-----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, DuDpeFb7yBwsq0mOR5YurQSmo5AGshijvcNHc9gvLa0HAffhzDbeeb8XRDpjsm1W PyDWl0aXEV41YqsGHXkmkw== 0001047469-98-019457.txt : 19980513 0001047469-98-019457.hdr.sgml : 19980513 ACCESSION NUMBER: 0001047469-98-019457 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 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-Q SEC ACT: SEC FILE NUMBER: 000-11230 FILM NUMBER: 98616738 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-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 --------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------------ ------------- For Quarter Ended March 31, 1998 Commission file number 011230 ---------------- --------- Regis Corporation - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Minnesota 41-0749934 ------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7201 Metro Boulevard, Edina, Minnesota 55439 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612)947-7777 ------------------------------------------------------ (Registrant's telephone number, including area code) 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 ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 1, 1998: Common Stock, $.05 par value 23,800,062 - ---------------------------- ----------------------------- Class Number of Shares 1 REGIS CORPORATION INDEX
PART I. FINANCIAL INFORMATION Page Nos. --------- Item 1. Consolidated Financial Statements: Balance Sheet as of March 31, 1998 and June 30, 1997 3 Statement of Operations for the three months ended March 31, 1998 and 1997 4 Statement of Operations for the nine months ended March 31, 1998 and 1997 5 Statement of Cash Flows for the nine months ended March 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7-8 Review Report of Independent Accountants 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-20 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 21-22 Signature 23
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REGIS CORPORATION CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND JUNE 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) MARCH 31, 1998 JUNE 30, 1997 -------------- ------------- ASSETS Current assets: Cash $ 8,270 $ 8,935 Accounts receivable, net 9,941 12,388 Inventories 44,937 42,596 Deferred income taxes 5,957 6,335 Other current assets 9,001 6,819 -------- -------- Total current assets 78,106 77,073 Property and equipment, net 170,071 139,573 Goodwill 114,938 99,818 Other assets 7,602 15,071 -------- -------- Total assets $370,717 $331,535 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 45,025 $ 30,722 Accounts payable 18,761 24,111 Accrued expenses 40,646 37,291 -------- -------- Total current liabilities 104,432 92,124 Long-term debt 78,382 82,740 Other noncurrent liabilities 8,251 7,557 Shareholders' equity: Common stock, $.05 par value; issued and outstanding, 23,798,562 and 23,317,924 shares at March 31, 1998 and June 30, 1997, respectively 1,190 1,166 Additional paid-in capital 132,104 120,483 Retained earnings 46,358 27,465 -------- -------- Total shareholders' equity 179,652 149,114 -------- -------- Total liabilities and shareholders' equity $370,717 $331,535 -------- -------- -------- --------
See accompanying notes to unaudited Consolidated Financial Statements. 3 REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 ---- ---- Revenues: Company-owned salons: Service $135,855 $121,995 Product 55,118 46,823 -------- -------- 190,973 168,818 Franchise income 6,300 6,670 -------- -------- 197,273 175,488 Operating expenses: Company-owned: Cost of service 78,120 71,727 Cost of product 29,950 26,285 Direct salon 17,303 15,664 Rent 26,914 23,804 Depreciation 6,435 5,425 -------- -------- 158,722 142,905 Selling, general and administrative 21,832 20,064 Depreciation and amortization 2,454 2,179 Other 376 567 -------- -------- Total operating expenses 183,384 165,715 -------- -------- Operating income 13,889 9,773 Other income (expense): Interest (2,615) (2,506) Other, net 324 327 -------- -------- Income before income taxes 11,598 7,594 Income taxes 4,829 3,343 -------- -------- Net income $ 6,769 $ 4,251 -------- -------- -------- -------- Net income per share: Basic $ .29 $ .19 -------- -------- -------- -------- Diluted $ .28 $ .18 -------- -------- -------- --------
