the end of the Service Period, continue for the remainder of his life, regardless of whether Kunin for any reason is or is not rendering services to the Corporation at the time of such payments. The sums payable to Kunin as provided herein shall continue for the remainder of his life although Kunin is not rendering services to the Corporation during the Service Period if (i) in the opinion of physicians at the Mayo Clinic, Rochester, Minnesota, Kunin is unable adequately to render the services specified in paragraph 1 above because of extended Illness or other physical or mental disability, or (ii) his services are terminated by the Corporation on grounds other than for Cause. For purposes of this Agreement, "Cause" shall mean (i) willful and gross misconduct resulting in material harm to the business or reputation of the Company, (ii) any act of willful fraud, embezzlement or misappropriation of a material nature against the Company or (iii) the conviction of a felony. The Corporation shall be deemed to have terminated Kunin's services without Cause at such time as the corporate perquisites and benefits afforded him, including but not limited to office space and facilities suitable to his position, are in any manner less favorable than those afforded other senior executive officers of the Corporation. Monthly payments shall be paid for all months up to and including the month in which Kunin's death occurs. 3. ADJUSTMENTS TO COMPENSATION. Commencing July 1, 1997, and annually thereafter, the compensation to be paid to Kunin shall be adjusted by increasing such compensation in proportion to any increase in the consumer price index from July 1, 1996 to each July 1 thereafter in which payments are made to Kunin pursuant to this agreement. The consumer price index to be used for purposes of this agreement shall be the "Consumer Price Index for all Urban Consumers, U.S. City Average for all Items, 1982-1984 = 100" published by the Bureau of Labor Statistics of the United States Department of Labor. If publication of such index is discontinued, the parties shall accept comparable statistics on the cost of living as computed and published by an agency of the United States or by a responsible financial periodical of recognized authority. Under no circumstances shall Kunin's compensation be reduced in any year. 4. NON-COMPETITION. In consideration of the Corporation's obligation set forth herein, Kunin covenants and agrees that during the period for which payments to Kunin are made as provided by this agreement, he will not, directly or indirectly, render any services of any nature to or become employed by or participate or engage in any business competitive with any business conducted by the Corporation. 5. ADVANCEMENT OF EXPENSES. Should Kunin become a party to any litigation involving the validity or interpretation of this Agreement, or any provision thereof, the Corporation shall advance to Kunin the expenses incurred by him, including reasonable attorneys fees, in connection with such litigation, and such expenses and fees shall be paid to Kunin as incurred by him in advance of the final disposition of any such proceeding. Such 2 advances shall be repaid by Kunin only if he does not prevail in such proceeding. Kunin shall be deemed to have prevailed in any such proceedings if such proceedings are terminated by settlement. 6. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. As used in this agreement, the term "successor" shall include any person, firm, corporation or other business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the assets or business or capital stock of the Corporation. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the day and year first above written. REGIS CORPORATION By: /s/ Paul Finkelstein ------------------------------------- Paul Finkelstein, President and Chief Executive Officer /s/ Myron Kunin ------------------------------------- Myron Kunin 3 EX-10.(AA) 9 EXHIBIT 10(AA) TERM B NOTE $15,000,000 Chicago, Illinois July 11, 1997 FOR VALUE RECEIVED, the undersigned, REGIS CORPORATION, a Minnesota corporation (herein, together with its successors and assigns, called the "Borrower"), promises to pay to the order of LaSALLE NATIONAL BANK, a national banking association (herein, together with its successors and assigns, called the "Bank"), the principal sum of FIFTEEN MILLION DOLLARS ($15,000,000), or such lesser principal amount as may be outstanding pursuant to the Credit Agreement (as hereinafter defined) with respect to Term Loan B (as defined in the Credit Agreement), together with interest on the unpaid principal amount of this Note outstanding from time to time. This Note is the Term B Note referred to in, evidences indebtedness incurred under, and is subject to the terms and provisions of, that certain Credit Agreement dated as of June 21, 1994, between the Borrower, the Bank and a certain other party whose interest has been transferred and assigned to the Bank, as amended by that certain Amendment to Credit Agreement dated as of March 10, 1995, that certain Second Amendment to Credit Agreement dated as of July 20, 1995, that certain Third Amendment to Credit Agreement dated as of March 19, 1996, that certain Fourth Amendment to Credit Agreement dated as of July 9, 1996, that certain Fifth Amendment to Credit Agreement dated as of October 28, 1996, that certain Sixth Amendment to Credit Agreement dated as of March 19, 1997, and that certain Seventh Amendment to Credit Agreement dated as of even date herewith (herein, as the same may be further amended, modified or supplemented from time to time, called the "Credit Agreement"), including, without limitation, the provisions in ARTICLE 4-2 therein. The Credit Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Term B Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. The Borrower further promises to pay to the order of the Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at such rates and at such times as shall be determined in accordance with the provisions of the Credit Agreement. Accrued interest shall be payable on the dates specified in the Credit Agreement. The principal amount of the indebtedness evidenced hereby shall be payable in the amounts and on the dates specified in the Credit Agreement and, if not sooner paid in full, on December 31, 1998. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at the Bank's principal office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as may be designated by the Bank to the Borrower in writing. In addition to, and not in limitation of, the foregoing and the provisions of the Credit Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of the Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. REGIS CORPORATION, a Minnesota corporation ATTEST: By: /s/ FRANK E. EVANGELIST By: /s/ PAUL D. FINKELSTEIN ------------------------------- ------------------------------- Name: Frank E. Evangelist Name: Paul D. Finkelstein ------------------------- ------------------------- Title: Senior Vice President Title: President & CEO ------------------------ ------------------------ Borrower's Address: 7201 Metro Boulevard Minneapolis, Minnesota 55439 2 EX-10.(BB) 10 EXHIBIT 10(BB) [LETTERHEAD] July 11, 1997 Regis Corporation 7201 Metro Boulevard Minneapolis, Minnesota 55439 Attention: Senior Vice President Re: AMENDMENT TO PRIVATE SHELF AGREEMENT Ladies and Gentlemen: Reference is made to that certain Private Shelf Agreement dated as of July 25, 1995 (as amended from time to time, the "AGREEMENT") among Regis Corporation, a Minnesota corporation (the "COMPANY"), on the one hand, and The Prudential Insurance Company of America and each "Prudential Affiliate" which is a party thereto (collectively, "PRUDENTIAL"), on the other hand, pursuant to which the Company issued and sold and Prudential purchased the Company's: (i) 6.94% $10,000,000 Series A Senior Notes due July 1, 2005, (ii) 7.99% $5,000,000 Series B Senior Notes due July 1, 2003, (iii) 7.80% $22,000,000 Series C Senior Notes due July 1, 2006, (iv) 7.16% $5,000,000 Series D Senior Notes due January 2, 2002, and (v) 8.18% $8,000,000 Series E Senior Notes due July 2, 2006. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Agreement. Pursuant to the request of the Company and in accordance with the provisions of paragraph 11C of the Agreement, the parties hereto agree as follows: SECTION 1. AMENDMENT. From and after the date this letter becomes effective in accordance with its terms, the Agreement is amended as follows: 1.1 The cover page to the Agreement and paragraph 1A of the Agreement is each hereby amended to delete in its entirety the amount "$50,000,000" appearing therein and to substitute therefor the amount "$100,000,000". Regis Corporation July 11, 1997 Page 2 1.2 Paragraph 2B of the Agreement is amended to delete in its entirety clause (i) thereof and to substitute therefor the following: "(i) July 11, 2000, and". 1.3 The Company and Prudential expressly agree and acknowledge that as of the date hereof the Available Facility Amount is $50,000,000. NOTWITHSTANDING THE FOREGOING, THIS AMENDMENT AND THE AGREEMENT HAVE BEEN ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE SHELF NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF SHELF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE. SECTION 2. REPRESENTATION AND WARRANTY. The Company hereby represents and warrants that no Default or Event of Default exists under the Agreement as of the date hereof. SECTION 3. CONDITIONS PRECEDENT. This letter shall become effective as of the date first above written upon (i) the return on or before July 11, 1997 by the Company to Prudential of a counterpart hereof duly executed by the Company and Prudential, (ii) the payment of a $15,000 non-refundable structuring fee to The Prudential Insurance Company of America and (iii) the delivery by Prudential to the Company of a letter in the form of EXHIBIT A attached hereto on or before July 25, 1997. Upon execution hereof by the Company, this letter should be returned to: Prudential Capital Group, Two Prudential Plaza, Suite 5600, Chicago, Illinois 60601, Attention: Marianne Grabowski. SECTION 4. REFERENCE TO AND EFFECT ON AGREEMENT. Upon the effectiveness of this letter, each reference to the Agreement in any other document, instrument or agreement shall mean and be a reference to the Agreement as modified by this letter. Except as specifically set forth in Section 1 hereof, the Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. SECTION 5. GOVERNING LAW. THIS LETTER SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS OF SUCH STATE. Regis Corporation July 11, 1997 Page 3 SECTION 6. COUNTERPARTS; SECTION TITLES. This letter may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. The section titles contained in this letter are and shall be without substance, meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. Very truly yours, THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ [illegible] ---------------------------------- Vice President AGREED AND ACCEPTED REGIS CORPORATION By: /s/ Frank E. Evangelist ---------------------------------- Frank E. Evangelist Senior Vice President-Finance EX-10.