-----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, PDMSFEaPRPRheu1RN+Cj6hjNbI0GYrxT8DgEFbqzFvmMC30FiCpR9jxlA8RLQJ6G YRhsAgCoL0R7WVKPRvZfEw== 0000912057-96-020411.txt : 19960917 0000912057-96-020411.hdr.sgml : 19960917 ACCESSION NUMBER: 0000912057-96-020411 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960916 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: 1934 Act SEC FILE NUMBER: 000-11230 FILM NUMBER: 96630824 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, 1996 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 $25.00 per share as of September 3, 1996, as quoted on the NASDAQ), was $451,892,300. The number of outstanding shares of the registrant's common stock, par value $.05 per share, as of September 3, 1996, was 18,075,692. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended June 30, 1996, are incorporated by reference into Parts I and II. 2 PART I ITEM 1. BUSINESS BACKGROUND The Company is the largest owner and operator of mall-based hair and retail hair product salons in the world. At June 30, 1996, the Company operated 1,963 salons (1,891 company-owned and 72 franchised) offering high-quality haircare services and products in 50 states and certain foreign countries, principally the United Kingdom. Regis operates its salons primarily under the names Regis Hairstylists, MasterCuts and Trade Secret. In 1996, the Company began operating hair salons in Wal-Mart stores and supercenters. INDUSTRY OVERVIEW Management estimates that annual sales of the haircare industry were $37 billion in the United States and $65 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. Regis 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. MALL-BASED LOCATIONS. As the largest national mall-based operator in the hair salon industry, Regis 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. During fiscal 3 1996, Regis provided services to more than 30 million customer worldwide. MULTIPLE SALON CONCEPTS. Regis operates primarily three salon concepts; Regis Hairstylists, MasterCuts and Trade Secrets. Regis' various salon concepts in the United States address the major segments of the salon market and 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 promotionally priced, family-oriented hair care salons located in Wal-Mart stores and supercenters. EXPANSION. The Company has grown through increased sales from existing salons, constructing additional salons, and acquisitions. During the five year period ended June 30, 1996, the Company has added 832 net units to its worldwide salon base from new salon construction and acquisitions. During this same period of time, the Company added two new operating divisions, Trade Secret and Wal- Mart, and also expanded its Regis Hairstylists, MasterCuts and International salon divisions. In addition to continuing its salon acquisition strategy, the Company expects to construct at least 150 new salons and complete approximately 60 major remodeling and conversion projects during fiscal 1997. In addition, in July 1996, the Company and Supercuts, Inc. signed an agreement and plan of merger pursuant to which Supercuts will, subject to satisfaction of the closing conditions in the agreement, merge with a subsidiary of the Company in a stock-for-stock merger transaction. Supercuts is one of the largest publicly held owners, operators and franchisors of hair salons in the United States. The Supercuts system includes over 1,150 company-owned and franchised stores in 39 states and Puerto Rico. 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 percent in fiscal 1996 to $139 million and represented 28 percent of total 4 sales. CONTROL OVER SALON OPERATIONS. As a salon owner/operator, 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 the Regis Hairstylists and MasterCuts salons where a greater portion of sales are derived from hairstyling and color 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. 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 their services. 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, 1996, the Company operated 797 Regis Hairstylists salons in shopping malls in North America. Sales from the Regis Hairstylists salons were $268 million, or 54 percent of the Company's total sales, in fiscal 1996. The Company expects to construct about 35 new Regis Hairstylists salons in fiscal 1997. 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 5 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, 1996, the Company operated 327 MasterCuts salons in North America. Sales from MasterCuts salons accounted for $83 million, or 17 percent of the Company's total sales, in fiscal 1996. During fiscal 1997, the Company plans to construct approximately 35 new MasterCuts salons. TRADE SECRET Trade Secret salons emphasize haircare and beauty product sales in a retail setting while providing high-quality haircare and beauty 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 beauty items. The average sale at Trade Secret salons is approximately $14, but the number of daily transactions is generally higher than at Regis Hairstylists or MasterCuts locations. At June 30, 1996, the number of Trade Secret salons totalled 274 in North America, including 55 franchised locations. Sales from Trade Secret salons during fiscal 1996 were $70 million, or 14 percent of the Company's total sales. The Company anticipates constructing approximately 40 new Trade Secret salons in fiscal 1997. 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 sales contribute solidly to overall sales. The Company operated 157 Wal-Mart salons at June 30, 1996. The Company anticipates constructing at least 35 new salons in Wal-Mart supercenters in fiscal 1997. INTERNATIONAL SALON OPERATIONS The Company operated 408 hair care salons in five countries outside of the United States and Canada at June 30, 1996, including 343 salons in the United Kingdom. Canadian salons operate under the Regis Hairstylists, MasterCuts and Trade Secret tradenames, while salons in the remaining five countries primarily operate in department stores under license arrangements. Sales from the International salon operations were $76 million, or 15 percent of the Company's total sales, in fiscal 1996. The Company expects to continue to increase its International salon base in fiscal 1997. 6 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. 7 SALON LOCATION SUMMARY 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- REGIS Open at beginning of period 813 815 802 801 787 Salons constructed 36 34 24 17 31 Acquired 6 9 9 Less: Relocations 6 13 11 11 11 --- --- --- --- --- Net salon openings 30 21 19 15 29 Conversions (11) (13) (3) (10) (4) Salons closed or sold (17) (21) (17) (19) (15) --- --- --- --- --- Open at end of period 815 802 801 787 797 --- --- --- --- --- --- --- --- --- --- MASTERCUTS Open at beginning of period 155 185 229 257 283 Salons constructed 22 34 25 21 33 Acquired 3 1 12 Less: Relocations 1 3 2 3 --- --- --- --- --- Net salon openings 22 33 25 20 42 Conversions 11 13 3 10 3 Salon closed or sold (3) (2) (4) (1) --- --- --- --- --- Open at end of period 185 229 257 283 327 --- --- --- --- --- --- --- --- --- --- TRADE SECRET Company-Owned: Open at beginning of period 55 106 152 Salons constructed 1 22 28 40 Acquired 54 30 19 11 Less: Relocations 2 1 4 --- --- --- --- --- Net salon openings 55 50 46 47 Conversions(1) 1 2 20 Salon closed or sold (2) --- --- --- --- --- Open at end of period 0 55 106 152 219 --- --- --- --- --- --- --- --- --- --- Franchised Stores: Open at beginning of period 64 68 Salons added 1 7 8 Acquired 64 Less: Relocations 1 --- --- --- --- --- Net salon openings 65 7 7 Conversions(1) (1) (2) (19) Salon closed or sold (1) (1) --- --- --- --- --- Open at end of period 0 0 64 68 55 --- --- --- --- --- --- --- --- --- --- 8 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- WAL-MART Open at beginning of period Salons constructed 3 Acquired 154 ----- Net salon openings 157 Open at end of period 157 ----- ----- INTERNATIONAL(2) Open at beginning of period 163 199 225 251 244 Salons constructed 11 18 6 9 9 Acquired 42 21 27 2 178 Less: Relocations 4 4 1 ----- ----- ----- ----- ----- Net salon openings 49 35 33 11 186 Salons closed or sold (13) (9) (7) (18) (22) ----- ----- ----- ----- ----- Open at end of period 199 225 251 244 408 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Grand total 1,199 1,311 1,479 1,534 1,963 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Major remodelings & conversions 43 38 35 46 65 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- (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. Of the 116 new salons opened in fiscal 1996, 31 were Regis Hairstylists salons, 33 were MasterCuts, 40 were Trade Secret, 3 were Wal-Mart and 9 were International salons. The Company intends to construct at least 150 new salons during fiscal year 1997 and expects that about 35 of these will be Regis Hairstylists salons, about 35 will be MasterCuts, about 40 will be Trade Secret, about 35 will be Wal-Mart salons and 10 will be International. 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 sales have become an increasingly important part of the Company's business, having grown from 5.4 percent of total sales in fiscal 1987 to 28.1 percent in fiscal 1996. A significant portion of this growth has resulted from the introduction of national brand merchandise in 1988 and the acquisition of Trade Secret in December 1993 and Beauty Express in November 1992. The haircare products offered are primarily shampoos, hair conditioners, fixatives and hair sprays. Both the Regis label products and lines of salon branded 9 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, 1996, the Company's 1,398 United States and Canadian mall- based salons were located in approximately 965 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 approximately one- third. The Company generally locates its 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. 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 10 United States may diminish the impact of fluctuations in regional business cycles. Most of the Company's salons, other than its department store salons in the International salon division and Wal-Mart salons, are located in enclosed mall shopping centers. The Company maintains various advertising, sales and promotion programs for its salons, budgeting a predetermined percentage of sales 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 of the 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). 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 nearly reached $1.5 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. 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 11 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 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. To the greatest extent possible, 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 $125,000 to $145,000, with about 80 percent of the total construction cost for leasehold improvements and the balance for salon fixtures, equipment, and inventory. 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. 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, primarily located in department stores in the United Kingdom and South Africa, 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. 12 Over the years the Company has developed uniform procedures for opening new salons in such a manner as to maximize sales 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. 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. 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. TRADEMARKS The Company holds numerous trademarks, both in the United States and in several foreign countries. The most important are the trademarks "Regis Hairstylists," "MasterCuts" and "Trade Secret." The Company believes the use of the trademarks "Regis Hairstylists," "MasterCuts" and "Trade Secret" 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. 13 EMPLOYEES As of June 30, 1996, the Company had approximately 20,000 full- and part- time employees worldwide, of which approximately 15,000 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. ITEM 2. PROPERTIES The Company's consolidated executive and administrative offices are located 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 believes that this space will be adequate for inventory storage needs for the foreseeable 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 department stores. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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. 1995 1996 HIGH LOW HIGH LOW 1st quarter $ 9.83 $ 8.17 $14.33 $12.49 2nd quarter 11.00 9.33 16.67 13.83 3rd quarter 12.67 9.50 20.50 14.17 4th quarter 12.83 10.17 33.00 20.33 The Company declared quarterly dividends of $.017, $.017, $.017 and $.02, respectively, during fiscal 1996. The Company did not pay dividends during fiscal 1995 due to debt covenant restrictions. As of September 3, 1996, Regis shares were owned by approximately 5,000 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 1996 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 20 of the Registrant's 1996 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 31, the Consolidated Financial Statements on pages 21 to 31 and the Quarterly Financial Data on page 32 of the Registrant's 1996 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. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows: Name Age Position - -------------------- --- --------------------------------------------- Myron Kunin 67 Chairman of the Board of Directors Paul D. Finkelstein 54 President, Chief Executive Officer and Director Christopher A. Fox 46 Executive Vice President and Director Frank E. Evangelist 59 Senior Vice President, Finance, Secretary and Director William E. Halfacre 55 Senior Vice President, Retail and Purchasing Mark Kartarik 40 Senior Vice President, Operations Gordon Nelson 45 Senior Vice President, Fashion and Education Anthony W.E. Rammelt 59 Senior Vice President, International Rolf F. Bjelland 58 Director Van Zandt Hawn 51 Director Susan S. Hoyt 52 Director 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. He is also a director of Pet Food Warehouse, Inc. 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. Mark Kartarik has served as Senior Vice President, Operations of the Company since 1994, and as Vice President from 1989 to 1994. 16 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. Rolf F. Bjelland was elected a Director of the Company in 1983. Since 1983, Mr. Bjelland has been the Executive Vice President - Chief Investment Officer of Lutheran Brotherhood, a fraternal insurance society. Van Zandt Hawn was elected a Director of the Company in 1991. He is a managing director and a founder of Goldner Hawn Johnson & Morrison Incorporated, a private investment firm. Susan S. Hoyt was elected a Director of the Company in 1995. She is Executive Vice President of Human Resources for Staples, Inc. From 1991 to 1996, she was Executive Vice President of Store Operations for the Dayton Hudson Department Stores Division of Dayton Hudson Corporation. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the officers and directors of Regis, and persons who own more than 10 percent of a registered class of the Regis equity securities, to file reports of ownership and changes in ownership with the Commission. Such officers, directors and shareholders are required by the commission's regulations to furnish the Company with copies of all such reports. To the knowledge of Regis, based solely on a review of copies of reports filed with the Commission during the fiscal year ended June 30, 1996, all applicable Section 16(a) filing requirements were complied with. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors consists of Messrs. Hawn and Bjelland and Ms. Hoyt, independent outside Directors. The Compensation Committee has responsibility for administering Regis' incentive plans and setting policies that govern annual compensation and long-term incentives for the principal executive officers of the Company. The Company's executive compensation policies are intended to permit the Company to attract and retain talented executives and to align the financial interests of the Company's management with those of its stockholders. Historically, the Company has sought to accomplish its objectives of attracting and retaining executives by providing for competitive salary levels and occasional cash bonus awards based upon individual performance, subjectively determined by the Chairman of the Board. The principal executive officers of the Company, other than the Chairman, were permitted in 1988 to purchase substantial numbers of restricted shares of the Company's common stock under agreement which provide for vesting over time. The loans incurred by such officers for such purchases were paid from the proceeds of special bonuses to such officers in 1991, which also included payments of the income taxes incurred by such officers with respect to such bonuses. As a result of these transactions, and subsequent grants of stock options, all of the Company's principal executive officers named in the Summary Compensation Table have substantial ownership positions in the common stock of the Company, aligning their interests directly with those of the other stockholders in both the risks and rewards of ownership of the Company's common stock. 17 The Company's stock option program provides compensation opportunities that directly link the interests of management and shareholders, and aid in retaining key executive officers. Executive officers are eligible for annual grants of stock options. Individual awards are based on the individual's responsibilities and performance, ability to impact financial performance and future potential. These factors are not assigned pre-determined relative weights. All individual stock option grants for non-executive officers are reviewed and approved by the Committee. All such grants for executive officers are awarded solely by the two independent outside directors, based on recommendations of management. Executive officers receive gains from exercised stock options only to the extent that the fair market value of the stock has increased since the date of option grant. At the beginning of each fiscal year, the Compensation Committee reviews annual salary recommendations for the Company's executives made by the Chief Executive Officer and approves, with any modifications it deems appropriate, such recommendations. The annual salary recommendations are made by the Chief Executive Officer, and approved or modified by the Compensation Committee, based upon industry practice and national surveys of compensation packages, as well as evaluations of the individual executive's responsibilities and past and expected future performance. The independent outside directors of the Compensation Committee fix the salary of the Chief Executive Officer based on a review of competitive compensation data, and the outside directors' assessment of his past performance and their expectation as to his future performance in leading the Company. No element of the compensation of the principal executive officers during the year ended June 30, 1996, was variable or determined with reference to the performance, financial or otherwise, of the Company. Rolf F. Bjelland Van Zandt Hawn Susan S. Hoyt MEMBERS OF THE COMPENSATION COMMITTEE SUMMARY COMPENSATION TABLE The following table shows, for the fiscal years ended June 30, 1996, 1995 and 1994, the cash compensation paid by the Company, as well as certain other compensation paid or accrued for those years, to the Company's Chief Executive Officer, and each of the other four most highly compensated executive officers of the Company as of June 30, 1996. 18 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------------------------------- ANNUAL COMPENSATION ALL OTHER ------------------------ OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) (#)(1) ($)(2) - ---------------------------------------------- ------------- --------- ----------- --------- ------------- Myron Kunin 1996 600,000 -- -- 142,111(3) Chairman of the Board and Chief Executive 1995 600,000 -- -- 151,120(3) Officer 1994 500,000 -- 150,000 23,070 Paul D. Finkelstein 1996 450,000 -- -- 28,977 President and Chief Operating Officer 1995 400,000 50,000 -- 25,477 1994 315,000 -- 150,000 14,534 Christopher A. Fox 1996 250,000 -- 6,000 16,101 Executive Vice President 1995 225,000 25,000 6,000 14,330 1994 185,000 22,000 45,000 9,551 Frank E. Evangelist 1996 200,000 -- 6,000 12,876 Senior Vice President, Finance and Secretary 1995 190,000 10,000 6,000 12,101 1994 173,000 -- 45,000 7,982 William E. Halfacre 1996 225,000 -- 6,000 14,488 Senior Vice President, Retail and Purchasing 1995 175,000 25,000 6,000 11,146 1994 152,500 -- 28,500 7,036
- ------------------------ (1) All options are adjusted for a 3-for-2 stock split effective May 20, 1996. (2) Represents the dollar value of shares of the Company and cash allocated to such officers pursuant to the Company's Executive Stock Award Plan, based on the average purchase price for such shares. (3) Includes life insurance premiums on life of Mr. Kunin in amounts of $103,471 for 1996 and $112,905 for 1995. 19 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth for each of the named executives the stock options granted by the Company in the fiscal year ended June 30, 1996 and the potential value of these stock options and stock appreciation rights determined pursuant to Securities and Exchange Commission requirements.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ---------------------------- ANNUAL RATES OF STOCK % OF TOTAL PRICE APPRECIATION FOR OPTIONS OPTIONS GRANTED EXERCISE OR OPTION TERM GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------- NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($)(2) 10%($)(2) - -------------------------------------------- ----------- --------------- ----------- ----------- ----------- --------- Myron Kunin................................. 0 Paul D. Finkelstein......................... 0 Christopher A. Fox.......................... 6,000 2.8% 17.67 3/7/06 66,676 168,964 Frank E. Evangelist......................... 6,000 2.8% 17.67 3/7/06 66,676 168,964 William E. Halfacre......................... 6,000 2.8% 17.67 3/7/06 66,676 168,964
- ------------------------ (1) All options are adjusted for a 3-for-2 stock split effective May 20, 1996. (2) The hypothetical potential appreciation shown in these columns reflects the required calculations at annual rates of 5% and 10% set by the Securities and Exchange Commission, and therefore is not intended to represent either historical appreciation or anticipated future appreciation of the Company's Common Stock price. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth for each of the named executive officers the value realized from stock options exercised during the fiscal year ended June 30, 1996 and the number and value of exercisable and unexercisable stock options held at June 30, 1996.
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR-END(#)(1) YEAR-END($)(2) --------------------- --------------------- SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE $ UNEXERCISABLE UNEXERCISABLE - -------------------------------- --------------- --------------- --------------------- --------------------- Myron Kunin..................... 0 0 30,000/120,000 677,400/2,709,600 Paul D. Finkelstein............. 0 0 30,000/120,000 712,500/2,850,000 Christopher A. Fox.............. 0 0 10,200/46,800 236,400/1,027,108 Frank E. Evangelist............. 0 0 10,200/46,800 236,400/1,027,108 William E. Halfacre............. 12,000 133,675 8,700/28,800 200,460/599,158
- ------------------------ (1) All options are adjusted for a 3-for-2 stock split effective May 20, 1996. (2) Value of unexercised in-the-money-options is determined by multiplying the difference between the exercise price per share and $31.25, the closing price per share on June 30, 1996, by the number of shares subject to such options. 20 EXECUTIVE STOCK AWARD PLAN In July, 1992, the Company established its Executive Stock Award Plan ("ESAP") to provide benefits to employees who are ineligible to participate in the Company's Employee Stock Ownership Plan because they are "highly compensated employees" as defined in Section 414 of the Code. Approximately 25 employees are currently participants in the ESAP, including the Company's five executive officers. Each year the Company's Board of Directors in its discretion determines the number of shares of the Company, if any, to be contributed to the plan. The number of shares contributed is the same percentage of each participant's compensation as is contributed by the Company to the Company's Employee Stock Ownership Plan, up to a maximum of 15% of participating employee's compensation. However, either the Board of Directors or the compensation committee has the authority to increase or decrease the number of shares awarded to anyone or more plan participants. Shares contributed to the ESAP are allocated to the accounts of each participant in proportion to the compensation paid to such participant during each plan year except that extraordinary individual grants are allocated solely to the accounts of the recipients of such grants. Upon retirement or other termination of employment, participating employees are entitled to receive all vested portions of their plan accounts. As of June 30, 1996, 112,960 shares had been allocated to the accounts of participants, including 57,912 shares to accounts of the Company's five named executive officers. The ESAP is not a qualified retirement plan under the Code. 1991 CONTRIBUTORY STOCK PURCHASE PLAN In 1991, the Company established its 1991 Contributory Stock Purchase Plan (the "1991 Plan"). A total of 1,050,000 shares of Common Stock has been authorized for purchase under the 1991 Plan. All employees of the Company (including those who are officers and directors) are eligible to participate in the 1991 Plan. The 1991 Plan will continue until terminated by the Board of Directors. The Company estimates that approximately 16,000 employees are eligible to participate in the 1991 Plan. Employees who wish to participate in the 1991 Plan do so by voluntarily enrolling in it. Upon enrolling, an employee elects to have a percentage (up to 10%) of compensation withheld in each pay period. Withheld amounts are then applied to purchase shares of Common Stock. The Company will contribute to the 1991 Plan an amount equal to 15% of the purchase price of the shares to be purchased (not to exceed $1,000,000 in the aggregate). All shares purchased under the 1991 Plan on behalf of participants are immediately owned by them and may be sold or otherwise disposed of at anytime after purchase. A participating employee may discontinue 1991 Plan withholding at any time and, in this event, all credits to a participant's account which have not been used to purchase shares of Common Stock will be refunded. The 1991 Plan operates under the direction of the Compensation Committee of the Board of Directors. Administration of the 1991 Plan, including purchases of Common Stock, maintenance of records and accounting activities, is carried out by Piper Jaffray Inc. EMPLOYMENT ARRANGEMENTS The Company has entered into unfunded deferred compensation agreements with its executive officers (excluding Mr. Kunin). Each of these agreements provides that (a) if such executive officer becomes disabled while employed by the Company, the Company will pay to such executive officer $60,000 per year ($100,000 per year in the case of Mr. Finkelstein) during each year that such executive officer remains disabled until the earlier to occur of age 65 or death, and (b) upon retirement 21 after 20 years' service with the Company or after reaching age 65, or death, while disabled or employed by the Company, such executive officer or his designated beneficiary will receive the annual deferred compensation amount for 15 years. Payments are further conditioned upon the officers not rendering services for any competitor of the Company during the period of the payments. The Company carries insurance on the lives of each of the persons covered by deferred compensation agreements, is entitled to the case values and the death proceeds from these policies, and may, but is not required to, use cash values or death proceeds from these policies to pay deferred compensation. The Company has entered into an unfunded salary continuation agreement with Myron Kunin, its Chairman, providing that upon the death of Mr. Kunin, the Company shall pay to his wife, if she survives him, $300,000 annually for the remainder of her life, subject to adjustment based on any increases in the Consumer Price Index from July 1, 1995. LIFE AND HEALTH INSURANCE PLANS The Company has adopted "split dollar" life insurance plans for Messrs. Kunin, Finkelstein, Fox and Evangelist. Under these plans, the Company pays the premiums on certain policies insuring the lives of these executive officers. The officers designate the beneficiaries of the "death protection" portions of such policies. Upon the death of an officer, the Company receives the amount of the premiums paid or the cash value of such policies, whichever is greater, and the officer's named beneficiary receives the balance of the proceeds. The present death protection portion of each such executive officer's policy is $100,000. The Company has a health insurance plan under which the Company pays premiums up to $5,400 per year for health and medical insurance for each of the executive officers. The Company also has a medical reimbursement plan under which the Company will reimburse each executive officer for up to $3,000 per year in medical expenses not covered by insurance. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of July 31, 1996, the ownership of Common Stock of the Company by each shareholder who is known by the Company to own beneficially more than 5% of the outstanding shares of the Company, by each director, by each executive officer identified in the Summary Compensation Table, and by all executive officers and directors as a group. The parties listed in the table have the voting and investment powers with respect to the shares indicated.
