-----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, MTBUi7eBjjKJ7sQX/tKM3Mv6rOdeeXJS07Ymrd5dwQAj/oqMQdjFDSrd1a12onaT pK4oUjCqmH+shwo3igWzWQ== 0001047469-98-034843.txt : 19980918 0001047469-98-034843.hdr.sgml : 19980918 ACCESSION NUMBER: 0001047469-98-034843 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980917 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGIS CORP CENTRAL INDEX KEY: 0000716643 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 410749934 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11230 FILM NUMBER: 98711074 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 FORM 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, 1998 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) 1 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 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 $26.38 per share as of September 4, 1998, as quoted on the NASDAQ), was $472,840,607. The number of outstanding shares of the registrant's common stock, par value $.05 per share, as of September 4, 1998, was 23,838,780. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated September 17, 1998 and Annual Report to Shareholders for the year ended June 30, 1998, are incorporated by reference into Parts I, II and III. 2 PART I ITEM 1. BUSINESS BACKGROUND Regis Corporation (the Company), based in Minneapolis, is the largest owner, operator, franchisor, and consolidator of hair and retail product salons in the world. The Regis worldwide operations include 3,539 hairstyling salons at June 30, 1998 operating in six divisions: Regis Hairstylists, Strip Center Salons (primarily Supercuts), MasterCuts, Trade Secret, Wal-Mart/SmartStyle and International. Worldwide operations include 2,723 company-owned salons and 816 franchised salons operating primarily as Supercuts salons. The Company has 28,000 employees worldwide (excluding franchisee operations). INDUSTRY OVERVIEW Management estimates that annual revenues of the haircare industry are $40 billion in the United States and $80 billion worldwide. The industry is highly fragmented with the vast majority of haircare salons independently owned. However, the influence of chains, both franchise and company-owned, has increased substantially, although still accounting for a small percentage of total locations. Management believes that chains will continue to increase their presence. Management also believes that the demand for salon services and products will increase in the next decade as the population ages and desires additional haircare services, such as coloring. BUSINESS STRATEGY The Company's goal is to provide high quality haircare services and products to customers in different market groups through physically attractive salons located in high profile and convenient locations. The key elements of the Company's strategy to achieve these goals are the following: CONSISTENT, QUALITY SERVICE. The Company is committed to meeting its customer's haircare needs by providing competitively priced services and products in convenient locations with professional and knowledgeable hairstylists. The Company's operations and marketing emphasize high-quality services to create customer loyalty, to encourage referrals and to distinguish the Company's salons from its competitors. The major services supplied by the Company's salons are haircutting and styling, hair coloring, shampooing, conditioning and permanent waving. To promote quality and consistency of services provided throughout the Company's salons, Regis has full and part-time artistic directors whose duties are to teach and train salon operators and to instruct the stylists in current styling trends. During fiscal 1998, the Company and its franchisees provided services to 71.8 million customers worldwide. 3 MALL-BASED LOCATIONS. As the largest national mall-based operator in the hair salon industry, the Company has the ability to obtain desirable locations in high-profile, regional malls anchored by major department stores. Mall owners and developers typically seek retailers such as Regis due to the Company's financial strength, successful salon operations and status as a national mall tenant. The Company's locations, which are aesthetically appealing and designed to attract customers from mall shoppers, provide a steady source of new business. STRIP-MALL-BASED LOCATIONS. The merger with Supercuts on October 25, 1996, positions the Company in the rapidly growing strip shopping center segment of the retail haircare market in the United States (see below). Supercuts salons are conveniently located in strip shopping centers with adequate traffic, appropriate trade area demographics, good visibility within the center or from adjoining streets, effective signage, easy access and adequate parking. Supercuts seeks to locate its salons in so-called "power strips", anchored by the number one or two grocery chain in the specific market or