(CC) 11 EXHIBIT 10(CC) REGIS CORPORATION SERIES F SENIOR NOTE No. F-1 ORIGINAL PRINCIPAL AMOUNT: $2,000,000 ORIGINAL ISSUE DATE: July 28, 1997 INTEREST RATE: 7.48% per annum INTEREST PAYMENT DATES: January 2, April 2, July 2 and October 2 FINAL MATURITY DATE: July 2, 2006 FOR VALUE RECEIVED, the undersigned, Regis Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Minnesota, hereby promises to pay to The Prudential Insurance Company of America, or registered assigns, the principal sum of TWO MILLION DOLLARS ($2,000,000) on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing October 2, 1997, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield-Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its prime rate. Payments of principal, Yield-Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Private Shelf Agreement, dated as of July 25, 1995, as amended pursuant to that certain Amendment to Private Shelf Agreement dated July 11, 1997 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. 1 This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. REGIS CORPORATION By: /s/ Frank Evangelist ---------------------------------- Frank Evangelist Senior Vice President-Finance and Secretary 2 EX-11 12 EXHIBIT 11 PART II - OTHER INFORMATION Exhibit 11 COMPUTATION OF EARNINGS PER SHARE
Years Ended June 30 ---------------------------------------- 1997 1996 1995 ---- ---- ---- PRIMARY EARNINGS PER SHARE: Net income $6,574,000 $9,451,000 $11,590,000 ---------- ---------- ----------- ---------- ---------- ----------- Weighted average number of common shares outstanding during the period 22,619,000 21,940,000 21,235,000 Common equivalent shares 596,000 547,000 267,000 ---------- ---------- ----------- Total common and common equivalent shares outstanding 23,215,000 22,487,000 21,502,000 ---------- ---------- ----------- ---------- ---------- ----------- Net income per common and common equivalent share, primary $.28 $.42 $ .54 ------ ------ ----- ------ ------ ----- FULLY DILUTED EARNINGS PER SHARE: Net income $6,574,000 $ 9,451,000 $11,590,000 Net income adjustment - interest on convertible debt 54,000 121,000 ---------- ---------- ----------- Adjusted net income $6,574,000 $ 9,505,000 $11,711,000 ---------- ---------- ----------- ---------- ---------- ----------- Weighted average number of common shares outstanding during the period 22,619,000 21,940,000 21,235,000 Common equivalent shares assuming full dilution 636,000 851,000 876,000 ---------- ---------- ----------- Total common and common equivalent shares assuming full dilution 23,255,000 22,791,000 22,111,000 ---------- ---------- ----------- ---------- ---------- ----------- Net income per common and common equivalent share, fully diluted $.28 $.42 $ .53 ------ ------ ----- ------ ------ -----
Net income per common share as shown on the Company's Consolidated Statement of Operations is computed by dividing net income by the weighted average number of shares outstanding during each period. Convertible debt, converted in 1996, is included as common equivalent shares for the fully diluted earnings per share computation in 1995. In 1996 and 1997, incentive stock options are the primary reason for common equivalent shares for the fully diluted earnings per share computation. EX-13 13 EXHIBIT 13 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth, for the periods indicated, selected financial data derived from the Company's consolidated financial statements.
1997 1996 1995 1994 1993 Revenues $713,219 $617,307 $524,253 $453,561 $ 388,862 Operating income (a) 28,447 26,167 26,644 25,712 29,184 Net income (b) 6,574 9,451 11,590 3,883 8,805 Net income per share (b) .28 .42 .53 .20 .49 Total assets 331,535 303,954 244,836 226,944 183,062 Long-term debt, including current portion 113,462 102,381 85,092 82,991 66,787 Dividends declared .08 .07 --- --- ---
(a) The following information is provided to facilitate operating income comparisons, absent the impact of certain nonrecurring activity. The Company reported nonrecurring charges in 1997 and 1996 of $18,731 and $12,823, respectively. These charges related to restructuring activities in 1997 and 1996 and additionally to merger and transaction costs in 1997. Exclusive of these nonrecurring items, operating income would have been $47,178 in 1997 and $38,990 in 1996. (b) The following information is provided to facilitate earnings comparisons, absent the impact of certain nonrecurring activity. The Company reported nonrecurring gains (charges) in 1997, 1996, 1995, 1994 and 1993 of ($17,830), ($12,123), $1,195, ($10,000) and ($5,265), respectively, primarily associated with the merger and transaction and restructuring charges related to Supercuts in 1997 and 1996, and the resolution of litigation with MEI Salons in 1995, 1994 and 1993. Exclusive of these nonrecurring items, net income and net income per share, respectively, would have been $21,337 and $.92 in 1997, $16,981 and $.75 in 1996, $10,885 and $.50 in 1995, $9,883 and $.50 in 1994 and $11,806 and $.66 in 1993. - -------------------------------------------------------------------------------- KEY RATIOS FOR THE YEARS ENDED JUNE 30, 1997 1996 Cash flow per share* $1.77 $1.50 Gross margin percentage 42.8% 42.4% Product sales mix 27.3% 25.3% Operating income as a percent of revenues ** 6.6% 6.3% * Represents net income, excluding nonrecurring charges and noncash items ** Excludes nonrecurring charges (see Notes 3 and 8 to the Consolidated Financial Statements) - -------------------------------------------------------------------------------- ANNUAL RESULTS The following table sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percent of revenues. The percentages are computed as a percent of total Company revenues, except as noted.
FOR THE YEARS ENDED JUNE 30, 1997 1996 1995 Company-owned service revenues (1) 72.7% 74.7% 75.9% Company-owned product revenues (1) 27.3 25.3 24.1 Franchise income 3.8 4.1 4.8 Company-owned operations: Profit margins on service (2) 41.9 41.3 40.6 Profit margins on product (3) 45.0 45.7 46.2 Direct salon (1) 9.5 10.1 11.4 Rent (1) 14.0 13.8 12.9 Depreciation (1) 3.4 3.6 3.5 Direct salon contribution (1) 15.9 14.9 14.1 Selling, general and administrative 11.0 10.6 11.6 Depreciation and amortization 1.2 1.0 .8 Operating income 4.0 4.2 5.1 Income before income taxes 2.8 2.8 3.8 Net income .9 1.5 2.2 Operating income, excluding nonrecurring charges 6.6 6.3 5.1 Net income, excluding nonrecurring charges 3.0 2.8 2.1 (1) Computed as a percent of company-owned revenues (2) Computed as a percent of service revenues (3) Computed as a percent of product revenues
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 3,293 hairstyling salons at June 30, 1997 in six divisions: Regis Hairstylists, Supercuts, MasterCuts, Trade Secret, Wal-Mart and International. Worldwide operations include 757 franchised Supercuts salons and 52 other franchised salons operating primarily in the Trade Secret division. The Company has more than 25,000 employees worldwide. During fiscal 1997, the Company's consolidated revenues increased 15.5 percent to a record $713,219,000. Operating income grew 21.0 percent to $47,178,000 before nonrecurring charges of $18,731,000 related to the Supercuts' merger and restructuring activities. Exclusive of these nonrecurring items, fiscal 1997 net income was $.92 per share, an increase of 22.7 percent, compared to $.75 per share in the prior year. 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 (See Note 3 to the Consolidated Financial Statements). 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 and including adjustments to conform the historical accounting policies and practices of Supercuts to those of Regis. YEAR-END COMPARISONS YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996: REVENUES REVENUES in fiscal 1997 were a record $713,219,000, an increase of $95,912,000, or 15.5 percent, over fiscal 1996. Nearly two-thirds of the increase is attributable to acquisitions occurring in fiscal 1997 and the full year impact of the fiscal 1996 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 $72,851,000 of the increase in total revenues. The remainder of the revenue increase of $23,061,000 was primarily caused by the Company's mid-year fiscal 1996 acquisitions in the United Kingdom. The Company's International salons are located in the United Kingdom, South Africa, Switzerland, Mexico, Ireland, France and the United Arab Emirates (International salons). For fiscal 1997, revenues from Regis Hairstylists were $275,258,000, an increase of 2.9 percent; revenues from Supercuts were $94,904,000 for company-owned salons, a decrease of 2.4 percent (which was caused by the planned closing or franchising of certain under-performing salons or markets as described in Note 8 to the Consolidated Financial Statements); income from Supercuts franchise operations was $23,601,000, an increase of 14.2 percent; revenues from MasterCuts salons were $94,963,000, an increase of 13.8 percent; Trade Secret company-owned revenues were $91,412,000, an increase of 40.7 percent; fiscal 1997 revenues from Wal-Mart salons were $30,294,000, while fiscal 1996 Wal-Mart salon revenues represented only one month of operations due to the June 1996 acquisition date of that division; and International salon revenues were $99,348,000, an increase of 30.2 percent. During fiscal 1997, same-store sales from all Domestic company-owned salons open more than 12 months increased 3.1 percent, compared to a 3.6 percent increase the previous year, or 2.0 and 3.4 