NUMBER OF SHARES BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER OR IDENTITY OF GROUP OWNED (2) CLASS - ------------------------------------------------------------------------------------ ----------------- ----------- Curtis Squire, Inc.................................................................. 6,049,925 32.9% 7201 Metro Boulevard Minneapolis, MN 55439 Myron Kunin (1) Fidelity Management Research Corp................................................... 1,372,950 7.5% 82 Devonshire Street Boston, MA 02109 Paul D. Finkelstein................................................................. 372,000 2.0% Christopher A. Fox.................................................................. 60,700 * Frank E. Evangelist................................................................. 70,950 * William E. Halfacre................................................................. 10,052 *
22
NUMBER OF SHARES BENEFICIALLY PERCENT OF NAME OF BENEFICIAL OWNER OR IDENTITY OF GROUP OWNED (2) CLASS - ------------------------------------------------------------------------------------ ----------------- ----------- Rolf F. Bjelland.................................................................... 10,125 * Van Zandt Hawn...................................................................... 14,250 * Susan S. Hoyt....................................................................... 0 * All executive officers and directors as a group (nine persons)(3)................... 6,603,402 35.9%
- ------------------------ * less than 1% (1) Myron Kunin, Chairman of the Regis Board of Directors, owns a majority of the voting stock of Curtis Squire, Inc. and thereby has sole voting and investment power with respect to all shares of the Company owned by Curtis Squire, Inc. (2) Includes the following shares not currently outstanding but deemed beneficially owned because of the right to acquire them pursuant to options exercisable within 60 days as follows: 30,000 shares by each of Messrs. Kunin and Finkelstein, 10,200 shares by each of Messrs. Fox and Evangelist, 8,700 shares by Mr. Halfacre, 13,500 shares by Mr. Hawn; 10,125 shares by Mr. Bjelland; and 136,075 shares by all directors and executive officers as a group. (3) Includes shares held by Curtis Squire, Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 23 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 21 to 31 of the Registrant's 1996 Annual Report to Shareholders, are incorporated by reference in Item 8: Report of Independent Accountants Consolidated Balance Sheet as of June 30, 1995 and 1996 Consolidated Statement of Operations for the years ended June 30, 1994, 1995 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the years ended June 30, 1994, 1995 and 1996 Consolidated Statement of Cash Flows for the years ended June 30, 1994, 1995 and 1996 Notes to Consolidated Financial Statements (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, 1994, 1995 and 1996 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. 24 (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.) 10(a) Employment and Deferred Compensation Agreement, Dated October 13, 1988, between Regis Holding Corp. and Paul D. Finkelstein. (Filed as Exhibit 10(c) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 10(b) Employment and Deferred Compensation Agreement, dated October 26, 1988 between Regis Holding Corp. and Christopher A. Fox. (Filed as Exhibit 10(e) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 10(c) Employment and Deferred Compensation Agreement, dated October 13, 1988, between Regis Holding Corp. and Frank E. Evangelist. (Filed as Exhibit 10(f) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 10(d) 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.) 10(e) 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(f) 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(g) Modification of Note Agreement in 10(f) dated July 21, 1995. 10(h) 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). 25 10(i) Executive Stock Award Plan 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(j) Employment and Deferred Compensation Agreement, dated July 1, 1992, between the Company and William E. Halfacre. (Incorporated by reference to Exhibit 10(p) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(k) Senior 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(l) Modification to Senior Revolving Credit Agreement in 10(k) dated July 20, 1995. (Incorporated by reference to Exhibit 10(n) of the Company's report on 10-K dated September 27, 1995 for the year ended June 30, 1995.) 10(m) 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(n) Compensation contribution 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(o) Agreements for Sale and Purchase of Shares dated as of August 19, 1995, between the Company and the selling shareholders of Essanelle Limited and S&L du LAC, Inc. and the related product sale and purchase agreement. (Incorporated by reference to Exhibit 10(q) of the Company's report on 10-Q dated February 13, 1996, for the quarter ended December 31, 1995.) 10(p) 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(q) $10,000,000 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(r) Modification to Senior Revolving Credit agreement in 10(l) 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(s) Three-for-two stock split. (Incorporated by reference to Exhibit A to May 2, 1996, Form 8-K.) 26 10(t) 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(u) 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(v) $5,000,000 Note drawn from Private Shelf Agreement dated as of June 10, 1996, between the registrant and the Prudential Insurance Company of America. 10(w) Modification to Senior Revolving Credit agreement in 10(r) dated July 9, 1996. 11 Computation of earnings per share. 13 Select pages of the 1996 Annual Report to Shareholders. 23 Consent of Independent Accountants. (b) Reports on Form 8-K. -------------------- The following three 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 2, 1996 related to the Company's three-for-two stock split. Form 8-K dated May 9, 1996 related to the asset and purchase agreement between the Company and National Hair Care Centers LLC. Form 8-K dated July 15, 1996 related to the agreement and plan of merger between the Company and Supercuts, Inc. 27 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 16, 1996 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/ Rolf F. Bjelland - ----------------------------------- Rolf F. Bjelland, Director /s/ Van Zandt Hawn - ----------------------------------- Van Zandt Hawn, Director /s/ Susan Hoyt - ----------------------------------- Susan Hoyt, Director 28 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 31 of the 1996 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. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota August 20, 1996 29 REGIS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS as of June 30, 1994, 1995 and 1996 (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, 1994: Valuation Account, Receivable from MEI Salons $893 $893(1) -0- Valuation Account, Receivable from GEMM, Inc. -0- $2,850(2) $2,850 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 JUNE 30, 1996: Valuation Account, Receivable from GEMM, Inc. $4,500 $ 700(3) $3,800 Valuation Account, GEMM, Inc. Preferred Stock $500 $500
Notes: - ------ (1) Write off of accounts associated with MEI due to settlement of litigation with MEI during 1994. (2) Charge associated with advance to GEMM, Inc. (3) Payments received on previously written off balance. 30 EX-10.(V) 2 EXHIBIT 10 (V) 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 $5,000,000 (a) Name of Purchaser: The Prudential Insurance Company of America (b) Principal amount: $5,000,000 (c) Final maturity date: July 1, 2003 (d) Principal prepayment dates and amounts: None (e) Interest rate: 7.99% (f) Interest payment period: Quarterly (g) Payment and notice instructions: As set forth on attached Purchaser Schedule II. Closing Day: June 10, 1996 Dated: June 5, 1996 REGIS CORPORATION By: /s/ Myron Kunin ------------------------- Title: Chairman ---------------------- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ P. Scott von Fischer ------------------------- Vice President PURCHASER SCHEDULE SERIES B NOTES REGIS CORPORATION Aggregate Principal Amount of Notes to be Note Denom- Purchased ination(s) ----------- ----------- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA $5,000,000 $5,000,000 (1) All payments on account of Notes held by such purchaser shall be made by wire transfer of immediately available funds for credit to: Account No. 050-54-526 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York 10015 (ABA No.: 021-000-238) Each such wire transfer shall set forth the name of the Company, a reference to "7.99% Senior Notes due July 1, 2003, Security No. !INV5356!," and the due date and application (as among principal, interest and Yield-Maintenance Amount) of the payment being made. (2) Address for all notices relating to payments: The Prudential Insurance Company of America c/o Prudential Capital Group Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 Attention: Manager, Investment Operations Group Telephone: (201) 802-5260 Telecopy: (201) 802-8055 (3) Address for all other communications and notices: The Prudential Insurance Company of America c/o Prudential Capital Group Two Prudential Plaza 180 North Stetson Street, Suite 5600 Chicago, Illinois 60601-6716 Attention: Managing Director Telecopy: (312) 540-4222 (4) Recipient of telephonic prepayment notices: Manager, Investment Structure and Pricing Telephone: (201) 802-6660 Telecopy: (201) 802-9425 (5) Tax Identification No.: 22-1211670 EX-10.(W) 3 EXHIBIT 10 (W) FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of the 9th day of July, 1996, by and among 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 (collectively, the "Agreement"); WHEREAS, pursuant to Paragraph 3 of the Second Amendment to Credit Agreement dated July 20, 1995, Bank exercised the option to purchase all of Bank Hapoalim B.M.'s Commitment, Loan and Note, and the same has been sold, assigned and transferred to Bank; and WHEREAS, the parties hereto now desire to further amend the 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 Agreement, and the 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 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 Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. 2. AMENDMENT OF THE AGREEMENT. The Agreement is hereby amended as follows: (a) The definition of the term "MATURITY DATE" in PARAGRAPH 1.1 is hereby amended and restated to read as follows: "MATURITY DATE" means October 31, 1998. (b) The definition of the term "LIBOR MARGIN" in PARAGRAPH 1.1 is hereby amended and restated to read in its entirety as follows: "LIBOR MARGIN" means one and one-half percent (1.50%); provided, however, that as long as the ratio of Total Debt to the sum of Total Debt and Consolidated Net Worth does not exceed .35 to 1.00, LIBOR Margin shall mean one and 35/100 percent (1.35%). (c) The definition of the term "NOTES" in PARAGRAPH 1.1 is hereby deemed amended and restated to read in its entirety as follows: "NOTES" means that certain Substitute Revolving Note dated as of July 9, 1996 in the original maximum principal amount of $20,000,000 made payable by Borrower to the order of Bank, as such Notes may be amended, modified or supplemented from time to time, and together with any renewals thereof, exchanges or substitutions therefor. (d) Any and all references in PARAGRAPH 4A(14) to "one-half of one percent (.50%)" shall hereby be deemed amended to refer to and include "one- quarter of one percent (.25%)." (e) The Agreement is hereby deemed amended as the context shall require to effectuate the intent of the parties that (i) Bank be deemed the sole lending institution thereunder, (ii) the entire interest of Bank Hapoalim B.M. in the Commitment, Loan and Note has 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, and (iii) the concept of the "Agent" be deleted therefrom, provided Bank shall assume any obligations, duties or responsibilities of such Agent contained in the Agreement. 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 Agreement shall be deemed remade and affirmed as of the date hereof by Borrower, except that any and all references to the Agreement in such representations, warranties and covenants shall be deemed to include this Agreement. 2 4. NO BREACH OR DEFAULT. Borrower hereby represents and warrants that no Event of Default, breach or default has occurred under the Agreement. Borrower further represents and affirms that there are no defenses, setoffs, claims or counterclaims which could be asserted against Banks or Agent related to the Agreement. 5. EFFECTUATION. The amendments to the Agreement contemplated by this Amendment shall be deemed effective immediately upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. 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. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. ATTEST: REGIS CORPORATION By: /s/ F.E. Evangelist By: /s/ Paul D. Finkelstein --------------------------- ------------------------------ Its: Secretary Its: President LASALLE NATIONAL BANK By: /s/ ------------------------------ Its: Assistant Vice President 3 EX-11 4 EXHIBIT 11 PART II - OTHER INFORMATION Exhibit 11 COMPUTATION OF EARNINGS PER SHARE
Years Ended June 30 ---------------------------------------- 1994 1995 1996 ---- ---- ---- PRIMARY EARNINGS PER SHARE: Net income $4,053,000 $14,651,000 $19,124,000 ---------- ----------- ----------- ---------- ----------- ----------- Weighted average number of common shares outstanding during the period 15,383,000 16,716,000 17,467,000 Common equivalent shares 208,000 323,000 534,000 ---------- ----------- ----------- Total common and common equivalent shares outstanding 15,591,000 17,039,000 18,001,000 ---------- ----------- ----------- ---------- ----------- ----------- Net income per common and common equivalent share, primary $.26 $.86 $1.06 ---------- ----------- ----------- ---------- ----------- ----------- FULLY DILUTED EARNINGS PER SHARE: Net income $4,053,000 $14,651,000 $19,124,000 Net income adjustment - interest on convertible debt 125,000 121,000 54,000 ---------- ----------- ----------- Adjusted net income $4,178,000 $14,772,000 $19,178,000 ---------- ----------- ----------- ---------- ----------- ----------- Weighted average number of common shares outstanding during the period 15,383,000 16,716,000 17,467,000 Common equivalent shares assuming full dilution 783,000 932,000 824,000 ---------- ----------- ----------- Total common and common equivalent shares assuming full dilution 16,166,000 17,648,000 18,291,000 ---------- ----------- ----------- ---------- ----------- ----------- Net income per common and common equivalent share, fully diluted $.26 $.84 $1.05 ---------- ----------- ----------- ---------- ----------- -----------
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. In 1994 and 1995, convertible debt is the principal reason for common equivalent shares for the fully diluted earnings per share computation. In 1996, incentive stock options are the primary reason for common equivalent shares for the fully diluted earnings per share computation. 32 EX-13 5 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.