See accompanying notes to unaudited Consolidated Financial Statements. 4 REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 ---- ---- Revenues: Company-owned salons: Service $399,965 $364,490 Product 165,270 138,066 -------- -------- 565,235 502,556 Franchise income 19,671 19,995 -------- -------- 584,906 522,551 Operating expenses: Company-owned: Cost of service 229,297 212,551 Cost of product 90,372 76,377 Direct salon 52,440 48,801 Rent 78,657 70,383 Depreciation 18,571 16,375 -------- -------- 469,337 424,487 Selling, general and administrative 63,877 57,637 Depreciation and amortization 6,722 5,955 Nonrecurring charges 1,979 18,731 Other 1,166 1,574 -------- -------- Total operating expenses 543,081 508,384 -------- -------- Operating income 41,825 14,167 Other income (expense): Interest (7,502) (7,480) Other, net 788 1,072 -------- -------- Income before income taxes 35,111 7,759 Income taxes 14,589 7,847 -------- -------- Net income (loss) $ 20,522 $ (88) -------- -------- -------- -------- Net income (loss) per share: Basic $ .88 $ .00 -------- -------- -------- -------- Diluted $ .86 $ .00 -------- -------- -------- --------
See accompanying notes to unaudited Consolidated Financial Statements. 5 REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997 (DOLLARS IN THOUSANDS)
1998 1997 ---- ---- Cash flows from operating activities: Net income (loss) $ 20,522 $ (88) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 25,563 22,575 Deferred income taxes 8,783 (4,131) Nonrecurring charges 1,979 18,731 Changes in assets and liabilities, exclusive of investing and financing activities (3,892) (22,345) Other 119 (319) -------- -------- Net cash provided by operating activities 53,074 14,423 -------- -------- Cash flows from investing activities: Capital expenditures (41,975) (28,852) Purchases of salon assets, net of cash acquired and certain obligations assumed (23,694) (8,822) -------- -------- Net cash used in investing activities (65,669) (37,674) -------- -------- Cash flows from financing activities: Borrowings on revolving credit facilities 102,124 138,846 Payments on revolving credit facilities (110,560) (150,500) Proceeds from issuance of long-term debt 17,000 37,000 Repayment of long-term debt (6,671) (7,661) Increase in negative book cash balances 254 Dividends paid (1,401) (1,265) Proceeds from issuance of common stock 11,244 738 -------- -------- Net cash provided by financing activities 11,990 17,158 -------- -------- Effect of exchange rate changes on cash (60) 1 -------- -------- Decrease in cash (665) (6,092) Cash: Beginning of year 8,935 7,558 -------- -------- End of year $ 8,270 $ 1,466 -------- -------- -------- -------- Changes in assets and liabilities, exclusive of investing and financing activities: Accounts receivable $ 2,193 $(1,157) Inventories (1,905) (7,909) Other current assets (2,295) 164 Other assets (1,620) (318) Accounts payable (4,953) 789 Accrued expenses 3,681 (13,937) Other noncurrent liabilities 1,007 23 -------- -------- $ (3,892) $(22,345) -------- -------- -------- -------
See accompanying notes to unaudited Consolidated Financial Statements. 6 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS: The unaudited consolidated statement of operations for the three and nine months ended March 31, 1998 and 1997, reflects, in the opinion of management, all adjustments (which, with the exception of the matters discussed in Note 3 herein, include only normal recurring adjustments) necessary to fairly present the results of operations for the interim periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The unaudited interim consolidated financial statements should be read in conjunction with Regis Corporation's (the Company) consolidated financial statements which are incorporated by reference in the Company's Annual Report on Form 10-K for the year ended June 30, 1997. Coopers & Lybrand L.L.P., the Company's independent accountants, have performed limited reviews of the financial data included herein. Their report on such reviews accompanies this filing. COST OF PRODUCT SALES. On an interim basis, product costs are determined by applying an estimated gross profit margin. 2. FINANCING ARRANGEMENTS: During the second quarter of fiscal 1998, the Company entered into an additional credit facility which allows, at the discretion of the lender, for borrowings of up to $35,000,000. Interest rates and maturity schedules are negotiated between the Company and the lender and may vary by individual note issuances under the facility. In December 1997, the Company borrowed $7,000,000 under a 7.72 percent senior term note with interest due semi-annually and $1,400,000 in principal payments due on December 31 in the years 2000 through 2004. The proceeds were used to acquire a controlling interest in additional administrative office facilities. During the first nine months of fiscal 1998, the Company borrowed $8,000,000 under an existing credit facility to fund construction of a new distribution center. In May 1998, the Company entered into an additional revolving credit facility which allows for borrowings of up to $20,000,000, bears interest at prime or libor plus 1.0 percent and matures in May of 1999. 