percent, respectively, excluding Supercuts. Same-store sales for the United Kingdom salons (U.K. salons), the primary component of International salons, increased 2.1 percent in fiscal 1997. Same-store sales increases achieved during fiscal 1997 are primarily due to an increase in the number of customers served, especially salon maturation in the Supercuts division. A total of 70,600,000 customers were served in fiscal 1997, an increase of 9.6 percent, from 64,400,000 customers served in fiscal 1996. The Company utilizes an audiovisual-based training system in its salons. Management believes this training system provides its employees with improved customer service and technical skills, and positively contributes to the increase in customers served. System-wide sales, inclusive of non-consolidated sales generated from franchisee salons, increased 13.0 percent in fiscal 1997 to $955,102,000 from $845,515,000 in fiscal 1996. These increases in system-wide sales are the result of the total number of salons added to the system through acquisitions and net salon openings as well as same-store sales increases from existing salons. System-wide same-store sales for fiscal 1997 increased 2.6 percent. SERVICE REVENUES in fiscal 1997 were $498,559,000, an increase of $56,193,000, or 12.7 percent, over fiscal 1996. This increase was due to acquisitions, net salon openings, and same-store sales growth. PRODUCT REVENUES in fiscal 1997 were $187,620,000, an increase of $38,097,000, or 25.5 percent, over fiscal 1996. This increase was due to acquisitions, net salon openings, and same-store sales growth. Product revenues as a percent of total company-owned revenues increased to 27.3 percent of revenues compared to 25.3 percent of revenues in 1996. FRANCHISE INCOME, including royalties and initial franchise fees from franchisees, and product sales made by the Company to franchisees, increased 6.4 percent in fiscal 1997 to $27,040,000 from $25,418,000 in fiscal 1996. This increase is the result of an increase in franchisee sales, which are not included in the Company's consolidated revenues. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION COST OF SERVICE Cost of service revenues in fiscal 1997 was $289,621,000, compared to $259,765,000 in fiscal 1996. The gross profit margins on service revenues for fiscal 1997 improved 60 basis points to 41.9 percent. This improvement is primarily due to sales maturation in the Supercuts division matched against fixed cost payrolls. COST OF PRODUCT Cost of product revenues in fiscal 1997 was $103,181,000, compared to $81,165,000 in fiscal 1996. The gross profit margins on product revenues for fiscal 1997 declined 70 basis points to 45.0 percent. The decline in product margins was due primarily to the increase in Trade Secret revenues as a percent of total Company revenues, as Trade Secret product margins are somewhat lower than the other divisions. Additionally, the Company responded to a disappointing Christmas season by discounting retail products in the third quarter of 1997. This bolstered the same-store sales growth but also reduced margins. DIRECT SALON This expense category includes direct costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. Direct salon expense increased $5,047,000 to $64,962,000 in fiscal 1997, but improved as a percent of revenues to 9.5 percent in fiscal 1997 from 10.1 percent in fiscal 1996. The improvement resulted primarily from an increased ability to leverage these costs against increased revenues from a maturing salon base as well as controls maintained over advertising costs in the Regis and MasterCuts divisions. RENT Rent expense in fiscal 1997 was $95,726,000, or 14.0 percent of revenues, compared to $81,634,000, or 13.8 percent of revenues, in fiscal 1996. The percentage increase is due to the mid-year fiscal 1996 acquisitions in the United Kingdom, as well as the Wal-Mart acquisition in June 1996. When compared to Domestic salon operations, the U.K. salons and the Wal-Mart salons have higher rent expense and lower selling, general and administrative expense because certain costs are absorbed by department and discount stores and passed on as rent. DEPRECIATION SALON LEVEL Depreciation expense at the salon level remained fairly consistent at 3.4 percent of revenues, improving 20 basis points over fiscal 1996. DIRECT SALON CONTRIBUTION For reasons described above, direct salon contribution, representing company-owned salon revenues less associated operating expenses, improved in fiscal 1997 to 15.9 percent of company-owned revenues, or $109,259,000, compared to 14.9 percent of company-owned revenues, or $88,368,000, in fiscal 1996. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expense increased to $78,666,000, or 11.0 percent of revenues, in fiscal 1997 from $65,133,000, or 10.6 percent of revenues, in fiscal 1996. Expenses in this category include field supervision (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). The increase is primarily a result of higher warehouse expenses due to volume increases. In addition, SG&A expense for the International division is higher than fiscal 1996 due to an extended transition period for the 1996 acquisitions. All direct and indirect expenses associated with franchise operations, other than the cost of products sold to franchisees, are included in SG&A expense. The cost of products sold and associated franchise activities remained relatively consistent in both 1997 and 1996. DEPRECIATION AND AMORTIZATION CORPORATE Depreciation and amortization increased slightly in fiscal 1997 to 1.2 percent of revenues from 1.0 percent in fiscal 1996. Amortization expense has increased due to the increased level of intangible assets associated with the Company's salon acquisition activity. Depreciation expense within this category has remained relatively consistent as a percent of revenues. MERGER AND TRANSACTION COSTS See Note 3 to the Consolidated Financial Statements. RESTRUCTURING CHARGES See Note 8 to the Consolidated Financial Statements. OPERATING INCOME Operating income in fiscal 1997 was $28,447,000 compared to $26,167,000 in fiscal 1996. Both years were significantly affected by merger and transaction costs and restructuring charges (nonrecurring charges). Exclusive of nonrecurring charges, operating income in fiscal 1997 improved to $47,178,000, or 6.6 percent of revenues, an increase of $8,188,000, or 21.0 percent, over fiscal 1996 operating income of $38,990,000, or 6.3 percent of revenues. This improvement is attributable primarily to improved gross margins, the leveraging of direct salon expense, partially offset by higher SG&A expenses as a percent of revenues. INTEREST Interest expense in fiscal 1997 was $10,264,000, or 1.4 percent of revenues, compared to $9,880,000, or 1.6 percent of revenues, in fiscal 1996. The decline is primarily due to reduced interest rates. NONRECURRING ITEMS See Note 4 to the Consolidated Financial Statements. INCOME TAXES The Company's effective tax rate in fiscal 1997 was 66.6 percent of pre-tax income compared to 45.6 percent of pre-tax income in fiscal 1996. The increase in the effective rate is attributable to certain nondeductible merger and transaction costs associated with the Supercuts merger. Additionally, 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 fiscal 1997. NET INCOME Net income in fiscal 1997 was $6,574,000, or $.28 per share, compared to net income in fiscal 1996 of $9,451,000, or $.42 per share. Exclusive of nonrecurring items, net income in fiscal 1997 increased to $21,337,000, or $.92 per share, compared to net income in fiscal 1996 of $16,981,000, or $.75 per share, an earnings per share increase of 22.7 percent. YEAR-END COMPARISONS YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995: REVENUES REVENUES in 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. Domestic salons accounted for $60,230,000 of the increase in total revenues. The remainder of the revenue increase, or $32,824,000, was related to the Company's International salon operations which 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 $97,196,000 for company-owned salons, an increase of 18.9 percent; income from Supercuts franchise operations was $20,669,000, an increase of 1.6 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. During fiscal 1996, same-store sales from Domestic company-owned salons, exclusive of Supercuts, open for more than 12 months increased 3.4 percent compared to a 4.2 percent increase the previous year. Same-store sales for the U.K. salons increased 1.5 percent in fiscal 1996. 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. System-wide sales, inclusive of non-consolidated sales from franchisee salons, increased 17.4 percent to $845,515,000 from $719,933,000 in fiscal 1996 and 1995, respectively. This increase in system-wide sales is the result of the total number of salons in the system increasing over the past 12 months as well as same-store sales increases. System-wide same-store sales for fiscal 1996 increased 3.3 percent. 