alternatively, a major mass merchant. In addition to Supercuts, the Company has added 62 strip center salons (11 franchised) in 1998, which together with Supercuts, comprise the Strip Center Salons division. MULTIPLE SALON CONCEPTS. Regis operates six salon concepts: Regis Hairstylists, Strip Center Salons (primarily Supercuts), MasterCuts, Trade Secret, Wal-Mart/SmartStyle and International. Regis' various salon concepts in the United States address the major segments of the salon market. The Company's regional mall salon concepts provide the Company with the ability to have multiple locations in a single mall and the flexibility to convert concepts if mall demographics or customer preferences shift. Regis Hairstylists appeal primarily to women and are positioned at the moderate-to-upscale end of the salon market. MasterCuts appeal to the more value-conscious customer with promotional or discount prices and have a higher percentage of men and children as customers. Trade Secret provides hairstyling service and a broad selection of quality haircare and beauty products sold only through professional salons. Because the square footage for each of these concepts is approximately the same, the Company has the ability to determine which salon concept is best suited to a new location and change the concept of existing salons to meet demographic changes in the salon's market. The Company also operates salons outside of the mall concepts, as mentioned previously. The Strip Center Salons division primarily targets the male population with affordable hair care salons in strip centers. SmartStyle salons located in Wal-Mart stores and supercenters offer promotionally priced, family-oriented hair care. The International salons are located in department stores, hotels and stand-alone locations and are primarily focused on the moderate-to-upscale market. EXPANSION. The Company has grown through increased revenues from existing salons, constructing additional salons, and mergers and acquisitions. During the five year period ended June 30, 1998, the Company has added 2,228 net units (including franchised salons) to its worldwide salon base from new salon construction and merger and acquisitions. During this same period of time, the Company added new operating divisions, Trade Secret and Wal- Mart/SmartStyle, merged with Supercuts (see below), and expanded its Regis Hairstylists, 4 MasterCuts and International salon divisions. In addition to continuing its salon acquisition strategy, the Company expects to construct about 275 new company-owned salons and complete approximately 125 major remodeling and conversion projects during fiscal 1999. The Company intends to continue to focus future growth of salons in strip shopping centers across the United States as it adds additional company-owned salons and assists current and new franchisees in their expansion and market development. The Company believes the growth opportunities in the strip shopping center segment of the retail haircare market in the United States are vast, and will complement the Company's continuing growth of other divisions. The Company does not intend to refocus other divisions, now located in enclosed shopping malls throughout the United States, into the strip shopping center segment of the retail haircare market, nor does it intend to refocus its strip center salons into the enclosed shopping mall segment of the retail haircare market in the United States. The Strip Center Salon division (primarily Supercuts) does not have operations outside North America. The Company may elect to grow this division through international expansion, but any such plans have not been finalized. HIGH QUALITY HAIRCARE PRODUCTS. Through Trade Secret and the Company's other salons, Regis sells nationally-recognized haircare products such as Matrix-Registered Trademark-, Paul Mitchell-Registered Trademark-, Sebastian-Registered Trademark-, Redken-Registered Trademark-, and Nexxus-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 slightly 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 18.1 percent in fiscal 1998 to $221.6 million and represented 28.7 percent of total revenues. CONTROL OVER SALON OPERATIONS. Regis controls the quality of operations and enjoys certain economies of scale in terms of certain corporate and store level expenses. The Company has an extensive training program, including the production of training videos for use in the salons, to ensure that hairstylists are knowledgeable and provide consistent quality haircare services. 