3. NONRECURRING CHARGES: In the first quarter of fiscal 1998, the Company recorded a special charge of $1,979,000 associated with the divestiture of the business and assets of Anasazi Exclusive Salon Products, LLC (Anasazi), a professional salon products manufacturing firm the Company acquired in fiscal 1997. Anasazi was sold to Curtis Acquisition LLC, which is controlled by two members of the Company's Board of Directors, one of whom is the Chairman. In the second quarter of fiscal 1997, the Company recorded $18,731,000 of merger and restructuring costs associated with the acquisition of Supercuts. 7 4. NET INCOME PER SHARE: During the second quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share (EPS). Basic EPS is calculated as net income divided by weighted average common shares outstanding. The Company's only dilutive securities are issuable under the Company's stock option plan, as amended. Diluted EPS is calculated as net income divided by weighted average common shares outstanding, increased to include assumed conversion of dilutive securities. Dilutive securities are excluded from the calculation of weighted average common and common equivalent shares outstanding in all loss periods, as their inclusion would be anti-dilutive. The following provides information related to the calculation of the Company's basic and diluted EPS:
FOR THE PERIODS ENDED MARCH 31, ------------------------------ THREE MONTHS NINE MONTHS ------------ ----------- 1998 1997 1998 1997 ---- ---- ---- ---- Weighted average common shares outstanding 23,429,759 22,601,573 23,373,154 22,590,064 Common equivalent shares assuming conversion of dilutive securities 605,400 474,182 605,041 ----- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding 24,035,159 23,075,755 23,978,195 22,590,064 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
5. STOCK PURCHASE PLAN: The Company has an employee stock purchase plan (SPP), available to substantially all employees. Under the terms of the plan, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15 percent of the purchase price of the stock to be purchased on the open market, not to exceed an aggregate contribution of $2,200,000. In February 1998, in order to encourage increased employee ownership of the Company's stock, the maximum contribution to the plan was increased from $1,200,000 to $2,200,000. 8 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Regis Corporation: We have reviewed the accompanying consolidated balance sheet of Regis Corporation as of March 31, 1998, the related consolidated statements of operations for the three and nine months ended March 31, 1998 and 1997 and cash flows for the nine months ended March 31, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of June 30, 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the year then ended (not fully presented herein); and in our report dated August 22, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota April 22, 1998 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Regis Corporation, based in Minneapolis, is the world's largest owner, operator, franchisor and consolidator of hair and retail product salons with 3,508 salons (813 franchised) in 50 states, Puerto Rico and Canada, and seven international countries at March 31, 1998. Regis operates and franchises salons in six divisions: Regis Hairstylists, Strip Center Salons (primarily Supercuts), MasterCuts, Trade Secret, Wal-Mart/SmartStyle Family Hair Salons and International, and has 27,000 employees worldwide. Third quarter revenues grew to a record $197,273,000, including franchise income of $6,300,000, a 12.4 percent increase over fiscal 1997 third quarter total revenues of $175,488,000. In the third quarter of fiscal 1998, operating income grew 42.1 percent to $13,889,000, and net income grew to a record $6,769,000 or $.28 per share, a diluted earnings per share increase of 55.6 percent. Revenues for the nine months ended March 31, 1998, grew to a record $584,906,000, including franchise income of $19,671,000, an 11.9 percent increase over total revenues of $522,551,000 in the comparable fiscal 1997 period. Excluding nonrecurring items in both periods, nine month fiscal 1998 operating income grew 33.2 percent to $43,804,000, and net income grew to $21,634,000 or $.90 per share, a diluted earnings per share increase of 40.6 percent. Fiscal 1998 and 1997 results reflect certain previously reported nonrecurring items comprised primarily of merger and restructuring costs associated with the acquisition of Supercuts and disposition of Anasazi. As a result, the Company reported third quarter fiscal 1998 net income of $6,769,000, or $.28 per share, compared to net income of $4,251,000, or $.18 per share, in the third quarter the previous year. For the first nine months of fiscal 1998, the Company reported net income of $20,522,000, or $.86 per share, compared to a net loss of $88,000 in the first nine months of fiscal 1997. 10 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percentage of total revenues, except as noted.