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 due to acquisitions, net salon openings, and same-store sales growth. PRODUCT REVENUES in fiscal 1996 were $149,523,000, an increase of $29,142,000, or 24.2 percent, over fiscal 1995. The increase was due to acquisitions, net salon openings, and same-store sales growth. FRANCHISE INCOME increased 2.0 percent in fiscal 1996 to $25,418,000 from $24,929,000 in fiscal 1995. This increase is the result of an increase in franchise sales, partially offset by a lower level of franchisee openings in 1996 compared to 1995. COST OF SERVICE Cost of service revenues in fiscal 1996 was $259,765,000, compared to $225,102,000 in fiscal 1995. The gross profit margins on service revenues in fiscal 1996 improved 70 basis points to 41.3 percent, compared to 40.6 percent in fiscal 1995. This improvement is primarily due to improved sales leverage on the salaries and commissions structure at Regis Hairstylists, which is the major component of cost of service. Improved service margin was also the result of improved Supercuts margins, primarily due to fixed cost payroll matched against maturing sales volume. COST OF PRODUCT Cost of product revenues in fiscal 1996 was $81,165,000, compared to $64,777,000 in fiscal 1995. The resulting gross product margin in fiscal 1996 declined 50 basis points to 45.7 percent, compared to 46.2 percent in fiscal 1995. One primary factor for this change is due to the increase in Trade Secret revenues as a percent of total Company revenues, as Trade Secret product margins are somewhat lower than the other divisions. Also, Supercuts recognized a negative physical inventory adjustment in fiscal 1996. DIRECT SALON Direct salon expenses increased $3,204,000 to $59,915,000 in fiscal 1996, but decreased as a percent of revenues to 10.1 percent in fiscal 1996 down from 11.4 percent in fiscal 1995. Expenses include costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. The improvement came primarily from an increased ability to leverage these costs against a maturing salon base in the Supercuts division, as well as controls maintained over advertising costs in the Regis and MasterCuts divisions. RENT 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 acquisitions in the United Kingdom. When compared to Domestic salon operations, the U.K. salon operations have higher rent expense and lower selling, general and administrative expenses, because certain costs are absorbed by department stores and passed on as rent. DEPRECIATION SALON LEVEL Depreciation expense at the salon level remained fairly consistent at 3.6 percent of revenues, increasing only 10 basis points over fiscal 1995. DIRECT SALON CONTRIBUTION For reasons described above, direct salon contribution, representing company-owned salon revenues less associated operating expenses, improved in fiscal 1996 to 14.9 percent of company-owned revenues, or $88,368,000, compared to 14.1 percent of company-owned revenues, or $70,593,000, in fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expense improved as a percent of total revenues to 10.6 percent from 11.6 percent in fiscal 1996 and 1995, respectively. These expenses totaled $65,133,000 in fiscal 1996 compared to $60,685,000 in fiscal 1995. Expenses in this category include field supervision (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). This improvement as a percent of revenues is due to sales leveraging of the Supercuts division. A portion of the improvement is also attributable to the fiscal 1996 U.K. salon acquisitions which, as described 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. The direct and indirect costs associated with franchise activities remained relatively consistent in both 1996 and 1995. DEPRECIATION AND AMORTIZATION--CORPORATE Depreciation and amortization increased slightly in fiscal 1996 to 1.0 percent of revenues from .8 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 within this category has remained relatively consistent as a percent of revenues. RESTRUCTURING CHARGES See Note 8 to the Consolidated Financial Statements. OPERATING INCOME Operating income was $26,167,000 in fiscal 1996 compared to $26,644,000 in fiscal 1995, with 1996 significantly affected by Supercuts restructuring charges. Exclusive of restructuring charges of $12,823,000, operating income in fiscal 1996 improved to $38,990,000, or 6.3 percent of revenues, an increase of $12,346,000, or 46.3 percent, over fiscal 1995 operating income of $26,644,000, or 5.1 percent of 1995 revenues. This improvement is attributable primarily to improved gross margins and the leveraging of SG&A expense as a percent of revenues. INTEREST Interest expense for fiscal 1996 was $9,880,000, or 1.6 percent of revenues, compared to $8,774,000, or 1.7 percent of revenues, in fiscal 1995. NONRECURRING ITEMS See Note 4 to the Consolidated Financial Statements. INCOME TAXES The Company's effective income tax rate in fiscal 1996 was 45.6 percent of pre-tax income compared to 41.6 percent of pre-tax income in 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. NET INCOME Net income in fiscal 1996 was $9,451,000, or $.42 per share, compared to net income in fiscal 1995 of $11,590,000, or $.53 per share. Exclusive of nonrecurring items, net income in fiscal 1996 would have been $.75 per share, compared to net income in fiscal 1995 of $.50 per share, an increase of 50 percent. EFFECTS OF INFLATION The Company compensates its Regis Hairstylists and International salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of revenues to remain relatively constant. Accordingly, this provides the Company certain protection against inflationary increases, as payroll expense and related benefits (the Company's major expense components) are, with respect to these divisions, variable costs of sales. The Company does not believe inflation, due to its low rate, has had a significant impact on the results of operations associated with hourly paid hairstylists for the Supercuts, MasterCuts, Trade Secret or Wal-Mart divisions. LIQUIDITY AND CAPITAL RESOURCES Customers generally pay for salon services and merchandise in cash at the time of sale, which reduces the Company's working capital requirements. Net cash provided by operating activities in fiscal 1997 was $34,857,000, compared to $38,806,000 during the same period the previous year. The decrease between the two periods was primarily due to increased payments in fiscal 1997 associated with the Supercuts merger and restructuring costs. Payments for these items were $18,263,000 compared to $2,517,000 in 1997 and 1996, respectively. CAPITAL EXPENDITURES AND ACQUISITIONS During fiscal 1997, the Company had worldwide capital expenditures of $42,185,000, of which $2,760,000 related to acquisitions. The Company constructed 174 new salons (28 Regis Hairstylists, 4 Supercuts, 36 MasterCuts, 56 Trade Secret, 24 Wal-Mart and 26 International) and added 1,229 salons through merger and acquisitions, 1,170 of which were Supercuts (430 company-owned and 740 franchised salons). The Company also completed 72 major remodeling projects, including eight conversions of existing salons to another salon concept. All capital expenditures during fiscal 1997 were funded by the Company's operations and borrowings under its revolving credit facility. Additional system-wide salon growth was achieved through the opening of 31 Supercuts franchise salons since the merger date. The Company anticipates its worldwide salon development program for fiscal 1998 will include approximately 200 new salons and 60 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $41,000,000 in fiscal 1998, excluding capital expenditures for acquisitions and the Company's new distribution center. FINANCING 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 requiring repayments of $10,000,000 and $12,000,000 in fiscal 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 repayments required during the period fiscal 1998 through 2005, to fund merger-related costs and to pay down the Regis revolving credit facility. In April 1997, the Company borrowed an additional $8,000,000 under long-term senior term notes with repayment in fiscal 2007, to pay down 11.52 percent senior term notes. These additional term note borrowings bear interest at fixed rates ranging from 7.16 to 8.18 percent. In March 1997, the Company entered into a treasury lock agreement for the purpose of establishing the effective interest rate on the $14,000,000 senior term note expected to be refinanced in June 1998. The contract was entered into to reduce the risk to the Company of future interest rate fluctuations. The contract has a notional amount of $14,000,000 and is tied to the U.S. government ten-year treasury note rate. At the settlement date in June 1998, the gain or loss on the contract will be recognized. The deferred unrealized loss related to this contract was not material at June 30, 1997. The Company does not enter into financial instruments for trading or speculative purposes. The Company increased its revolving credit facility in April 1997. The revolving credit facility allows for borrowings up to $25,000,000, bears interest at the prime rate, and matures in October 1998. The prime rate at June 30, 1997 and 1996 was 8.50 and 8.25 percent, respectively. The facility also allows for borrowings bearing interest at LIBOR rates plus 1.50 percent. The average LIBOR rate utilized by the Company was 5.78 percent at June 30, 1997. The revolving credit facility requires a quarterly commitment fee at the rate of 1/4 percent per year on the unused portion of the facility. The weighted average interest rate on this facility was 7.67 percent and 8.25 percent, respectively, at June 30, 1997 and June 30, 1996. As the Company continues to expand, the need for additional warehouse and distribution capabilities also increases. In July 1997, in connection with the construction of a new distribution center in Tennessee, the Company entered into an additional credit facility. The credit facility allows for borrowings up to $15,000,000, bears interest at the prime rate, and matures in December 1998. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate. At June 30, 1997, the U.K. term notes have been classified as current as a result of noncompliance with certain loan covenants. The Company is currently in negotiations and intends to re-establish this financing as long-term during fiscal 1998. See merger and transaction costs discussed in Note 3 to the Consolidated Financial Statements. See restructuring activities discussed in Note 8 to the Consolidated Financial Statements. The Company translates the financial statements of its international subsidiaries to U.S. dollars for financial reporting purposes, and accordingly is subject to fluctuations in currency exchange rates. The Company has already begun the necessary software conversion and programming modifications necessary to comply with the Year 2000 computer software issues. The Company does not expect these activities to materially impact earnings. Management believes that cash generated from operations and amounts available under its revolving credit facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. DIVIDENDS The Company paid dividends of $.08 per share during fiscal 1997 and $.07 per share during fiscal 1996. On August 14, 1997, the Board of Directors of the Company declared a $.02 per share quarterly dividend payable September 9, 1997, to shareholders of record on August 25, 1997. OTHER During fiscal 1997, the Company resolved the litigation brought by David E. Lipson and DEL Holding Corporation (DEL), a corporation controlled by Mr. Lipson, against Supercuts. The Company paid Mr. Lipson