1992 1993 1994 1995 1996 Sales $ 305,989 $ 340,966 $ 376,971 $ 422,188 $ 499,442 Operating income 17,219 20,568 25,038 30,329 38,229 Net income (b) 4,417 3,858 4,053 14,651 19,124 Net income per share (b) .31 .27 .26 .84(a) 1.05(a) Total assets 127,933 143,152 165,999 166,323 221,174 Long-term obligations, including capital lease obligations 54,911 51,822 54,309 37,969 49,717
(a) Fully diluted. For periods prior to fiscal 1995, common equivalent shares were antidilutive. (b) To facilitate earnings comparisons, absent the impact of certain nonrecurring activity, the following information is provided. The Company incurred nonrecurring gains (charges) in 1993, 1994, 1995 and 1996 of ($5,265), ($10,000), $1,195 and $700, respectively, associated with resolution of its litigation with MEI Salons. Exclusive of these nonrecurring items, net income and net income per share, respectively, would have been $6,859 and $.49 in 1993, $10,053 and $.67 in 1994, $13,946 and $.80 in 1995 and $18,704 and $1.03 in 1996.
KEY RATIOS FOR THE YEARS ENDED JUNE 30, ---------------------------- 1995 1996 Cash flow per fully diluted share $ 1.74 $ 2.02 Gross margin percentage 42.8 % 43.1 % Product sales mix 26.4 % 28.1 % Debt to capitalization 39.5 % 36.9 % Operating income as percent of sales 7.3 % 7.7 %
ANNUAL RESULTS
FOR THE YEARS ENDED JUNE 30, ------------------------------------ 1994 1995 1996 Sales 100.0 % 100.0 % 100.0 % Operating expenses: Cost of sales 57.7 57.2 56.9 Rent 13.0 12.9 13.5 Selling, general and administrative 18.8 19.0 17.9 Depreciation and amortization 3.6 3.5 3.7 Other, including franchise revenues and expenses 0.2 0.1 0.3 ------------------------------------ 93.3 92.7 92.3 ------------------------------------ Operating income 6.7 7.3 7.7 Other income (expense): Interest (2.0) (1.5) (1.2) Nonrecurring items (2.6) 0.3 0.1 Other, net (0.2) (0.1) -- ------------------------------------ Income before income taxes 1.9 6.0 6.6 Income taxes (0.8) (2.5) (2.8) ------------------------------------ Net income 1.1 % 3.5 % 3.8 % ------------------------------------ ------------------------------------
(16) REGIS CORPORATION 1996 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SUMMARY Regis Corporation, based in Minneapolis, is the largest owner and operator of mall-based hair and retail product salons in the world. The Regis worldwide operations include 1,963 hairstyling salons at June 30, 1996 operating in 5 divisions: Regis Hairstylists, MasterCuts, Trade Secret, Wal-Mart and International. Worldwide operations include 72 franchised salons operating primarily in the Trade Secret division. The Company has more than 20,000 employees worldwide. During fiscal 1996, the Company's consolidated sales increased 18.3 percent to a record $499,442,000 and operating income grew 26.0 percent to $38,229,000. Fiscal 1996 net income was $19,124,000 or $1.05 per share on a fully diluted basis. Exclusive of nonrecurring gains, fiscal 1996 earnings were $1.03 per share, an increase of 28.8 percent, compared to $.80 per share in the prior year. RESULTS OF OPERATIONS The Annual Results table at left sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percentage of sales. All percentages were computed as a percentage of company-owned salon sales. For purposes of this analysis, franchise revenues have been netted against the related franchise expenses and included in the cost category "Other, including franchise revenues and expenses." Franchise revenues are not material to the Company, as they represent approximately 1 percent of total sales. YEAR-END COMPARISONS YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995: SALES SALES for fiscal 1996 were a record $499,442,000, representing an increase of $77,254,000, or 18.3 percent, over fiscal 1995. Nearly 60 percent of the increase is attributable to acquisitions occurring in fiscal 1996 and the full year impact of the fiscal 1995 acquisitions, with the remaining increase due to net salon openings, and increases in customers served and product sales. Regis Hairstylists, MasterCuts, Trade Secret and Wal-Mart salons in the United States and Canada (Domestic salons) accounted for $44,430,000 of the increase in total sales. The remainder of the sales increase, or $32,824,000, was related to the Company's salon operations in the United Kingdom, South Africa, Switzerland and Mexico (International salons) and was largely influenced by the Company's fiscal 1996 acquisitions in the United Kingdom. For fiscal 1996, sales from Regis Hairstylists were $267,576,000, an increase of 4.1 percent; sales from MasterCuts salons were $83,411,000, an increase of 18.3 percent; Trade Secret company-owned sales were $64,960,000, an increase of 39.8 percent; and International salon sales were $76,287,000, an increase of 75.5 percent. Same-store sales from Domestic salons open for more than 12 months increased an average of 3.4 percent, compared to a 4.2 percent increase the previous year. Same-store sales for the United Kingdom salons (U.K. salons), the primary component of International salons, increased 1.5 percent during the year. Same- store sales increases achieved during fiscal 1996 were primarily due to an increase in the number of customers served. A total of 30,317,000 customers were served in fiscal 1996, an increase of 11.7 percent, from 27,142,000 customers served in fiscal 1995. The Company utilizes an audio-visual-based training system in its salons. Management believes this training system provides its employees with improved customer service and technical skills and positively contributes to the increase in customers served. SERVICE SALES in fiscal 1996 were $355,880,000, an increase of $49,582,000, or 16.2 percent, over fiscal 1995. This increase was primarily due to acquisitions, net salon openings, and same-store sales growth. PRODUCT SALES in fiscal 1996 were $138,813,000, an increase of $27,501,000, or 24.7 percent, over fiscal 1995. The Trade Secret retail product salon operations represented $14,463,000 of this overall increase, reflecting acquisitions occurring in fiscal 1996 and the full year impact of the fiscal 1995 acquisitions, net salon openings, and same-store sales growth. Product sales for the Company's Regis Hairstylists, MasterCuts and Wal-Mart salons increased $8,658,000 and represented 20.0 percent of their fiscal 1996 service and product sales, up from 18.9 percent in fiscal 1995, reflecting increased customer awareness and further acceptance of national brand salon merchandise and sales training of Company employees. The balance of the increase relates to International salons and was largely caused by the fiscal 1996 salon acquisitions. COST OF SALES Cost of sales in fiscal 1996 was $281,552,000, compared to $238,810,000 in fiscal 1995. The resulting combined gross margin for fiscal 1996 improved 30 basis points to 43.1 percent, compared to 42.8 percent in fiscal 1995. This improvement is due to several factors, the most significant of which is an improved sales leverage on the salaries and commissions structure at Regis Hairstylists, which is the major component of cost of sales. Improved gross margin was also the result of an increase in the percentage of product sales in Regis Hairstylists and MasterCuts, which generally have a higher gross profit margin than service sales. Service margins improved to 41.8 percent in fiscal 1996, compared to 41.4 percent in fiscal 1995. Retail product margins declined slightly during fiscal 1996 to 46.4 percent, compared to 46.7 percent during fiscal 1995. RENT EXPENSE Rent expense in fiscal 1996 was $67,014,000, or 13.5 percent of sales, compared to $53,745,000, or 12.9 percent of sales, in fiscal 1995. The percentage increase is due to the fiscal 1996 U.K. acquisitions of the Essanelle department store salons and the Steiner salons. When compared to Domestic salon operations, the U.K. salon operations have higher rent expenses and lower selling and administrative expenses, because certain costs are absorbed by department stores and passed on as rent. Rent expense as a percentage of sales for the Company's Domestic salons was 11.9 percent in fiscal 1996, comparable to the 11.8 percent in fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative (SG&A) expense in fiscal 1996 was $88,721,000, or 17.9 percent of sales, compared to $79,398,000, or 19.0 percent of sales, in fiscal 1995. Such expenses include costs associated with salon operations (such as advertising, promotion, insurance, telephone and utilities), field supervision costs (payroll, REGIS CORPORATION 1996 (17) MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION related taxes and travel) and total home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). A portion of the improvement was attributable to the fiscal 1996 U.K. salon acquisitions which, for the reasons described under rent expense above, have a lower level of SG&A expense. The balance of the rate improvement was due to continued sales leveraging of fixed and semi-fixed costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense in fiscal 1996 was 3.7 percent of sales, compared to 3.5 percent in fiscal 1995. Amortization costs have increased due to the increased level of intangible assets associated with the Company's salon acquisition activity. Depreciation expense, the major component within this category, has remained relatively consistent as a percentage of sales. OPERATING INCOME Operating income in fiscal 1996 improved to $38,229,000, an increase of $7,900,000, or 26.0 percent, over fiscal 1995. Operating income as a percentage of sales increased to 7.7 percent in fiscal 1996, compared to 7.3 percent in fiscal 1995. This improvement is attributable primarily to improved gross margins and the leveraging of selling, general and administrative expense as a percentage of sales. INTEREST EXPENSE Interest expense for fiscal 1996 was $6,106,000, or 1.2 percent of sales, down from $6,465,000, or 1.5 percent of sales, in fiscal 1995. This improvement reflects sales leveraging, lower average debt balances and slightly lower average interest rates during fiscal 1996. NONRECURRING ITEMS During fiscal 1996, the Company received $700,000 of principal payments from Premier Salons under a note agreement. The Company had previously written off the related receivable, and accordingly, has recorded these recoveries as nonrecurring gains. There is no assurance that such recoveries will continue. Fiscal 1995 nonrecurring items are discussed in the comparison of 1995 and 1994 Results of Operations. INCOME TAXES The Company's effective income tax rate for fiscal 1996 was 42.0 percent of pretax income, which is the same as fiscal 1995. The fiscal 1996 effective rate reflects higher levels of pretax income which reduces the effective rate. The decrease was offset by the discontinuance of the targeted jobs tax credit. NET INCOME Net income for fiscal 1996 was $19,124,000, or $1.05 per share on a fully diluted basis, compared to net income for fiscal 1995 of $14,651,000, or $.84 per share. Exclusive of nonrecurring items, net income for fiscal 1996 would have been $1.03 per share on a fully diluted basis, compared to net income for fiscal 1995 of $.80 per share, an increase of 28.8 percent. YEAR-END COMPARISONS YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994: SALES SALES for fiscal 1995 were a record $422,188,000, representing an increase of $45,217,000, or 12.0 percent, over fiscal 1994. This increase was attributable to net salon openings, acquisitions, and increases in same-store sales. Domestic salons accounted for $38,611,000 of the total sales increase. The balance of the overall sales increase of $6,606,000 related to the Company's International salons. For fiscal 1995, sales from Regis Hairstylists were $257,161,000, an increase of 3.6 percent; sales from MasterCuts salons were $70,510,000, an increase of 18.6 percent; Trade Secret company-owned sales were $46,476,000, an increase of 51.8 percent; and International salon sales were $43,463,000, an increase of 17.9 percent. Same-store sales from Domestic salons open for more than 12 months increased an average of 4.2 percent, compared to a 3.4 percent increase the previous year. Same-store sales for the United Kingdom salons, the primary