THREE MONTHS NINE MONTHS ------------ ----------- 1998 1997 1998 1997 ---- ---- ---- ---- Company-owned service revenues (1) 71.1% 72.3% 70.8% 72.5% Company-owned product revenues (1) 28.9 27.7 29.2 27.5 Franchise income 3.2 3.8 3.4 3.8 Company-owned operations: Profit margins on service (2) 42.5 41.2 42.7 41.7 Profit margins on product (3) 45.7 43.9 45.3 44.7 Direct salon (1) 9.1 9.3 9.3 9.7 Rent (1) 14.1 14.1 13.9 14.0 Depreciation (1) 3.4 3.2 3.3 3.3 Direct salon contribution (1) 16.9 15.3 17.0 15.5 Selling, general and administrative 11.1 11.4 10.9 11.0 Depreciation and amortization 1.2 1.2 1.1 1.1 Nonrecurring charges - - 0.3 3.6 Operating income 7.0 5.6 7.2 2.7 Income before income taxes 5.9 4.3 6.0 1.5 Net income 3.4 2.4 3.5 0.0 Operating income, excluding 7.0 5.6 7.5 6.3 nonrecurring items Net income, excluding nonrecurring items 3.4 2.3 3.7 2.8
(1) Computed as a percent of company-owned revenues (2) Computed as a percent of company-owned service revenues (3) Computed as a percent of company-owned product revenues 11 THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO THREE MONTHS ENDED MARCH 31, 1997: REVENUES REVENUES for the third quarter of fiscal 1998 grew to a record $197,273,000, an increase of $21,785,000 or 12.4 percent, over the same period in fiscal 1997. System-wide sales, inclusive of non-consolidated sales generated from franchise salons, increased 11.2 percent in the third quarter of fiscal 1998 to $261,620,000 from $235,184,000 in the same period in fiscal 1997. These increases in company-owned and system-wide sales are the result of same-store sales increases from existing salons, as well as the total number of salons added to the system through net salon openings and acquisitions. For the third quarters of fiscal 1998 and 1997, respectively, revenues by division are as follows:
1998 1997 ---- ---- Regis Hairstylists $73,809,000 $ 68,350,000 Strip Centers (primarily Supercuts) 27,778,000 22,663,000 MasterCuts 26,789,000 23,529,000 Trade Secret 28,718,000 23,564,000 Wal-Mart/SmartStyle 10,586,000 7,618,000 International 23,293,000 23,094,000 Franchise Income 6,300,000 6,670,000 ------------ ------------ $197,273,000 $175,488,000 ------------ ------------ ------------ ------------
Same-store sales for domestic company-owned salons increased 5.0 percent in the third quarter of fiscal 1998, compared to 3.6 percent in the same period in fiscal 1997. System-wide same-store sales for the third quarter of fiscal 1998 increased 5.5 percent, compared to 2.9 percent in the same period a year ago. Same-store sales increases achieved are primarily due to an increase in the number of customers served. A total of 17,858,000 customers were served system-wide during the third quarter of fiscal 1998. The Company utilizes an audiovisual-based training system in its company-owned salons. Management believes this training system provides its employees with improved customer service and technical skills, and positively contributes to the increase in customers served. SERVICE REVENUES in the third quarter of fiscal 1998 were $135,855,000, an increase of $13,860,000, or 11.4 percent, over the same period in fiscal 1997. This increase is a result of strong service same-store sales growth of 5.3 percent, salon acquisitions during the past twelve months and accelerated new salon construction. 12 PRODUCT REVENUES in the third quarter of fiscal 1998 grew to $55,118,000, an increase of $8,295,000, or 17.7 percent, over the same period of fiscal 1997. This increase continues a trend of escalating product revenues due to strong product same-store sales growth of 4.7 percent, a reflection of the continuous focus on product awareness, training and acceptance of national label merchandise and the addition of 39 new Trade Secret salons between periods. Product revenues as a percent of total company-owned revenues increased to 28.9 percent of revenues compared to 27.7 percent of revenues in the same period of fiscal 1997. FRANCHISE INCOME, including royalties, initial franchise fees and product sales made by the Company to franchisees, was $6,300,000 in the third quarter of fiscal 1998, compared to $6,670,000 in the same period of fiscal 1997. The slight decrease in franchise income is a result of a reduction in royalty rates charged to the franchisees. The Company believes that the reduction in royalty rates will not have an adverse affect on earnings due to a corresponding decrease in the level of service provided to the franchisees. COST OF REVENUES The aggregate cost of service and product revenues in the third quarter of fiscal 1998 were $108,070,000, compared to $98,012,000, in the same period in fiscal 1997. The resulting combined gross margin percentage for the third quarter of fiscal 1998 improved 150 basis points to 43.4 percent of company-owned revenues compared to 41.9 percent of company-owned revenues in the same period in fiscal 1997. As discussed below, this improvement was primarily due to strong same-store sales and the increased sales leverage in the Company's fixed cost payroll divisions. SERVICE