and DEL $6,700,000 in complete settlement of all claims of Mr. Lipson, DEL or any other entity controlled by Mr. Lipson. See Note 4 to the Consolidated Financial Statements. This was funded through the issuance of the Company's common stock. CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30 ------------------------------ ASSETS 1997 1996 Current assets: Cash $8,935 $7,558 Accounts receivable, net 12,388 10,640 Inventories 42,596 32,507 Deferred income taxes 6,335 6,687 Other current assets 6,819 9,691 ---------------------------- Total current assets 77,073 67,083 Property and equipment, net 139,573 126,821 Goodwill 99,818 93,352 Other assets 15,071 16,698 ---------------------------- Total assets $331,535 $303,954 ---------------------------- ---------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $30,722 $19,168 Accounts payable 24,111 20,369 Accrued expenses 37,291 47,261 --------------------------- Total current liabilities 92,124 86,798 Long-term debt 82,740 83,213 Other noncurrent liabilities 7,557 6,308 Commitments (Note 6) Shareholders' equity: Common stock, $.05 par value; issued and outstanding, 23,317,924 and 22,537,161 shares at June 30, 1997 and 1996, respectively 1,166 1,127 Additional paid-in capital 120,483 104,634 Retained earnings 27,465 21,874 ---------------------------- Total shareholders' equity 149,114 127,635 ---------------------------- Total liabilities and shareholders' equity $331,535 $303,954 ---------------------------- ----------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENT OF OPERATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30 ------------------------------------------------------- 1997 1996 1995 Revenues: Company-owned salons: Service $498,559 $442,366 $378,943 Product 187,620 149,523 120,38 ---------------------------------------------------- 686,179 591,889 499,324 Franchise income 27,040 25,418 24,929 ---------------------------------------------------- 713,219 617,307 524,253 ---------------------------------------------------- Operating expenses: Company-owned: Cost of service 289,621 259,765 225,102 Cost of product 103,181 81,165 64,777 Direct salon 64,962 59,915 56,711 Rent 95,726 81,634 64,439 Depreciation 23,430 21,042 17,702 ---------------------------------------------------- 576,920 503,521 428,731 Selling, general and administrative 78,666 65,133 60,685 Depreciation and amortization 8,325 6,315 4,220 Merger and transaction costs 14,322 Restructuring charges 4,409 12,823 Other 2,130 3,348 3,973 ---------------------------------------------------- Total operating expenses 684,772 591,140 497,609 ---------------------------------------------------- Operating income 28,447 26,167 26,644 Other income (expense): Interest (10,264) (9,880) (8,774) Nonrecurring items 901 700 1,195 Other, net 618 390 793 ---------------------------------------------------- Income before income taxes 19,702 17,377 19,858 Income taxes (13,128) (7,926) (8,268) ---------------------------------------------------- Net income $6,574 $9,451 $11,590 ---------------------------------------------------- ---------------------------------------------------- Net income per share $.28 $.42 $.53 ---------------------------------------------------- ---------------------------------------------------- Weighted average common and common equivalent shares outstanding 23,255 22,791 22,111 ---------------------------------------------------- ----------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATE STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
Common Stock ADDITIONAL ---------------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL 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 Foreign currency translation adjustments (410) (410) Net income 11,590 11,590 ------------------------------------------------------------------------- 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 Proceeds from sale of common stock 500,000 25 11,100 11,125 Shares issued in connection with employee benefit plans 13,056 1 240 241 Proceeds from exercise of stock options 267,707 13 3,656 3,669 Tax benefit realized upon exercise of stock options 853 853 Dividends (1,722) (1,722) Foreign currency translation adjustments 739 739 Net income 6,574 6,574 ------------------------------------------------------------------------- Balance, June 30, 1997 23,317,924 $1,166 $120,483 $27,465 $149,114 ------------------------------------------------------------------------- -------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL SATEMENTS. CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30 --------------------------------------- 1997 1996 1995 Cash flows from operating activities: Net income $6,574 $9,451 $11,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 32,084 27,789 22,402 Deferred income taxes 1,114 (3,059) (5,040) Merger and transaction costs 14,322 Provision for restructuring charge 4,409 12,823 MEI Salons nonrecurring charge 1,805 Changes in assets and liabilities, exclusive of investing and financing activities (23,905) (8,701) (1,944) Other 259 503 1,225 ---------------------------------------- Net cash provided by operating activities 34,857 38,806 30,038 ---------------------------------------- Cash flows from investing activities: Capital expenditures (39,425) (32,605) (30,388) Purchases of salon assets, net of cash acquired and certain obligations assumed (10,370) (29,343) (3,259) Proceeds from sale of assets 7,725 Other 103 ---------------------------------------- Net cash used in investing activities (49,795) (61,948) (25,819) ---------------------------------------- Cash flows from financing activities: Borrowings on revolving credit facilities 187,328 150,758 88,166 Payments on revolving credit facilities (203,425) (147,158) (87,164) Proceeds from issuance of long-term debt 45,000 29,435 440 Repayment of long-term debt (21,067) (17,164) (9,573) (Decrease) increase in negative book cash balances (4,842) 1,957 1,153 Dividends paid (1,722) (1,235) Proceeds from issuance of common stock 15,035 10,955 569 ---------------------------------------- Net cash provided by (used in) financing activities 16,307 27,548 (6,409) ---------------------------------------- Effect of exchange rate changes on cash 8 (30) (109) ---------------------------------------- Increase (decrease) in cash 1,377 4,376 (2,299) Cash: Beginning of year 7,558 3,182 5,481 ---------------------------------------- End of year $8,935 $7,558 $3,182 ---------------------------------------- ---------------------------------------- Changes in assets and liabilities, exclusive of investing and financing activities: Accounts receivable $(1,222) $(1,190) $ (1,106) Inventories (8,376) (3,682) (2,723) Other current assets 2,339 (3,299) 525 Other assets 13 (1,996) (336) Accounts payable 6,487 1,948 784 Accrued expenses (22,396) (80) 1,820 Other noncurrent liabilities (750) (402) (908) ---------------------------------------- $(23,905) $(8,701) $(1,944) ---------------------------------------- ----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 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, 1997, approximately 25 percent of the Company's outstanding common stock is owned by Curtis Squire, Inc. (CSI), which is a holding company controlled by the Chairman of the Board of Directors of the Company, and approximately 6 percent is owned by management and the Company's benefit plans. BASIS OF PRESENTATION: Financial and share data for 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 grouped within shareholders' equity. FRANCHISE INCOME AND EXPENSES: Franchise income includes royalties and initial franchise fees from franchisees, and product sales made by the Company to franchisees. Royalties are recognized as income in the month in which franchisee services are rendered or products are sold by franchisees. The Company recognizes income from initial franchise fees at the time franchisee salons are opened. Product sales by the Company to franchisees are recorded at the time product is shipped to 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. Cost of product sold to franchisees is included in other operating expenses in the Consolidated Statement of Operations. All other direct and indirect expenses associated with franchise operations are included in selling, general and administrative expenses in the Consolidated Statement of Operations. INVENTORIES: Inventories consist principally of hair care products held either for use in salon services or for sale. Inventories are stated at the lower of cost or market with cost determined on the first-in, first-out method. PROPERTY AND EQUIPMENT: Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed on the straight-line method over estimated useful asset lives (shorter of asset life or lease term for leasehold improvements). Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operations. Fully depreciated assets remain in the accounts until retired from service. GOODWILL: Goodwill recorded in connection with the fiscal 1989 purchase of the publicly held minority interest in the Company and 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: The Company periodically measures and evaluates the recoverability of its tangible and intangible noncurrent assets using undiscounted cash flow analyses. 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. NET INCOME PER SHARE: Net income per 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. In February 1997, Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share (EPS) was issued by the Financial Accounting Standards Board. This standard, which the Company must adopt effective with its second quarter of fiscal 1998, requires dual presentation of basic and diluted EPS on the face of the Consolidated Statement of Operations. Net income per share currently presented by the Company is comparable to the diluted EPS required under SFAS No. 128. Basic EPS for the Company would be calculated based on only common shares outstanding without considering the dilutive effects of common stock equivalents. 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, 1997 and 1996:
(DOLLARS IN THOUSANDS) 1997 1996 Property and equipment: Land $700 $700 Building and improvements 6,172 4,361 Equipment, furniture and lease- hold improvements 237,845 213,982 Equipment, furniture and lease- hold improvements under capital leases 9,983 10,621 ------------------------ 254,700 229,664 Less accumulated depreciation and amortization (113,228) (101,368) Less amortization of equipment, furniture and leasehold improvements under capital leases (1,899) (1,475) ------------------------ $139,573 $126,821 ------------------------ ------------------------ Goodwill $120,429 $108,955 Less accumulated amortization (20,611) (15,603) ------------------------ $99,818 $93,352 ------------------------ ------------------------ Accrued expenses: Payroll and payroll related costs $19,923 $20,695 Taxes 3,725 5,670 Insurance 5,653 2,730 Restructuring 1,188 6,493 Other 6,802 11,673 ------------------------ $37,291 $47,261 ------------------------ ------------------------
Negative book cash balances of $376,000 and $5,218,000 at June 30, 1997 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, 1997, 1996 and 1995: (DOLLARS IN THOUSANDS) 1997 1996 1995 Cash paid during the year for: Interest $10,862 $9,052 $8,020 Income taxes 13,016 15,227 11,714 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Non-cash investing and financing activities include the following: Year ended June 30, 1997: * In connection with various acquisitions, the Company entered into seller-financed notes payable (Note 3). Year ended June 30, 1996: * In connection with the conversion of the Company's $2,812,500 of convertible debt, 562,500 shares of common stock were issued. * In connection with various acquisitions, the Company entered into seller-financed notes payable (Note 3). Year ended June 30, 1995: * Capital lease obligations of $7,725,000 were entered into during the year under a sale-leaseback transaction. A gain of $506,000 was realized on this transaction and is being recognized over the lease term. * In connection with 1995 acquisitions, the Company issued 276,663 shares of its common stock valued at $2,895,000. * In connection with various acquisitions, the Company entered into seller-financed notes payable. 3. MERGERS AND ACQUISITIONS: SUPERCUTS, INC. MERGER: Effective October 25, 1996, the Company received shareholder approval for the merger agreement with Supercuts in a stock-for-stock merger transaction. Supercuts was the national operator of approximately 430 company-owned, and franchisor of approximately 740 affordable hair care salons at the acquisition date. Each Supercuts shareholder received .40 shares of the Company's common stock in exchange for each Supercuts common share, resulting in the issuance of approximately 4,500,000 shares of the Company's common stock. 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. The severance expense of $3,465,000 covered 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. There is $1,826,000 remaining for severance liabilities for terminated employees at June 30,1997, which is included in accrued expenses. The Supercuts transaction has been accounted for as a pooling-of-interests, therefore 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. Prior to the merger, Supercuts' fiscal year for financial reporting purposes ended on December 31. No 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, 1997 were as follows (dollars in thousands): SUPERCUTS, YEAR ENDED JUNE 30 REGIS AS CONFORMED COMBINED 1997 Revenues $594,714 $118,505 $713,219 Net income (loss) 13,206 (6,632) 6,574 1996 Revenues 499,442 117,865 617,307 Net income (loss) 19,124 (9,673) 9,451 1995 Revenues 422,188 102,065 524,253 Net income (loss) 14,651 (3,061) 11,590 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 for sale. 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 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. 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. OTHER ACQUISITIONS: During 1997 and 1996, the Company made numerous additional acquisitions. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $9,700,000 and $7,900,000 in 1997 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 $13,900,000 associated with these acquisitions in 1997, approximately $11,300,000 was paid in cash during fiscal 1997; approximately $2,600,000 is payable during fiscal 1998. 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 was payable over three years. The aforementioned acquisitions, except Supercuts, have been recorded using the purchase method of accounting. Accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The acquisitions in 1997, 1996 and 1995 recorded using the purchase method are not material to the Company's operations. 4. RESOLUTION OF LITIGATION: During fiscal 1994, the Company resolved its litigation with a former joint venture partner, MEI Diversified Inc. (MEI). As part of the litigation resolution, the Company advanced $5,850,000 to 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 139,830 shares of its common stock to the bankruptcy creditors of MEI as final resolution of a 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 gain. As a result of these transactions, the Company recorded a $695,000 nonrecurring gain during fiscal 1995 and adjusted the amounts previously recorded by decreasing shareholders' equity by $500,000. During fiscal 1997, 1996 and 1995, the Company received $901,000, $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. During fiscal 1997, the Company resolved litigation brought by David E. Lipson (former Supercuts Chairman and Chief Executive Officer) and DEL Holding Corporation (DEL), a corporation controlled by Mr. Lipson, against Supercuts. Mr. Lipson and DEL had brought legal action against Supercuts seeking damages pursuant to a consulting agreement between DEL and Supercuts and damages allegedly sustained by Mr. Lipson as a result of alleged defamation and a delay in his ability to sell certain shares of Supercuts common stock. In resolution, the Company paid Mr. Lipson and DEL $6,700,000 in complete settlement of all claims of Mr. Lipson, DEL or any other entity controlled by Mr. Lipson. This settlement and related costs approximated amounts accrued as part of the Company's fiscal 1997 and 1996 restructuring charges (Note 8). Supercuts paid DEL approximately $225,000 and $450,000 for Mr. Lipson's services in 1996 and 1995, respectively. 5. FINANCING ARRANGEMENTS: The Company's long-term debt consists of the following at June 30, 1997 and 1996: (DOLLARS IN THOUSANDS) 1997 1996 Senior term notes $74,000 $39,000 Revolving credit facilities 14,448 30,545 Equipment and leasehold notes payable 9,664 11,112 U.K. term notes 8,083 9,020 Other notes payable, principally subordinated notes 7,267 12,704 ------------------- 113,462 102,381 Less current portion (30,722) (19,168) ------------------- Long-term portion $82,740 $83,213 ------------------- ------------------- At June 30, 1997, the senior term notes consist of $60,000,000 of individual note agreements with interest rates ranging from 6.94 percent to 8.18 percent and a $14,000,000 senior term note with an interest rate of 11.52 percent. Repayment dates range from 1998 through 2007. The Company increased its revolving credit facility in April 1997. The revolving credit facility allows for borrowings up to $25,000,000, bears interest at the prime rate, and matures in October 1998. The prime rate at June 30, 1997 and 1996 was 8.50 percent and 8.25 percent, respectively. The facility also allows for borrowings bearing interest at LIBOR rates plus 1.50 percent. The average LIBOR rate utilized by the Company at June 30, 1997 was 5.78 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 weighted average interest rate on this facility was 7.63 percent and 8.25 percent, respectively, at June 30, 1997 and June 30, 1996. A letter of credit totaling approximately $700,000 was outstanding at June 30, 1997, which reduces the amount available under the revolving credit facility. At June 30, 1996, the revolving credit facility included $21,200,000 outstanding under a former Supercuts facility which was refinanced during fiscal 1997 as part of new borrowings under senior term notes. The Company's U.K. subsidiary also has a credit facility which allows for borrowings up to approximately $5,000,000, bears interest at the LIBORrate plus 3.00 percent and is due on demand. Amounts outstanding under this facility were $3,148,000 and $245,000 at June 30, 1997 and 1996, respectively. In March 1997, the Company entered into a treasury lock agreement for the purpose of establishing the effective interest rate on the $14,000,000 senior term note expected to be refinanced in June 1998. The contract was entered into to reduce the risk to the Company of future interest rate fluctuations. The contract has a notional amount of $14,000,000 and is tied to the U.S. government 10-year treasury note rate. At the settlement date in June 1998, the gain or loss on the contract will be recognized. The deferred unrealized loss related to this contract was not material at June 30, 1997. The Company does not enter into financial instruments for trading or speculative purposes. 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 and leasehold notes payable are primarily comprised of capital lease obligations totaling $5,100,000 and $6,346,000 at June 30, 1997 and 1996, respectively. These capital lease obligations bear an average interest rate of approximately 12 percent and are payable in monthly installments over five years. These balances exclude future interest payable of $945,000 and $1,574,000 at June 30, 1997 and 1996, respectively. 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 bearing interest at rates varying from 4.00 percent to the LIBOR rate plus 2.50 percent which are subject to annual mandatory principal repayments until final maturity in July 2000. The annual LIBOR rate at June 30, 1997 was 6.06 percent. The U.K. term 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. At June 30, 1997, the U.K. term notes have been classified as current as a result of noncompliance with certain loan covenants. The Company is currently in negotiations with the lender and intends to refinance this debt as long-term during fiscal 1998. The Company's subordinated notes consist primarily of notes associated with various acquisitions, which bear interest in the range of 5.84 to 12.00 percent, require monthly payments over terms ranging from two to seven years and are generally subordinate to senior term notes and revolving credit facility arrangements. The fair value of the senior term, equipment and leasehold and subordinated notes payable based upon a discounted cash flow analysis using the Company's current incremental borrowing rate approximates their carrying values at June 30, 1997. Aggregate maturities of long-term debt at June 30, 1997 are as follows: FISCAL YEAR (DOLLARS IN THOUSANDS) 1998 $30,722 1999 20,094 2000 9,271 2001 7,208 2002 1,123 Thereafter 45,044 ----------- $113,462 ----------- ----------- In July 1997, in connection with the construction of a new distribution center, the Company entered into an additional credit facility. The credit facility allows for borrowings up to $15,000,000, bears interest at the prime rate, and matures in December 1998. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate. 6. COMMITMENTS: OPERATING LEASES: The Company is committed under long-term operating leases for the rental of most of its company-owned salon locations. The terms of the leases range from one to 20 years, with many leases renewable for an additional five- to 10-year term at the option of the Company, and certain leases include escalation provisions. For certain leases, the Company is required to pay additional rent based on a percent of sales and, in most cases, real estate taxes and other expenses. Rent expense for the Company's international department store salons is based primarily on a percent of sales. The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. Future minimum lease payments for the next five years, which are reimbursable from the franchisees, are approximately $15,000,000 annually. All additional lease costs are passed through to the franchisees. Total rent expense, excluding sublease rental obligations which are passed through to the franchisees, includes the following: (DOLLARS IN THOUSANDS) 1997 1996 1995 Minimum rent $62,125 $49,667 $41,719 Percentage rent based on sales 16,799 16,078 9,634 Real estate taxes and other expenses 16,802 15,889 13,086 --------------------------------------- $95,726 $81,634 $64,439 --------------------------------------- --------------------------------------- FUTURE MINIMUM LEASE PAYMENTS: As of June 30, 1997, future minimum lease payments (excluding percentage rents based on sales and sublease rental obligations which are passed through to the franchisees) due under existing noncancellable operating leases with remaining terms of greater than one year are as follows: FISCAL YEAR (DOLLARS IN THOUSANDS) 1998 $62,111 1999 56,054 2000 46,434 2001 35,586 2002 29,440 Thereafter 93,597 -------- Total minimum lease payments $323,222 -------- -------- 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) 1997 1996 1995 Current: Federal $10,133 $9,142 $11,085 State 1,589 1,828 2,217 International 292 15 6 Deferred: United States 1,138 (2,596) (5,040) International (24) (463) ------------------------------ $13,128 $7,926 $8,268 ------------------------------ ------------------------------ The components of the net deferred tax asset and liability are as follows: (DOLLARS IN THOUSANDS) 1997 1996 Net current deferred tax asset: Nonrecurring items $378 $362 Insurance 1,756 632 Payroll and payroll related costs 1,313 1,513 Restructuring 463 2,532 Merger and transaction 702 Excess of tax over book basis of certain assets associated with restructuring 1,723 1,648 ------------------- $6,335 $6,687 ------------------- ------------------- Net noncurrent deferred tax asset (liability): Depreciation and amortization $(4,214) $(3,286) Deferred rent 1,785 1,816 Nonrecurring items 947 1,359 Payroll and payroll related costs 1,115 851 Excess of tax over book basis of certain assets associated with salon development program 8,112 8,068 Other, net 777 476 ------------------- $8,522 $9,284 ------------------- Management believes no valuation allowance for the net deferred tax asset is required due to its recoverability through carryback to income taxes paid in prior years or reduction of future taxable income. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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)
1997 1996 1995 Income (loss) before income taxes: United States $20,336 $16,709 $19,887 International (634) 668 (29) --------------------------------------- $19,702 $17,377 $19,858 --------------------------------------- --------------------------------------- Computed income tax expense at federal statutory rate $6,945 $6,082 $6,950 Increase (decrease) in income taxes resulting from: State income taxes, net of federal income tax benefit 1,033 953 971 Nondeductible merger and transaction costs 2,228 Change in estimate 1,500 Jobs tax credit (140) (486) Other, principally nondeductible goodwill 1,562 891 833 --------------------------------------- Income tax expense $13,128 $7,926 $8,268 --------------------------------------- ---------------------------------------
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 resulting from the completion of an Internal Revenue Service examination. 8. RESTRUCTURING CHARGES: 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 (Mr. 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 restructuring charge described above was $11,965,000 (as adjusted from the $18,925,000 originally reported due to conforming accounting adjustments - Note 1). Approximately $7,000,000 of this charge related to salon closings or dispositions. The balance related principally to the Lipson litigation (Note 4). 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 $12,823,000 for the year ended June 30, 1996. Of the $12,823,000 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). 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. During the third and fourth quarters of fiscal 1997, the Company finalized its restructuring activities. The actual total restructuring costs approximated amounts previously recorded. 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 (not to exceed $1,200,000 in the aggregate) equal to 15 percent of the purchase price of the stock to be purchased. 401(K) PLAN: Supercuts had a 401(k) defined contribution plan. As a result of the merger, the 401(k) plan was terminated on October 20, 1996. Substantially all of the assets remaining in the 401(k) plan have been distributed to participants. Company contributions to the aforementioned plans, which are charged to earnings in the period contributed, included the following: (DOLLARS IN THOUSANDS) 1997 1996 1995 ESOP $662 $616 $428 PSP 119 ESAP 257 231 197 SPP 223 172 132 401(k) 64 212 173 STOCK OPTIONS: The Company's Stock Option Plan (the Plan), as amended, provides for granting both incentive stock options and nonqualified stock options. A total of 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. Options granted to employees generally vest over a five-year period. Options may also be granted under this Plan to the Company's outside directors for a term not to exceed five years from the vesting date. Options granted to outside directors vest over a four-year period, although the previous Supercuts Board members were fully vested at time of merger. The Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Incentive stock options are granted at not less than fair market value on the date of grant. The Board of Directors determines the Plan participants and establishes the terms and conditions of each option. Separate from the Stock Option Plan described above, in an action approved by shareholders on October 23, 1996 in connection with the merger (Note 3) and effective termination of the Supercuts stock option plans, outstanding Supercuts stock options were converted to options to purchase approximately 400,000 shares of Regis common stock on the basis of the exchange ratio established to effect the merger. Common shares available for grant as of June 30 were 53,850, 405,356 and 799,494 for 1997, 1996 and 1995, respectively. The Board has authorized, subject to shareholder approval on October 14, 1997, 550,000 additional shares be made available for grant under the Plan. Stock options outstanding and weighted average exercise prices are as follows: OPTIONS OUTSTANDING WEIGHTED AVERAGE EXERCISE SHARES PRICE Balance, June 30, 1994 1,258,032 $12.60 Granted 179,100 12.54 Cancelled (63,233) 21.33 Exercised (20,082) 7.52 ------------------------- Balance, June 30, 1995 1,353,817 12.24 Granted 473,400 16.25 Cancelled (79,262) 20.62 Exercised (114,150) 7.34 ------------------------- Balance, June 30, 1996 1,633,805 13.32 Granted 307,500 20.44 Cancelled (102,117) 21.68 Exercised (271,357) 13.18 ------------------------- Balance, June 30, 1997 1,567,831 $14.20 ------------------------- ------------------------- At June 30, 1997, the weighted average exercise price and remaining contractual life of stock options are as follows: RANGE OF EXERCISE $4.00- $14.00- $23.25- PRICES $12.38 $20.72 $34.38 TOTAL Total options outstanding 879,376 360,351 328,104 1,567,831 Weighted average exercise price $8.52 $17.18 $26.15 $14.20 Weighted average remaining contractual life in years 6.6 8.8 8.0 7.4 Options exercisable 401,493 62,485 151,604 615,582 Weighted average price of exercisable options $8.17 $17.36 $29.52 $14.36 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, a standard of accounting and reporting for stock-based compensation plans. The Company adopted this standard in fiscal 1997. The Company has continued to measure compensation cost for its incentive stock plans using the intrinsic value-based method of accounting it has historically used and, therefore, the standard has no effect on the Company's operating results. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Had the Company used the fair-value-based method of accounting for its stock option and incentive plans beginning in 1996 and charged compensation cost against income, over the vesting period, based on the fair value of options at the date of grant, net income and net income per common share for 1997 and 1996 would have been reduced to the following pro forma amounts: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 Net income: As reported $6,574 $9,451 Pro forma 6,000 8,528 Net income per common share: As reported $.28 $.42 Pro forma .26 .37 The pro forma information above only includes stock options granted in 1997 and 1996. Compensation expense under the fair-value-based method of accounting will increase over the next few years as additional stock option grants are considered. The weighted-average fair value per option granted during 1997 and 1996 was $9.47 and $11.00, respectively. The weighted-average fair value was calculated by using the fair value of each option grant on the date of grant. The fair value of options was calculated utilizing the Black-Scholes option-pricing model and the following key assumptions: 1997 1996 Risk-free interest rate 6.41% 5.91% Expected life in years 6.5 7.0 Expected volatility 35.50% 41.43% Expected dividend yield .39% .25% OTHER: The Company has established unfunded deferred compensation plans which cover certain management and executive personnel. The Company maintains life insurance policies on the plans' participants. The amounts charged to earnings for these plans were $385,000, $379,000 and $128,000 in 1997, 1996 and 1995, respectively. The Company has a survivor benefit plan for the Chairman of the Board's spouse, payable upon his death, at a rate of $300,000 annually, adjusted for inflation, for the remainder of his life. The Company has the ability and intent to fund its future obligations under this plan through life insurance policies on the Chairman of the Board (the Chairman). The Company has entered into an agreement with the Chairman providing that the Chairman will continue to render services to the Company until at least May 2007, and for such further period as may be agreed upon mutually. The Company has agreed to pay the Chairman an annual amount of $600,000, adjusted for inflation, for the remainder of his life. The Chairman has agreed that during the period in which payments to him are made as provided in the agreement, he will not engage in any business competitive with the business conducted by the Company. Compensation associated with this agreement is charged to expense as services are provided through May 2007. 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 for the United States and International is presented below. All intercompany revenues and expenses have been eliminated. (DOLLARS IN THOUSANDS) 1997 1996 1995 Revenues: United States $603,170 $531,599 $472,316 International 110,049 85,708 51,937 --------------------------------------- $713,219 $617,307 $524,253 --------------------------------------- --------------------------------------- Operating income: United States $26,584 $23,552 $25,543 International 1,863 2,615 1,101 --------------------------------------- $28,447 $26,167 $26,644 --------------------------------------- --------------------------------------- Total assets: United States $300,814 $275,954 $238,083 International 30,721 28,000 6,753 --------------------------------------- $331,535 $303,954 $244,836 --------------------------------------- --------------------------------------- 11. 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 AND DESIGNATION OF PREFERRED CLASS: On November 12, 1996, at the annual meeting of the shareholders of the Company, the shareholders approved an increase in the authorized shares of capital stock of the Company from 25,000,000 to 50,000,000, par value $.05, of which all outstanding shares and shares available under the Stock Option Plan have been designated as common. On December 23, 1996, the Board of Directors designated 250,000 shares of authorized capital stock as Series A Junior Participating Preferred Stock (preferred stock). None of the preferred stock has been issued. 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. 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 one one-hundredth of a share of preferred stock at an exercise price of $120, subject to adjustment, or in lieu of purchasing the preferred stock, to purchase for the same exercise price common stock of the Company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right. 12. SUPERCUTS 5% ADVERTISING FUND: The Company administers the Supercuts 5% Advertising Fund (the Fund) to which all Supercuts franchise salons and company-owned Supercuts salons are required to contribute 5 percent of monthly service revenues. Voluntary supplemental salon contributions are also collected for additional advertising and promotions related specifically to the contributing salons. Such amounts are segregated from the cash resources of the Company, accounted for separately and are not included in the financial statements of the Company. Expenditures of the Fund are used, as determined by the Supercuts Council, for system-wide expenditures such as creative production, national advertising, consumer research, public relations and agency fees and for local market expenditures such as television, radio and print placement costs. The amounts charged to earnings, representing the Company's 5 percent contributions to the Fund, were $4,266,000, $4,324,000 and $3,632,000 in 1997, 1996 and 1995, respectively. 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, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended June 30, 1997, 1996 and 1995. 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years ended June 30, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand, L.L.P. Minneapolis, Minnesota August 22, 1997 SHAREHOLDER INFORMATION QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER ENDED ----------------------------------------------------------- YEAR SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ENDED 1997 Revenues $170,605 $176,458 $175,488 $190,668 $713,219 Operating income (loss) 12,360 (7,966) 9,773 14,280 28,447 Net income (loss) 4,541 (8,880) 4,251 6,662 6,574 Net income (loss) per share (a) .20 (.38) .18 .29 .28 (c) Dividends declared per share .02 .02 .02 .02 .08 1996 Revenues $140,575 $155,316 $155,466 $165,950 $617,307 Operating income (loss) 9,053 (3,240) 8,966 11,388 26,167 Net income (loss) 4,018 (3,815) 3,957 5,291 9,451 Net income (loss) per share (b) .18 (.17) .17 .23 .42 (c) Dividends declared per share .017 .017 .017 .02 .07
(a) For the quarters ended September 30, 1996, December 31, 1996, March 31, 1997, June 30, 1997 and the full year 1997, exclusive of nonrecurring gains (Note 4), merger and transaction costs (Note 3) and restructuring charges (Note 8), net income per share would have been $.25, $.21, $.18, $.28 and $.92, respectively. (b) For the quarters ended September 30, 1995, December 31, 1995, March 31, 1996, June 30, 1996 and the full year 1996, exclusive of nonrecurring gains (Note 4) and restructuring charges (Note 8), net income per share would have been $.18, $.16, $.17, $.25 and $.75, respectively. (c) The summation of quarterly net income per share amounts does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis. - -------------------------------------------------------------------------------- STOCK DATA Regis common stock is listed and traded on the Nasdaq National Market under the symbol "RGIS". The accompanying table sets forth the high and low closing bid quotations as reported by Nasdaq for each quarter during the previous two fiscal years. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. As of June 30, 1997, Regis shares were owned by approximately 12,000 shareholders. The common stock price was $23.19 per share on August 15, 1997. 1997 1996 HIGH LOW HIGH LOW 1st quarter $34.00 $21.75 $14.33 $12.49 2nd quarter 27.50 15.25 16.67 13.83 3rd quarter 18.50 15.75 20.50 14.17 4th quarter 24.00 17.63 33.00 20.33 CORPORATE INFORMATION BOARD OF DIRECTORS Myron Kunin CHAIRMAN OF THE BOARD Regis Corporation Paul D. Finkelstein PRESIDENT AND CHIEF EXECUTIVE OFFICER Regis Corporation Christopher A. Fox EXECUTIVE VICE PRESIDENT Regis Corporation Frank E. Evangelist SENIOR VICE PRESIDENT, FINANCE SECRETARY Regis Corporation Rolf Bjelland EXECUTIVE VICE PRESIDENT CHIEF INVESTMENT OFFICER Lutheran Brotherhood Thomas L. Gregory CONSULTANT TLG Associates Van Zandt Hawn DIRECTOR AND FOUNDER Goldner Hawn Johnson & Morrison Incorporated Susan S. Hoyt EXECUTIVE VICE PRESIDENT HUMAN RESOURCES Staples, Inc. David B. Kunin CHAIRMAN Anasazi Exclusive Salon Products, LLC CORPORATE OFFICERS Myron Kunin CHAIRMAN Paul D. Finkelstein PRESIDENT AND CHIEF EXECUTIVE OFFICER Christopher A. Fox EXECUTIVE VICE PRESIDENT Frank E. Evangelist SENIOR VICE PRESIDENT, FINANCE SECRETARY Bert M. Gross SENIOR VICE PRESIDENT, GENERAL COUNSEL William E. Halfacre SENIOR VICE PRESIDENT, RETAIL AND PURCHASING Bruce D. Johnson SENIOR VICE PRESIDENT, DESIGN AND CONSTRUCTION Mark Kartarik CHIEF OPERATING OFFICER, SUPERCUTS, INC. Gordon Nelson SENIOR VICE PRESIDENT, FASHION AND EDUCATION Anthony W. E. Rammelt SENIOR VICE PRESIDENT, INTERNATIONAL MANAGING DIRECTOR, EUROPE Randy L. Pearce VICE PRESIDENT, FINANCE INVESTOR RELATIONS ANNUAL MEETING The annual meeting of Regis shareholders will be held at The Minneapolis Institute of Arts, 2400 Third Avenue South, Minneapolis, Minnesota, on October 14, 1997, at 4:00 p.m. ANNUAL REPORT ON FORM 10-K A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 1997, may be obtained without charge by writing to: Frank E. Evangelist, SECRETARY Regis Corporation 7201 Metro Boulevard Minneapolis, Minnesota 55439 TRANSFER AGENT AND REGISTRAR Norwest Bank Minnesota, N.A. South St. Paul, Minnesota INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. Minneapolis, Minnesota CORPORATE HEADQUARTERS 7201 Metro Boulevard Minneapolis, Minnesota 55439 PHONE: (612) 947-7777 FAX: (612) 947-7700 EX-23 14 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 Nos. 333-28511, No. 33-82094, No. 33-86276, No. 33-89150, No. 33-92244, No. 33-96224, and No. 33-80337) and Form S-8 (File Nos. 33-44867 and No. 33-89882) of our reports dated August 22, 1997, on our audits of the consolidated financial statements and financial statement schedule of Regis Corporation as of June 30, 1997 and 1996, and for the years ended June 30, 1997, 1996, and 1995, which reports are incorporated by reference or included in its Annual Report on Form 10-K for the year ended June 30, 1997. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota September 24, 1997 EX-27 15 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 8,935 0 12,588 200 42,596 77,073 254,700 115,127 331,535 92,124 0 0 0 1,166 147,948 331,535 187,620 713,219 103,181 576,920 29,186 236 10,264 19,702 (13,128) 6,574 0 0 0 6,574 0 .28 Includes merger and transaction charges of$14,322, and restructuring charges of $4,409. EPS before merger and transaction and restructuring charges would have been $.92.
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