component of International salons, increased 11.2 percent during the year. Same-store sales increases achieved during fiscal 1995 were primarily due to an increase in the number of customers served. A total of 27,142,000 customers were served in fiscal 1995, an increase of 10.2 percent, from 24,634,000 customers served in fiscal 1994. SERVICE SALES in fiscal 1995 were $306,298,000, an increase of $19,765,000, or 6.9 percent, over fiscal 1994. This increase was primarily due to net salon openings and increases in customers served. PRODUCT SALES in fiscal 1995 were $111,312,000, an increase of $22,777,000, or 25.7 percent, over fiscal 1994. The Trade Secret retail product salon operations represented $14,555,000 of this overall increase, reflecting the full year impact of the Trade Secret acquisition, additional acquisitions in the current year and net salon openings. Product sales for the Company's Regis Hairstylists and MasterCuts salons were $61,878,000, and represented 18.9 percent of their fiscal 1995 sales, up from 18.0 percent in fiscal 1994, reflecting increased customer awareness and further acceptance of national brand salon merchandise and sales training of Company associates. COST OF SALES Cost of sales in fiscal 1995 was $238,810,000, compared to $216,266,000 in fiscal 1994. The resulting combined gross margin for fiscal 1995 improved to 42.8 percent, compared to 42.3 percent in fiscal 1994. This improvement is due to several factors, the most significant of which is an increase in the percentage of product sales in Regis Hairstylists and MasterCuts, which generally have a higher gross profit margin than service sales. Salary and commissions paid to hairstylists, the major component of cost of sales, also favorably improved in fiscal 1995 due to the increase in sales from MasterCuts salons which have lower payroll costs than Regis Hairstylists salons. Service margins of 41.4 percent in fiscal 1995 are equal to the previous year. Retail product margins improved during fiscal 1995 to 46.7 percent, compared to 45.5 percent during fiscal 1994. The lower margins in fiscal 1994 were due to the Trade Secret acquisition, as Trade Secret salons experienced higher payroll costs due to new store openings (18) REGIS CORPORATION 1996 and training. In addition, product costs in the Trade Secret division were higher during the transition period immediately following the fiscal 1994 acquisition and did not reflect the full benefit of the Company's purchasing power. RENT EXPENSE Rent expense in fiscal 1995 was $53,745,000, or 12.9 percent of sales, compared to $48,622,000, or 13.0 percent of sales, in fiscal 1994. The improvement is due primarily to strong same-store sales performance in fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense in fiscal 1995 was $79,398,000, or 19.0 percent of sales, compared to $70,555,000, or 18.8 percent of sales, in fiscal 1994. The slight increase is primarily due to an increase in worker's compensation insurance and certain discretionary payments made to employee benefit plans in response to the Company's strong operating performance in fiscal 1995. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense in fiscal 1995 was 3.5 percent of sales, compared to 3.6 percent in fiscal 1994. This improvement relates primarily to strong same-store sales increases. Depreciation expense, the major component within this category, is principally associated with the Company's salon equipment and leasehold improvements. OPERATING INCOME Operating income in fiscal 1995 improved to $30,329,000, an increase of $5,291,000 over fiscal 1994. Operating income as a percentage of sales increased 60 basis points to 7.3 percent in fiscal 1995 compared to 6.7 percent in fiscal 1994. This improvement is attributable primarily to increased same-store sales in fiscal 1995 and improved gross margins. Operating income improvement in the U.K. salons was offset by a decrease in the South African salons operating income. INTEREST EXPENSE Interest expense for fiscal 1995 was $6,465,000, or 1.5 percent of sales, down from $7,432,000, or 2.0 percent of sales, in fiscal 1994. This improvement reflects the effect of principal reductions in senior notes and lower average balances on the Company's revolving line of credit facility throughout fiscal 1995. NONRECURRING ITEMS During fiscal 1995, the Company received a $2,500,000 cash settlement associated with its directors' and officers' insurance claim. Certain other negative events also occurred in fiscal 1995 with respect to the Company's investment in and advances to Premier Salons, which caused the Company to re-evaluate and write off the net carrying value ($2,305,000) of all remaining net assets associated with the fiscal 1994 MEI litigation settlement. In addition, during fiscal 1995, the Company issued 93,220 shares on a pre-split basis of its common stock to the bankruptcy creditors of MEI as final resolution of the stock guarantee. This was fewer shares than the Company originally estimated when the transaction was recorded the previous year, which resulted in a $500,000 pretax gain. As a result of these transactions, the Company recorded a $695,000 pretax gain during the first and second quarters of the year ended June 30, 1995 and adjusted the amounts previously recorded by decreasing shareholders' equity by $500,000. During the third and fourth quarters of fiscal 1995, the Company received $500,000 of principal payments from Premier Salons under the note agreement. The Company had previously written off the related receivable, and accordingly, has recorded these recoveries as nonrecurring gains. There is no assurance that such recoveries will continue. INCOME TAXES The Company's effective income tax rate for fiscal 1995 was 42.0 percent of pretax income, compared to 42.7 percent in fiscal 1994. The decrease in the effective rate is attributable to the Company's ability to utilize South African losses to offset U.K. taxable income during fiscal 1995. NET INCOME Net income for fiscal 1995 improved to $14,651,000, or $.84 per share on a fully diluted basis, compared to net income for fiscal 1994 of $4,053,000, or $.26 per share. Exclusive of the effect of nonrecurring items, net income for fiscal 1995 would have been $.80 per share on a fully diluted basis, compared to net income for fiscal 1994 of $.63 per share, an increase of 27.0 percent. EFFECTS OF INFLATION The Company has generally been protected against inflationary increases, as payroll expense and related benefits (the Company's major expense components) for Regis Hairstylists and International salon associates are primarily variable costs of sales. The Company compensates the great majority of its hairstylists with a percentage commission based on the sales they generate, thereby enabling salon payroll expense, as a percentage of sales, to remain relatively constant. The Company does not believe inflation has had a significant impact on the results of operations for the MasterCuts or Trade Secret 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 (before capital expenditures and debt principal repayments) in fiscal 1996 increased to $36,918,000, compared to $30,651,000 during the same period the previous year. The increase between the two periods was primarily due to improved operating performance in fiscal 1996. During fiscal 1996, the Company had worldwide capital expenditures of $39,607,000, of which $13,517,000 related to acquisitions. The Company constructed 116 new salons (31 Regis Hairstylists, 33 MasterCuts, 40 Trade Secret, 3 Wal-Mart and 9 International) and acquired 383 salons. The Company also completed 65 major remodeling projects, including 10 conversions of existing salons to another salon concept. All capital expenditures during fiscal 1996 were funded by the Company's operations and borrowings under its revolving credit facilities. The Company anticipates its worldwide salon development program for fiscal 1997 will include a minimum of 150 new salons and 60 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $28,000,000 in fiscal 1997. REGIS CORPORATION 1996 (19) MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In September 1995, the Company completed the acquisitions of Essanelle Limited (Essanelle) and S&L du Lac. The $6,300,000 aggregate purchase price was paid to the selling shareholder in cash at closing. Additionally, the Company made a $992,000 cash payment at closing to Essanelle to facilitate the payoff of existing debt of Essanelle. The purchase price was funded through a combination of proceeds from the issuance of the Company's common stock and long-term debt issued by banks. In January 1996, the Company completed the acquisitions of Steiner Salons Limited and Steiner Hairdressing Limited. The $2,800,000 aggregate purchase price was paid to the selling shareholder in cash at closing. The purchase price was funded with borrowings under the Company's revolving credit facility and long-term debt from banks. In June 1996, the Company completed the acquisition of National Hair Care Centers, LLC. Of the $12,257,000 aggregate purchase price, $10,364,000 was paid in cash at closing and the balance was settled by the Company's issuance of a note for $1,797,000 and a $96,000 noncompete agreement. The cash portion of the purchase price was funded with proceeds from the sale of 200,000 shares of common stock and a $5,000,000 senior term note. In February 1996, the Company issued a $10,000,000 senior note, bearing interest at 6.94 percent, due in July 2005. Proceeds associated with this borrowing were utilized to refinance the $10,000,000 principal payment on the senior notes paid in June 1996. In June 1996, the Company issued a $5,000,000 senior note, bearing interest at 7.99 percent, due in July 2003. Proceeds associated with this borrowing were utilized to partially fund the acquisition of National Hair Care Centers, LLC. The agreement under which the notes were issued contains financial and restrictive covenants similar to those contained in the Company's existing senior notes. In connection with the U.K. acquisitions, the Company's U.K. subsidiary entered into various term notes, denominated in pounds sterling, primarily with U.K. banks which have interest rates ranging from 4 percent fixed to the LIBOR rate plus 2.5 percent and are subject to annual mandatory principal repayments until July 2000. These U.K. notes contain covenants applicable to the U.K. subsidiary, including limitations on incurring debt, investments, mergers or consolidations and transactions with affiliates. In addition, the U.K. subsidiary must maintain certain interest coverage and debt-to-equity ratios. During fiscal 1996, the Company repaid the outstanding principal amount of $2,187,500 of subordinated debt associated with the financing of the Beauty Express acquisition. In addition, the Company's subordinated convertible debenture of $2,812,500 was also converted to 375,000 shares, on a pre-split basis, of the Company's common stock. The Company has renewed its existing revolving credit facility and cash management program. Under terms of this renewal, the revolving credit facility allows for borrowings of up to $20,000,000, bears interest at the prime rate, and matures in October 1998. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate plus a LIBOR margin up to 1.50 percent. The revolving credit facility requires a quarterly commitment fee of 1/4 percent per annum on the unused portion of the facility. The renewed credit agreement contains certain financial and restrictive covenants similar to those in the Company's senior debt agreement. As of June 30, 1996, borrowings of $9,100,000 were outstanding under this credit facility. At June 30, 1996, the Company had outstanding $24,000,000 of 11.52 percent fixed-rate senior notes after repayments of $10,000,000 and $9,000,000 of the notes during fiscal years 1996 and 1995, respectively. The notes require annual mandatory repayments of $10,000,000 in June 1997 and $14,000,000 in June 1998. The notes contain certain financial and restrictive covenants (see Note 5 of Notes to the Consolidated Financial Statements) and carry a substantial penalty based on yield maintenance in the event of voluntary prepayment. Subsequent to June 30, 1996, the Company signed a merger agreement with Supercuts, Inc., which is expected to be accounted for as a pooling-of- interests. Supercuts is a national operator and franchisor of over 1,150 affordable hair care salons. (See Note 3 of Notes to the Consolidated Financial Statements for additional details.) Transactions by the Company's International salons are invoiced and paid in local currency. Accordingly, the Company is subject to risks associated with fluctuations in currency exchange rates. Management believes that cash generated from operations and amounts available under its revolving credit facility will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. The Company paid dividends of $.07 per share during fiscal 1996. The Company did not pay dividends during fiscal 1995 due to debt covenant restrictions. On August 13, 1996, the Board of Directors of the Company approved the payment of a $.02 per share quarterly dividend payable to shareholders of record on August 23, 1996. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", was issued in March 1995 and is effective for fiscal years beginning after December 15, 1995. The Company believes implementation of this accounting standard in fiscal 1997 will not have a material impact on earnings. (20) REGIS CORPORATION 1996 CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30 ------------------------- ASSETS 1995 1996 Current assets: Cash and cash equivalents $ 1,244 $ 5,471 Accounts receivable 3,931 6,991 Inventories 23,406 30,600 Deferred income taxes 2,204 1,806 Other current assets 4,271 4,501 ------------------------- Total current assets 35,056 49,369 Property and equipment, net 73,939 95,089 Goodwill 51,421 70,732 Other assets 5,907 5,984 ------------------------- Total assets $ 166,323 $ 221,174 ------------------------- ------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 11,990 $ 13,668 Accounts payable 9,163 13,875 Accrued expenses 23,985 29,392 ------------------------- Total current liabilities 45,138 56,935 Long-term debt 37,969 49,717 Other noncurrent liabilities 6,789 6,308 Commitments (Note 6) Shareholders' equity: Capital stock, $.05 par value; authorized, 25,000,000 shares; issued and outstanding, 16,932,066 and 18,061,292 common shares at June 30, 1995 and 1996, respectively 565 903 Additional paid-in capital 65,460 79,378 Retained earnings 10,402 27,933 ------------------------- Total shareholders' equity 76,427 108,214 ------------------------- Total liabilities and shareholders' equity $ 166,323 $ 221,174 ------------------------- -------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. REGIS CORPORATION 1996 (21) CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30 ---------------------------------------- 1994 1995 1996 Sales: Company-owned operations: Service $ 286,533 $ 306,298 $ 355,880 Product 88,535 111,312 138,813 ---------------------------------------- 375,068 417,610 494,693 Franchise revenues 1,903 4,578 4,749 ---------------------------------------- 376,971 422,188 499,442 ---------------------------------------- Operating expenses: Cost of sales: Service 167,990 179,501 207,201 Product 48,276 59,309 74,351 Rent 48,622 53,745 67,014 Selling, general and administrative 70,555 79,398 88,721 Depreciation and amortization 13,583 14,799 18,380 Other, primarily franchise expenses 2,907 5,107 5,546 ---------------------------------------- 351,933 391,859 461,213 ---------------------------------------- Operating income 25,038 30,329 38,229 Other income (expense): Interest (7,432) (6,465) (6,106) Nonrecurring items (10,000) 1,195 700 Other, net (537) 206 155 ---------------------------------------- Income before income taxes 7,069 25,265 32,978 Income taxes (3,016) (10,614) (13,854) ---------------------------------------- Net income $ 4,053 $ 14,651 $ 19,124 ---------------------------------------- ---------------------------------------- Net income per share: Primary $ .26 $ .86 $ 1.06 ---------------------------------------- ---------------------------------------- Fully diluted $ .26 $ .84 $ 1.05 ---------------------------------------- ---------------------------------------- Common and common equivalent shares outstanding: Primary 15,591 17,039 18,001 ---------------------------------------- ---------------------------------------- Fully diluted 16,166 17,648 18,291 ---------------------------------------- ----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. (22) REGIS CORPORATION 1996 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RETAINED COMMON STOCK ADDITIONAL EARNINGS --------------------------- PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) TOTAL Balance, June 30, 1993 9,380,000 $ 469 $ 46,103 $ (7,544) $ 39,028 Proceeds from public offering of common stock, net of offering costs of $1,087 1,050,000 53 8,310 8,363 Shares issued in connection with resolution of MEI Salons litigation 500,000 25 7,600 7,625 Shares issued in connection with salon acquisition 70,000 3 924 927 Proceeds from exercise of stock options 646 8 8 Foreign currency translation adjustments (348) (348) Net income 4,053 4,053 ---------------------------------------------------------------------- Balance, June 30, 1994 11,000,646 550 62,945 (3,839) 59,656 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 Proceeds from exercise of stock options 9,736 1 134 135 Foreign currency translation adjustments (410) (410) Net income 14,651 14,651 ---------------------------------------------------------------------- Balance, June 30, 1995 11,288,044 565 65,460 10,402 76,427 Stock split effected in the form of a stock dividend 5,950,514 298 (298) 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 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 19,124 19,124 ---------------------------------------------------------------------- Balance, June 30, 1996 18,061,292 $ 903 $ 79,378 $ 27,933 $ 108,214 ---------------------------------------------------------------------- ----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. REGIS CORPORATION 1996 (23) CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30 ---------------------------------------- 1994 1995 1996 Cash flows from operating activities: Net income $ 4,053 $ 14,651 $ 19,124 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,307 15,279 18,812 Deferred income taxes (868) (979) 192 MEI Salons nonrecurring charge 10,000 1,805 Changes in assets and liabilities, exclusive of investing and financing activities (2,307) (1,795) (2,190) Other 726 1,690 980 ---------------------------------------- Net cash provided by operating activities 25,911 30,651 36,918 ---------------------------------------- Cash flows from investing activities: Capital expenditures (15,786) (15,274) (26,090) Purchases of salon assets, net of cash acquired and certain obligations assumed (10,802) (2,546) (27,669) Advance to Premier Salons (5,850) Payments from Premier Salons 1,093 103 ---------------------------------------- Net cash used in investing activities (31,345) (17,717) (53,759) ---------------------------------------- Cash flows from financing activities: Borrowings on line of credit 130,114 76,966 117,558 Payments on line of credit (124,061) (82,564) (114,258) Proceeds from issuance of long-term debt 23,284 Repayment of long-term debt (7,904) (9,573) (15,104) Dividends paid (1,235) Proceeds from issuance of common stock 8,363 135 10,853 ---------------------------------------- Net cash provided by (used in) financing activities 6,512 (15,036) 21,098 ---------------------------------------- Effect of exchange rate changes on cash 87 (109) (30) ---------------------------------------- Increase (decrease) in cash and cash equivalents 1,165 (2,211) 4,227 Cash and cash equivalents: Beginning of year 2,290 3,455 1,244 ---------------------------------------- End of year $ 3,455 $ 1,244 $ 5,471 ---------------------------------------- ---------------------------------------- Changes in assets and liabilities, exclusive of investing and financing activities: Accounts receivable $ (207) $ (889) $ (1,433) Inventories (1,934) (1,689) (3,775) Other current assets (1,904) 581 158 Accounts payable 2,110 (781) 3,248 Accrued expenses (372) 983 (388) ---------------------------------------- $ (2,307) $ (1,795) $ (2,190) ---------------------------------------- ----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. (24) REGIS CORPORATION 1996 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS DESCRIPTION: Regis Corporation (the Company) owns and operates 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. During 1994, through the acquisition of Trade Secret, the Company entered the franchising business (Note 3). At June 30, 1996, approximately 33 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 7 percent is owned by management and the Company's benefit plans. CONSOLIDATION: The financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. In consolidation, all material intercompany accounts and transactions are eliminated. FOREIGN CURRENCY TRANSLATION: Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Income statement accounts are translated at the average rates of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in the cumulative translation account in shareholders' equity. FRANCHISE REVENUES AND EXPENSES: Franchise revenues include royalties and initial franchise fees from franchisees, and product sales made by the Company to franchisees. Royalties are recognized as revenue in the month in which franchisee services are rendered or products are sold by franchisees. The Company recognizes revenues from initial franchise fees at the time franchisee retail product salons are opened. Product sales by the Company to franchisees are recorded as revenue at the time product is shipped to franchisee locations. Franchise expenses include all direct expenses, such as the cost of product sold to franchisees by the Company, salaries, marketing costs, and an allocation of general corporate overhead and occupancy expenses. CASH EQUIVALENTS: The Company considers its investments in all highly liquid debt instruments with original maturities of 3 months or less at date of purchase to be cash equivalents. The carrying amount approximates fair value because of the short maturity of those instruments. INVENTORIES: Inventories consist principally of hair care products held either for use in salon services or for sale. Inventories are stated at the lower of cost or market with cost determined on the first-in, first-out method. PROPERTY AND EQUIPMENT: Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed on the straight-line method over estimated useful asset lives (shorter of asset life or lease term for leasehold improvements). Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gain or loss included in income. Fully depreciated assets remain in the accounts until retired from service. 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. The Company periodically evaluates the recoverability of goodwill based on analyses of estimated future undiscounted cash flows. CONSULTING AND NONCOMPETE ASSETS: Consulting and noncompete assets recorded in connection with the Company's various acquisitions are amortized on a straight-line basis over the life of the agreement generally from 3 to 10 years. PREOPENING COSTS: Advertising, sales promotion and expenditures associated with the opening of new salon locations are charged to operations as incurred. INCOME TAXES: Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. REGIS CORPORATION 1996 (25) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NET INCOME PER SHARE: Primary and fully diluted net income per common and common equivalent share has been computed by dividing net income by the weighted average number of common and common equivalent shares outstanding for each period presented using the modified treasury stock method. Common equivalent shares relate primarily to incentive stock options granted to employees. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. 2. OTHER FINANCIAL STATEMENT DATA: The following provides additional information concerning selected balance sheet accounts at June 30, 1995 and 1996:
(Dollars in thousands) 1995 1996 Property and equipment: Land $ 700 $ 700 Building and improvements 4,116 4,361 Equipment, furniture and lease- hold improvements 142,799 176,980 ------------------------- 147,615 182,041 Less accumulated depreciation and amortization (73,676) (86,952) ------------------------- $ 73,939 $ 95,089 ------------------------- ------------------------- Goodwill $ 58,883 $ 80,634 Less accumulated amortization (7,462) (9,902) ------------------------- $ 51,421 $ 70,732 ------------------------- ------------------------- Accrued expenses: Payroll and payroll related costs $ 12,964 $ 16,647 Taxes 3,754 5,577 Insurance 2,421 2,339 Other 4,846 4,829 ------------------------- $ 23,985 $ 29,392 ------------------------- -------------------------
The following provides supplemental disclosures of cash flow activity for the years ended June 30, 1994, 1995 and 1996:
(DOLLARS IN THOUSANDS) 1994 1995 1996 Cash paid during the year for: Interest $7,416 $6,454 $5,791 Income taxes 4,925 9,298 14,760
Noncash investing and financing activities included the following: Year ended June 30, 1994: - - In connection with the acquisition of Trade Secret, the Company entered into a note agreement whereby $3,947,000 of the purchase price will be paid over a seven-year period (Note 3). - - In connection with resolution of the MEI Salons litigation, the Company issued 500,000 shares, on a pre-split basis, of its common stock valued at $7,625,000 (Note 4). Year ended June 30, 1995: - - In connection with 1995 acquisitions, the Company issued 184,442 shares, on a pre-split basis, of its common stock valued at $2,895,000 (Note 3). Year ended June 30, 1996: - - In connection with the conversion of the Company's $2,812,500 of convertible debt, 375,000 shares, on a pre-split basis, of common stock were issued (Note 5). - - In connection with the acquisitions of Essanelle Limited, S&L DuLac, Inc. and the Steiner companies, the Company assumed $1,575,000 of term indebtedness (Note 3). 3. MERGERS AND ACQUISITIONS: NATIONAL HAIR CARE CENTERS: Effective June 1, 1996, the Company acquired 154 salons from National Hair Care Centers, L.L.C. The salons are located within Wal-Mart stores and supercenters throughout the United States and perform hairstyling services and offer hair care products. Of the $ 12,257,000 purchase price, $10,364,000 was paid in cash at closing and the balance was settled by the Company's issuance of a note for $1,797,000 and a $96,000 noncompete agreement. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $6,900,000 and is being amortized on a straight-line basis over 17 years. (26) REGIS CORPORATION 1996 U.K. ACQUISITIONS: In September 1995, the Company acquired the outstanding shares of common stock of Essanelle Limited and S&L DuLac, Inc. which operate 87 hairstyling salons in major department stores throughout the U.K. (79 salons) and Switzerland (8 salons). The $6,300,000 aggregate purchase price was paid in cash at closing. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $6,600,000 and is being amortized on a straight-line basis over 15 years. In January 1996, the Company acquired 91 salons from Steiner Salons Limited and Steiner Hairdressing Limited operating throughout the U.K. The $2,824,000 aggregate purchase price was paid in cash at closing. The cost in excess of net tangible and identifiable intangible assets acquired is approximately $2,600,000 and is being amortized on a straight-line basis over 15 years. TRADE SECRET: Effective December 1, 1993, the Company acquired 24 company-owned Trade Secret retail product salons and the franchisor's rights for 64 franchised Trade Secret salons. Trade Secret salons, which are located in enclosed mall shopping centers throughout the United States, offer hair care and beauty products and perform hairstyling services. Of the $11,983,000 aggregate purchase price, $8,036,000 was paid in cash at closing and the balance was settled by the Company's issuance of a note for $3,947,000. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $11,500,000 and is being amortized on a straight-line basis over 40 years. OTHER: During 1995 and 1996, the Company made numerous additional acquisitions, aggregating 35 and 51 hairstyling and retail product salons, respectively. The cost in excess of net tangible and identifiable intangible assets acquired was approximately $4,700,000 and $5,900,000 in 1995 and 1996, respectively, and is being amortized on a straight-line basis over periods of up to 17 years. Of the $7,225,000 aggregate purchase price associated with these acquisitions in 1995, $2,928,000 was paid in cash at closing, $1,403,000 is payable during the next 5 years and 184,442 shares, on a pre-split basis, of common stock were issued by the Company. Of the $9,234,000 aggregate purchase price associated with these acquisitions in 1996, $7,430,000 was paid in cash at closing and $1,804,000 is payable during the next 3 years. The following represents the unaudited pro forma results of operations of the Company as if the previously described 1996 acquisitions and related common stock activity had occurred at the beginning of fiscal 1996, as well as at the beginning of the immediately preceding fiscal year:
(UNAUDITED, DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1996 Sales $ 514,946 $ 551,945 Income before income taxes 26,426 32,570 Net income 15,599 18,890 Net income per share $ .86 $ 1.02
These pro forma results may not be indicative of results that actually would have occurred had the acquisitions taken place at the beginning of the periods presented or of results which may occur in the future. All of the aforementioned acquisitions have been recorded using the purchase method of accounting. Accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. PENDING MERGER: Subsequent to June 30, 1996, the Company signed a merger agreement with Supercuts, Inc. in a stock-for-stock merger transaction. Supercuts is a national operator and franchisor of over 1,150 affordable hair care salons. The agreement calls for each Supercuts shareholder to receive 0.40 shares of the Company's common stock in exchange for each Supercuts, Inc. common share, or approximately 4,600,000 shares of the Company's common stock on a fully diluted basis. The transaction is intended to be accounted for as a pooling-of-interests and is subject to regulatory and shareholder approval. 4. RESOLUTION OF LITIGATION: During fiscal 1994, the Company resolved its litigation with a former joint venture partner, MEI Diversified Inc. (MEI), resulting in both parties terminating all claims against each other and causing the Company to record a $10,000,000 pretax charge. The primary components of the $10,000,000 charge are $7,625,000 for the estimated value of the incremental shares required to be issued to the bankruptcy creditors of MEI and $2,850,000 for the valuation allowance associated with the GEMM receivable as described below. As part of the resolution, the Company issued 500,000 shares, on a pre-split basis, of its common stock to the bankruptcy creditors of MEI and guaranteed that the value of the stock issued would reach $8,750,000, or $17.50 per share, within 12 months. The guarantee required the Company to issue up to an additional 200,000 shares, on a pre-split basis, of its common stock to satisfy any deficiency in value. In fiscal 1994, as part of the litigation resolution, the Company REGIS CORPORATION 1996 (27) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS advanced $5,850,000 to GEMM, Inc. (Premier Salons) to finance that company's acquisition of salons from the bankruptcy creditors of MEI. In return, the Company received 1,000,000 shares of $6 par value per share preferred stock of Premier Salons and a note receivable of $5,850,000, bearing interest at an annual rate of prime plus 1/2 percent. Of the note receivable balance, $850,000 was paid in March 1994 and the remaining balance of $5,000,000 is due in 60 monthly installments, commencing in January 1995. The note is partially collateralized by a department store license agreement and underlying operating assets. During fiscal 1995, the Company received a $2,500,000 cash settlement associated with its directors and officers insurance claim. Certain other negative events also occurred in fiscal 1995 with respect to the Company's investment in and advances to Premier Salons which caused the Company to re-evaluate and write off the net carrying value ($2,305,000) of all remaining net assets associated with the fiscal 1994 MEI litigation settlement. In addition, during fiscal 1995, the Company issued 93,220 shares, on a pre-split basis, of its common stock to the bankruptcy creditors of MEI as final resolution of the stock guarantee. This was fewer shares than the Company originally estimated when the transaction was recorded the previous year which resulted in a $500,000 pretax gain. As a result of these transactions, the Company recorded a $695,000 pretax gain during the first and second quarters of the year ended June 30, 1995 and adjusted the amounts previously recorded by decreasing shareholders' equity by $500,000. During fiscal 1996 and the third and fourth quarters of fiscal 1995, the Company received $700,000 and $500,000, respectively, of principal payments from Premier Salons under the note agreement. The Company had previously written off the related receivable, and accordingly, has recorded these recoveries as nonrecurring gains. There is no assurance that such recoveries will continue. 5. FINANCING ARRANGEMENTS: The Company's long-term debt consists of the following at June 30, 1995 and 1996: (Dollars in thousands) 1995 1996 Senior term notes $34,000 $39,000 Revolving credit facility 5,800 9,100 U.K. term notes 9,265 Subordinated notes, Trade Secret and other acquisitions (Note 3) 8,682 5,701 Other notes 1,477 319 ----------------- 49,959 63,385 Less current portion (11,990) (13,668) ----------------- Long-term portion $37,969 $49,717 ----------------- ----------------- At June 30, 1996, the senior term notes consist of 3 note agreements: a $24,000,000 note, bearing interest at a fixed rate of 11.52 percent which is subject to annual mandatory repayments of principal until final maturity in June 1998; a $10,000,000 note, bearing interest at a fixed 6.94 percent, which is due in July 2005; and a $5,000,000 note, bearing interest at a fixed 7.99 percent, which is due in June 2003. The Company renewed its revolving credit facility in June 1996. Under terms of this renewal, the revolving credit facility allows for borrowings, based on continuing compliance with the terms and conditions of the credit facility, of up to $20,000,000, bears interest at the prime rate, and matures in October 1998. The prime rate at June 30, 1996 was 8.25 percent. The facility also allows for borrowings bearing interest at an adjusted LIBOR rate plus a LIBOR margin up to 1.50 percent. The revolving credit facility requires a quarterly commitment fee at the rate of 1/4 percent per year on the unused portion of the facility. The senior term notes and the revolving credit facility agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, and transactions with affiliates. In addition, the Company must maintain specified interest coverage and debt-to-equity ratios. The Company's subordinated debt consists primarily of a subordinated promissory note for $2,782,000 associated with the Trade Secret acquisition, which bears interest at 8 percent per year and requires monthly payments over 7 years. In connection with the U.K. acquisitions (Note 3), the Company's U.K. subsidiary has various term notes, denominated in pounds sterling, primarily with U.K. banks (U.K. notes) bearing interest at rates varying from 4 percent to the LIBOR rate plus 2.5 percent and are subject to annual mandatory principal repayments until final maturity in July 2000. The LIBOR rate at June 30, 1996 was 5.875 percent. The U.K. notes contain covenants applicable to the U.K. subsidiary, including limitations on incurring debt, investments, merger or consolidation and transactions with affiliates. In addition, the U.K. subsidiary must maintain certain interest coverage and debt-to-equity ratios. The fair value of the senior term and subordinated notes based upon a discounted cash flow analysis using the Company's current incremental borrowing rate approximates their carrying values at June 30, 1996. Aggregate maturities of long-term debt are as follows: Fiscal Year (Dollars in thousands) 1997 $13,668 1998 17,775 1999 12,897 2000 2,869 2001 940 Thereafter 15,236 ------- $63,385 ------- ------- (28) REGIS CORPORATION 1996 6. COMMITMENTS: OPERATING LEASES: The Company is committed under long-term operating leases for the rental of most of its salon locations. The terms of the leases range from 1 to 20 years, with many leases renewable for an additional 5- to 10-year term at the option of the Company, and certain leases include escalation provisions. The Company is generally required to pay additional rent based on a percentage of sales and, in most cases, real estate taxes and other expenses. Rent expense for the Company's international department store salons is based primarily on a percentage of sales. Total rent expense includes the following: (DOLLARS IN THOUSANDS) 1994 1995 1996 Minimum rent $29,096 $32,736 $37,386 Percentage rent based on sales 9,377 9,634 16,078 Real estate taxes and other expenses 10,149 11,375 13,550 -------------------------------------- $48,622 $53,745 $67,014 -------------------------------------- -------------------------------------- FUTURE MINIMUM LEASE PAYMENTS: As of June 30, 1996, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancellable operating leases with remaining terms of greater than 1 year are as follows: Fiscal Year (Dollars in thousands) 1997 $ 45,354 1998 42,028 1999 36,041 2000 29,827 2001 24,386 Thereafter 85,094 -------- Total minimum lease payments $262,730 -------- -------- SALON DEVELOPMENT PROGRAM: As a part of its salon development program, the Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations. 