MARGINS improved to 42.5 percent in the third quarter of fiscal 1998, compared to 41.2 percent in the same period of fiscal 1997. This 130 basis point improvement is primarily due to continued sales leverage of Supercuts' fixed cost payrolls, and strong service same-store sales growth of 5.3 percent. PRODUCT MARGINS were 45.7 percent in the third quarter of fiscal 1998, compared to 43.9 percent in the same period a year ago. This 180 basis point improvement was driven by lower product costs in Supercuts salons and stronger same-store sales in the Trade Secret division leveraged against fixed payroll costs. DIRECT SALON This expense category includes direct costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. Direct salon expense of $17,303,000 improved as a percent of company-owned revenues to 9.1 percent in the third quarter of fiscal 1998 from 9.3 percent in the same period of fiscal 1997. This improvement resulted from an increased ability to leverage these costs against increased revenues, which were a result of stronger same-store sales and a maturing salon base, as well as the closures of under-performing stores, primarily Supercuts salons. 13 RENT Rent expense in the third quarter of fiscal 1998 was $26,914,000 or 14.1 percent of company-owned revenues, compared to $23,804,000, or 14.1 percent of company-owned revenues, in the same period of fiscal 1997. DEPRECIATION - SALON LEVEL Depreciation expense at the salon level was 3.4 percent of company-owned revenues, an increase of 20 basis points over the third quarter in fiscal 1997, due to fixed costs growing at a slightly faster rate than sales due to the accelerated growth of newly constructed and acquired locations over the past two years. DIRECT SALON CONTRIBUTION For the reasons described above, direct salon contribution, representing company-owned salon revenues less associated operating expenses, improved in the third quarter of fiscal 1998 to $32,251,000, or 16.9 percent of company-owned revenues, compared to $25,913,000, or 15.3 percent of company-owned revenues, in the same period of fiscal 1997. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses were $21,832,000, or 11.1 percent of total revenues in the third quarter of fiscal 1998, compared to $20,064,000, or 11.4 percent of total revenues, in the same period of fiscal 1997. Expenses in this category include field supervision (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). This 30 basis point improvement is a result of leveraging fixed costs against increased sales volumes during the quarter. The dollar increase is primarily driven by the Supercuts acquisition which resulted in higher warehouse expenses due to volume increases and additional corporate professional fees, which were more than offset by cost reductions associated with the amalgamation of the Supercuts administrative office functions. All direct and indirect expenses associated with franchise operations, other than the cost of products sold to franchisees, are included in SG&A expense. The cost of products sold and associated franchise activities remained relatively consistent in the third quarters of fiscal 1998 and 1997. DEPRECIATION AND AMORTIZATION - CORPORATE Depreciation and amortization remained consistent at 1.2 percent of total revenues in both periods. 14 OPERATING INCOME Operating income in the third quarter of fiscal 1998 improved to $13,889,000, or 7.0 percent of total revenues, an increase of $4,116,000, or 42.1 percent over the prior year operating income of $9,773,000, or 5.6 percent of total revenues. This improvement is attributable primarily to improved gross margins and the leveraging of direct salon and SG&A expenses. INTEREST Interest expense in the third quarter of fiscal 1998 was $2,615,000, or 1.3 percent of total revenues, compared to $2,506,000 or 1.4 percent of total revenues in the same period in fiscal 1997. Interest expense has remained relatively consistent between the two periods because, although debt levels have increased, average interest rates were lower during the current period. INCOME TAXES The Company's effective income tax rate for fiscal 1998 is estimated to be approximately 41.0 percent, compared to 66.6 percent in fiscal 1997. The Company's effective tax rate for fiscal 1997 was negatively affected by certain nondeductible merger and transaction costs (nonrecurring charges) associated with the Supercuts merger. Additionally, as part of the tax provision for the nine months ended March 31, 1997, the Company recorded a $1,500,000 charge associated with the resolution of Supercuts income tax matters related to years prior to 1997, resulting from the completion of an Internal Revenue Service examination. Exclusive of the effect of nonrecurring charges and the $1,500,000 resolution charge, the Company's effective tax rate for fiscal 1997 was 43.1 percent. NET INCOME Net income in the third quarter of fiscal 1998 was $6,769,000 or $.28 per diluted share, compared to a net income of $4,251,000 or $.18 per diluted share in the same period in fiscal 1997. Exclusive of nonrecurring items in the prior year, net income in the third quarter of fiscal 1998 increased to $6,769,000 or $.28 per diluted share, compared to net income in the same period in fiscal 1997 of $4,113,000 or $.18 per diluted share, an earnings per share increase of 55.6 percent. 15 NINE MONTHS ENDED MARCH 31, 1998, COMPARED TO NINE MONTHS ENDED MARCH 31, 1997: REVENUES REVENUES for the first nine months of fiscal 1998 were a record $584,906,000, an increase of $62,355,000, or 11.9 percent, over the same period of fiscal 1997. System-wide sales, inclusive of non-consolidated sales generated from franchise salons, increased 11.1 percent in the first nine months of fiscal 1998 to $777,889,000 from $700,152,000 in the same period of fiscal 1997. These increases in company-owned and system-wide sales are the result of same-store sales increases from existing salons, as well as the total number of salons added to the system through net salon openings and acquisitions. For the first nine months of fiscal 1998 and 1997, respectively, revenues by division are as follows:
1998 1997 ---- ---- Regis Hairstylists $219,591,000 $204,675,000 Strip Centers (primarily Supercuts) 77,360,000 70,366,000 MasterCuts 79,979,000 70,112,000 Trade Secret 86,126,000 66,382,000 Wal-Mart/SmartStyle 28,245,000 22,592,000 International 73,934,000 68,429,000 Franchise Income 19,671,000 19,995,000 ------------ ------------ $584,906,000 $552,551,000 ------------ ------------ ------------ ------------
Same-store sales for domestic company-owned salons increased 5.7 percent in the first nine months of fiscal 1998, compared to 2.9 percent in the same period in fiscal 1997. System-wide same-store sales for the first nine months of fiscal 1998 increased 5.3 percent, compared to 2.4 percent in the same period of fiscal 1997. Same-store sales increases achieved are primarily due to an increase in the number of customers served. A total of 53,438,000 customers system-wide were served during the first nine months of fiscal 1998. The Company utilizes an audiovisual-based training system in its company-owned salons. Management believes this training system provides its employees with improved customer service and technical skills, and positively contributes to the increase in customers served. SERVICE REVENUES in the first nine months of fiscal 1998 were $399,965,000, an increase of $35,475,000, or 9.7 percent, over the same period of fiscal 1997. This increase is a result of strong service same-store sales growth of 5.5 percent, salon acquisitions during the past twelve months and accelerated new salon construction. 16 PRODUCT REVENUES in the first nine months of fiscal 1998 were $165,270,000 an increase of $27,204,000, or 19.7 percent, over the same period of fiscal 1997. This increase continues a trend of escalating product revenues due to strong product same-store sales growth of 6.3 percent, a reflection of the continuous focus on product awareness, training and acceptance of national label merchandise, and the addition of 39 new Trade Secret salons between periods. Product revenues as a percent of total company-owned revenues increased to 29.2 percent of revenues compared to 27.5 percent of revenues in the same period of fiscal 1997. FRANCHISE INCOME, including royalties, initial franchise fees and product sales made by the Company to franchisees, was $19,671,000 in the third quarter of fiscal 1998, compared to $19,995,000 in the same period of fiscal 1997. The slight decrease in franchise income is a result of a reduction in royalty rates charged to the franchisees. The Company believes that the reduction in royalty rates will not have an adverse affect on earnings due to a corresponding decrease in the level of service provided to the franchisees. COST OF REVENUES The aggregate cost of service and product revenues in the first nine months of fiscal 1998 were $319,669,000, compared to $288,928,000 in the same period of fiscal 1997. The resulting combined gross margin percentage for the first nine months of fiscal 1998 improved 90 basis points to 43.4 percent of company-owned revenues compared to 42.5 percent of company-owned revenues in the same period in fiscal 1997. As discussed below, this improvement was primarily due to strong same-store sales and the increased sales leverage in the Company's fixed cost payroll divisions. SERVICE MARGINS improved to 42.7 percent in the first nine months of fiscal 1998, compared to 41.7 percent in the same period of fiscal 1997. This 100 basis point improvement is primarily due to continued sales leverage of Supercuts' fixed cost payrolls, and strong service same-store sales growth of 5.5 percent. PRODUCT MARGINS improved to 45.3 percent in the first nine months of fiscal 1998, compared to 44.7 percent in the same period a year ago. This 60 basis point improvement was driven by lower product costs in Supercuts salons, offset by increased discounting costs primarily in the Regis Hairstylists division as the result of the Company's 75th anniversary sale that took place in October 1997. DIRECT SALON This expense category includes direct costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. Direct salon expense of $52,440,000 improved as a percent of company-owned revenues to 9.3 percent in the first nine months of fiscal 1998 from 9.7 percent in the same period of fiscal 1997. This improvement resulted from an increased ability to leverage these costs against increased revenues, which were a result of stronger same-store sales and a maturing salon base, as well as the closures of under-performing stores, primarily Supercuts salons. 