7. INCOME TAXES: The provision for income taxes consists of: (Dollars in thousands) 1994 1995 1996 Current: Federal $2,439 $9,541 $10,901 State 1,097 2,046 2,746 International 348 6 15 Deferred: United States (568) (979) (271) International (300) 463 --------------------------- $3,016 $10,614 $13,854 --------------------------- --------------------------- The components of the net deferred tax asset and liability are as follows: (DOLLARS IN THOUSANDS) 1995 1996 Net current deferred tax asset: Nonrecurring items $ 552 $ 362 Insurance 713 632 Compensation 581 812 Other, net 358 ------------------ $ 2,204 $ 1,806 ------------------ ------------------ Net noncurrent deferred tax asset (liability): Depreciation and amortization $(3,811) $(3,081) Deferred rent 1,263 1,365 Nonrecurring items 2,126 1,359 Compensation 725 851 Other, net (412) (116) ------------------ $ (109) $ 378 ------------------ ------------------ Management believes no valuation allowance for the net deferred tax asset is required due to its recoverability through reduction of future taxable income. REGIS CORPORATION 1996 (29) 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) 1994 1995 1996 Income (loss) before income taxes: United States $7,305 $25,294 $32,310 International (236) (29) 668 -------------------------- $7,069 $25,265 $32,978 -------------------------- -------------------------- Computed income tax expense at federal statutory rate $2,403 $ 8,844 $11,542 Increase (decrease) in income taxes resulting from: State income taxes, net of federal income tax benefit 563 1,130 1,621 Net effect of targeted jobs tax credit (459) (486) Other, principally nondeductible acquisition costs 509 1,126 691 -------------------------- Income tax expense $3,016 $10,614 $13,854 -------------------------- -------------------------- 8. EMPLOYEE BENEFIT PLANS: EMPLOYEE STOCK OWNERSHIP PLAN: The Company has a qualified employee stock ownership plan (ESOP) covering substantially all field supervisors, warehouse and corporate office employees. Contributions to the ESOP are at the discretion of the Company. PROFIT SHARING PLAN: The Company has a qualified profit sharing plan (PSP) covering the same employees as its ESOP. Contributions to the PSP are at the discretion of the Company. EXECUTIVE STOCK AWARD PLAN: The Company has a nonqualified executive stock award plan (ESAP) covering those employees not eligible to participate under the qualified ESOP and PSP. Contributions to the ESAP are at the discretion of the Company. STOCK PURCHASE PLAN: The Company has an employee stock purchase plan (SPP) available to substantially all employees. Under terms of the plan, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15 percent of the purchase price of the stock to be purchased, not to exceed $1,200,000 in the aggregate. Company contributions to the aforementioned plans, which are charged to earnings in the period contributed, included the following: (Dollars in thousands) 1994 1995 1996 ESOP $344 $428 $616 PSP 119 ESAP 131 197 231 SPP 97 115 150 EMPLOYEE STOCK OPTION PLAN: The Company's Stock Option Plan (the Plan), as amended, provides for granting both incentive stock options and nonqualified stock options. A total of 1,650,000 shares of common stock may be granted under the Plan to employees of the Company for a term not to exceed 10 years from the date of grant. The Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Incentive stock options are granted at not less than fair market value on the date of grant. The Board of Directors determines the Plan participants and establishes the terms and conditions of each option. Stock options and shares reserved for grant are as follows: Options Outstanding Shares -------------------------- Reserved Price for Grant Shares Per Share Balance, June 30, 1993 393,000 207,000 $ 4.00 - 8.67 Additional shares reserved 600,000 Granted (733,500) 733,500 7.50 - 8.67 Cancelled 22,200 (22,200) 4.00 - 8.67 Exercised (1,800) 4.00 --------------------------------------- Balance, June 30, 1994 281,700 916,500 4.00 - 8.67 Additional shares reserved 450,000 Granted (166,500) 166,500 12.37 Cancelled 21,900 (21,900) 4.00 - 8.67 Exercised (19,482) 4.00 - 8.67 --------------------------------------- Balance, June 30, 1995 587,100 1,041,618 4.00 - 12.37 Granted (216,000) 216,000 17.67 Cancelled 30,000 (30,000) 4.00 - 12.37 Exercised (107,625) 4.00 - 12.37 --------------------------------------- Balance, June 30, 1996 401,100 1,119,993 $ 4.00 - 17.67 --------------------------------------- --------------------------------------- Options exercisable at June 30, 1996 277,293 $ 4.00 - 12.37 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, a new standard of accounting and reporting for stock-based compensation plans. The Company is not required to adopt the new standard until fiscal 1997. The Company will continue to measure compensation cost, if any, for its stock option plans using the intrinsic value based method of accounting it has (30) REGIS CORPORATION 1996 historically used. Therefore, the new standard will have no effect on the Company's operating results. The Company's financial statement disclosures will be expanded in fiscal 1997, as required, to include pro forma disclosures as if the fair value based method of accounting had been followed. BOARD OF DIRECTORS STOCK OPTION PLAN: The Company also has a stock option plan for its outside directors. Options to purchase 63,000 shares of common stock at prices ranging from $4.00 to $17.67 per share have been granted through 1996. All options vest over a 4-year period. At June 30, 1996, there were 23,625 options exercisable at prices ranging from $4.00 to $12.37 per share. During fiscal 1996, 5,625 options were exercised. OTHER: The Company has established several unfunded deferred compensation plans which cover certain management and executive personnel. The amounts charged to earnings for these plans were $106,000 in 1994, $128,000 in 1995 and $379,000 in 1996. The Company has a survivor benefit plan for the Chairman of the Board's spouse, payable upon his death, at a rate of $300,000 annually, adjusted for inflation. The Company has the ability and intent to fund future payments through certain life insurance policies on the Chairman of the Board. 9. GEOGRAPHIC BUSINESS OPERATIONS: The Company owns and operates hairstyling and hair care salons throughout the United States and in several other countries, principally the U.K. A summary of the Company's operations by geographic area is presented below. All intercompany revenues and expenses have been eliminated. (Dollars in thousands) 1994 1995 1996 Sales: United States $332,110 $370,251 $413,734 International 44,861 51,937 85,708 ------------------------------ $376,971 $422,188 $499,442 ------------------------------ ------------------------------ Operating income: United States $ 24,474 $ 29,228 $ 35,614 International 564 1,101 2,615 ------------------------------ $ 25,038 $ 30,329 $ 38,229 ------------------------------ ------------------------------ Total assets: United States $158,547 $159,570 $193,174 International 7,452 6,753 28,000 ------------------------------ $165,999 $166,323 $221,174 ------------------------------ ------------------------------ REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Regis Corporation: We have audited the accompanying consolidated balance sheet of Regis Corporation as of June 30, 1995 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended June 30, 1994, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Regis Corporation as of June 30, 1995 and 1996, and the consolidated results of its operations and its cash flows for the years ended June 30, 1994, 1995 and 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand, L.L.P. Coopers & Lybrand, L.L.P. Minneapolis, Minnesota August 20, 1996 REGIS CORPORATION 1996 (31) QUARTERLY FINANCIAL DATA (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER ENDED ----------------------------------------------- YEAR SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ENDED 1996 Sales $111,720 $126,604 $126,199 $134,919 $499,442 Operating income 8,442 10,353 8,841 10,593 38,229 Net income 4,177 5,175 4,409 5,363 19,124 Primary net income per share (a) .24 .29 .24 .29 1.06 Fully diluted net income per share (a) .23 .29 .24 .29 1.05 Dividends declared per share .017 .017 .017 .02 .07 1995 Sales $102,369 $108,366 $102,657 $108,796 $422,188 Operating income 7,078 8,007 6,657 8,587 30,329 Net income 3,126 4,040 3,216 4,269 14,651 Primary net income per share (b) .19 .24 .19 .25 .86(c) Fully diluted net income per share (b) .18 .23 .18 .24 .84(c) (a)For the quarters ended September 30, 1995, December 31, 1995, March 31, 1996 and June 30, 1996 and the full year 1996, exclusive of nonrecurring gains, primary net income per share would have been $.23, $.29, $.23, $.28 and $1.04, respectively. Exclusive of nonrecurring gains, fully diluted net income per share for the aforementioned periods would have been $.23, $.28, $.23, $.28 and $1.03, respectively. (b)For the quarters ended September 30, 1994, December 31, 1994, March 31, 1995 and June 30, 1995 and the full year 1995, exclusive of nonrecurring gains, primary net income per share would have been $.18, $.22, $.18, $.24 and $.82, respectively. Exclusive of nonrecurring gains, fully diluted net income per share for the aforementioned periods would have been $.17, $.21, $.17, $.23 and $.80, respectively. (c)The summation of quarterly net income per share does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis. EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Regis Corporation on Form S-3 (File No. 33-82094, No. 33-86276, No. 33-89150, No. 33-92244, No. 33-96224 and No. 33-80337) and Form S-8 (File No. 33-44867, No. 33-89882) of our report dated August 20, 1996, on our audits of the consolidated financial statements of Regis Corporation as of June 30, 1996 and 1995, and for the years ended June 30, 1996, 1995 and 1994, which report is incorporated by reference in its Annual Report on Form 10-K for the year ended June 30, 1996. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota September 16, 1996 EX-27 7 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULL YEAR FISCAL 1996 BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 5,471 0 6,991 0 30,600 49,369 182,041 86,952 221,174 56,935 0 0 0 80,281 27,933 221,174 138,813 499,442 74,351 348,566 23,926 0 6,106 32,978 13,854 19,124 0 0 0 19,124 1.06 1.05
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