17 RENT Rent expense in the first nine months of fiscal 1998 was $78,657,000, or 13.9 percent of company-owned revenues, compared to $70,383,000 or 14.0 percent of company-owned revenues in the same period in fiscal 1997. The 10 basis point improvement is primarily due to leveraging this fixed cost against increasing revenues. DEPRECIATION - SALON LEVEL Depreciation expense at the salon level was 3.3 percent of company-owned revenues, consistent with that of the first nine months in fiscal 1997. DIRECT SALON CONTRIBUTION For the reasons described above, direct salon contribution, representing company-owned salon revenues less associated operating expenses, improved in the first nine months of fiscal 1998 to $95,898,000, or 17.0 percent of company-owned revenues, compared to $78,069,000, or 15.5 percent of company-owned revenues, in the same period of fiscal 1997. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses were $63,877,000, or 10.9 percent of total revenues in the first nine months of fiscal 1998, compared to $57,637,000, or 11.0 percent of total revenues, in the same period in fiscal 1997. Expenses in this category include field supervision (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). Although the percentage of SG&A to total revenues remained relatively consistent, the dollar increase is primarily driven by the Supercuts acquisition which resulted in higher warehouse expenses due to volume increases and additional corporate professional fees, which were more than offset by cost reductions associated with the amalgamation of the Supercuts administrative office functions. All direct and indirect expenses associated with franchise operations, other than the cost of products sold to franchisees, are included in SG&A expense. The cost of products sold and associated franchise activities remained relatively consistent in both periods of fiscal 1998 and 1997. DEPRECIATION AND AMORTIZATION - CORPORATE Depreciation and amortization remained consistent at 1.1 percent of total revenues in both periods. NON RECURRING CHARGES See Note 3 to the unaudited Consolidated Financial Statements. 18 OPERATING INCOME Exclusive of nonrecurring items, operating income in the first nine months of fiscal 1998 improved to $43,804,000, or 7.5 percent of total revenues, an increase of $10,906,000, or 33.2 percent over the prior year period operating income of $32,898,000, or 6.3 percent of total revenues. This improvement is attributable primarily to improved gross margins and the leveraging of fixed costs. INTEREST Interest expense in the first nine months of fiscal 1998 was $7,502,000, or 1.3 percent of total revenues, compared to $7,480,000, or 1.4 percent of total revenues, in the same period in fiscal 1997. Interest expense has remained relatively consistent between the two periods because, although debt levels have increased, average interest rates were lower during the current period. INCOME TAXES The Company's effective income tax rate for fiscal 1998 is estimated to be approximately 41.0 percent, compared to 66.6 percent in fiscal 1997. The Company's effective tax rate for fiscal 1997 was negatively affected by certain nondeductible merger and transaction costs (nonrecurring charges) associated with the Supercuts merger. Additionally, as part of the tax provision for the nine months ended March 31, 1997, the Company recorded a $1,500,000 charge associated with the resolution of Supercuts income tax matters related to years prior to 1997, resulting from the completion of an Internal Revenue Service examination. Exclusive of the effect of nonrecurring charges and the $1,500,000 resolution charge, the Company's effective tax rate for fiscal 1997 was 43.1 percent. NET INCOME (LOSS) Net income in the first nine months of fiscal 1998 improved to $20,522,000 or $.86 per diluted share, compared to a net loss of $88,000 in the same period in fiscal 1997. Exclusive of nonrecurring items in both periods, net income in the first nine months of fiscal 1998 increased to $21,634,000, or $.90 per diluted share, compared to net income in the same period in fiscal 1997 of $14,814,000, or $.64 per diluted share, an earnings per share increase of 40.6 percent. LIQUIDITY AND CAPITAL RESOURCES Customers generally pay for salon services and merchandise in cash at the time of sale, which reduces the Company's working capital requirements. Net cash provided by operating activities in the first nine months of fiscal 1998 improved to $53,074,000 compared to $14,423,000 during the same period in fiscal 1997. The increase between the two periods is due to improved operating performance in the current period and the merger and transaction costs associated with the Supercuts merger in the prior year period. 19 During the first nine months of fiscal 1998, the Company had worldwide capital expenditures of $52,389,000, of which $4,176,000 related to acquisitions of 162 salons, $5,695,000 for capital lease obligations, $8,891,000 for the Company's new distribution center and $6,950,000 for the purchase of additional administrative office facilities. The Company constructed a total of 132 new salons including 26 new Regis Hairstylists salons, 34 new MasterCuts salons, 26 new Trade Secret salons, 30 new Wal-Mart/SmartStyle salons, one new Strip Center salon and 15 new International salons, and completed 69 major remodeling projects. All salon capital expenditures during the first nine months of fiscal 1998 were funded primarily by cash flow from the Company's operations and borrowings under its revolving credit facilities. The Company anticipates its worldwide salon development program for fiscal 1998 will include the construction of approximately 200 new company-owned salons, and 75 major remodeling and conversion projects. It is expected the Company's total capital expenditures in fiscal 1998 will be approximately $57,000,000, excluding acquisitions, with approximately $41,000,000 related to new salon construction and renovations. The remaining $16,000,000 is related to the construction of the Company's new distribution center and the purchase of additional administrtive office facilities. Expenditures will be funded in part through borrowings under existing credit facilities and capital lease arrangements. FINANCING See Note 2 to the unaudited Consolidated Financial Statements. In March 1998, the Company sold an additional 400,000 common shares for $10,410,000, net of issuance costs. The proceeds will be used for general working capital purposes and to finance current fiscal year acquisitions of businesses in the hairstyling and hair care products industry. Management believes that cash generated from operations and amounts available under its revolving credit facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. DIVIDENDS During the first nine months of fiscal 1998, the Company paid dividends of $.06 per share or $1,401,000. In May 1998, the Board of Directors of the Company approved an increase in the Company's quarterly cash dividend to $.03 per share from $.02 per share. The dividend is payable to shareholders of record on May 22, 1998. YEAR 2000 The Company has already begun the necessary software conversion and programming modifications to comply with the Year 2000 computer software issues for significant portions of its software and computer systems. Based on the Company's most recent assessment, the associated expense to be incurred is estimated to be approximately $5,000,000. Such expenses are estimated to be incurred and charged to earnings over the next twenty-four months. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 15 Letter Re: Unaudited Interim Financial Information. Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended March 31, 1998. 21 Exhibit 15 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION Securities and Exchange Commission 450 Fifth Street, North West Washington, D.C. 20549 RE: Regis Corporation Registrations on Form S-8 (File No. 33-44867, No. 33-89882) Registration on Form S-4 (File No. 333-12099) Registrations on Form S-3 (File No. 333-28511, No. 33-82094, No. 33-86276, No. 33-89150, No. 33-92244, No. 33-96224, No. 33-80337 and No. 333-49165) We are aware that our report dated April 22, 1998, on our reviews of the interim financial information of Regis Corporation as of March 31, 1998 and for the three and nine month periods ended March 31, 1998 and 1997, and included in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1998, is incorporated by reference in these registration statements. Pursuant to Rule 43(c) under the Securities Act of 1933, this report should not be considered a part of such registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Minneapolis, MN May 12, 1998 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGIS CORPORATION Date: May 12, 1998 By: /s/ Randy L. Pearce --------------------------------- Randy L. Pearce Senior Vice President, Finance Chief Financial Officer Signing on behalf of the registrant and as principal accounting officer 23 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGIS CORPORATION THIRD QUARTER BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1998 JUL-01-1997 MAR-31-1998 8,270 0 10,027 86 44,937 78,106 302,568 132,497 370,717 104,432 0 0 0 1,190 178,462 370,717 165,270 584,906 90,372 469,337 9,867 0 7,502 35,111 14,589 20,522 0 0 0 20,522 .88 .86 Reflects basic EPS according to FAS No. 128. Includes a charge of $1,979 associated with the divestiture of Anasazi Exclusive Salon Products, LLC. Excluding nonrecurring items, fully diluted EPS would have been $.90.
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