5 ECONOMIES OF SCALE. Management believes that due to its size and number of locations the Company has certain advantages which are not available to single location salons or small chains. The Company uses its point-of-sale system to track inventory and to monitor service and product sales. This product and customer information is used to evaluate salon productivity and, in some cases, to determine the most appropriate salon use for the location. Additionally, as a result of its volume purchases, the Company is able to purchase haircare products and supplies and salon fixtures on an advantageous basis. The Company is also able to gain national and local market recognition for the Regis name and its salon concepts through national and local advertising and promotional programs. REGIS HAIRSTYLISTS Regis Hairstylists are full-service salons providing complete haircare and beauty services aimed at moderate to upscale, fashion-conscious consumers. The customer mix at Regis Hairstylists salons is approximately 70 percent women and 30 percent men. These salons offer a full range of custom hairstyling, cutting, coloring, permanent wave and manicuring as well as haircare products. The average sale at Regis Hairstylists salons is approximately $21. Regis Hairstylists salons compete in their existing markets primarily by emphasizing the high quality of full services provided. The Company actively monitors the prices charged by its competitors in each area and makes every effort to maintain prices which, although in the higher range of local prices, are not so high as to be uncompetitive with prices of other salons offering similar, high-quality services. At June 30, 1998, the Company operated 820 Regis Hairstylists salons in shopping malls in North America. Revenues from the Regis Hairstylists salons were $294.6 million, or 37.0 percent of the Company's total revenues, in fiscal 1998. The Company expects to construct about 45 new Regis Hairstylists salons in fiscal 1999. STRIP CENTER SALONS (PRIMARILY SUPERCUTS) The Strip Center Salons division is primarily comprised of Supercuts stores. This concept provides consistent high quality haircare services to its customers at convenient times and locations and at a reasonable price. The services offered by strip center salons are limited and standardized. The salons are designed for ease of operation and the demand for basic haircare is believed to be recession resistant and non-seasonal. This concept appeals to men, women and children, although male customers account for over 75 percent of total haircuts. Consumer research indicates that males get their hair cut slightly more often (8-9 times annually) than females (7-8 times annually) and their haircuts generally take less time. The Strip Center concept targets a male audience. At June 30, 1998, the Company operated 1,268 strip center salons in North America, including 775 franchised locations. Revenues and income from company-owned strip center salons and franchising activity was $108.1 million and $23.4 million, respectively, or 16.5 percent of the Company's total revenues in fiscal 1998. The Company expects to construct about 45 new company-owned and add about 80 franchised strip center salons in fiscal 1999. 6 MASTERCUTS FAMILY HAIRCUTTERS MasterCuts Family Haircutters salons serve a broader customer base than Regis Hairstylists and respond to competitive pressures for lower cost haircare services. MasterCuts salons emphasize quality haircutting, lower prices and time-saving services for the entire family. The customer mix at MasterCuts salons contains a greater percentage of men and children than at Regis Hairstylists salons. MasterCuts salons cater to walk-in customers and provide a warm, inviting atmosphere that is comfortable for all members of the family. Many of the same product lines sold in Regis Hairstylists salons are also available in MasterCuts salons. The average sale at MasterCuts salons is approximately $11. The MasterCuts salons place more emphasis on discount or promotional pricing for the services being offered in order 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, 1998, the Company operated 412 MasterCuts salons in North America. Revenues from MasterCuts salons accounted for $107.8 million, or 13.5 percent of the Company's total revenues, in fiscal 1998. During fiscal 1999, the Company plans to construct approximately 50 new MasterCuts salons. TRADE SECRET Trade Secret salons emphasize haircare and beauty product sales in a retail setting while providing high-quality haircare services. Trade Secret salons are designed to display and attract sales of haircare and beauty products. Trade Secret salons offer the same products as the Regis Hairstylists and MasterCuts salons, but also have additional haircare items. The average sale at Trade Secret salons is approximately $16. At June 30, 1998, the number of Trade Secret salons totaled 374 in North America, including 34 franchised locations. Revenues and franchise income from company-owned Trade Secret salons and franchising activity during fiscal 1998 was $115.0 million and $2.8 million, respectively, or 14.7 percent of the Company's total revenues. The Company anticipates constructing approximately 40 new Trade Secret salons in fiscal 1999. WAL-MART/SMARTSTYLE FAMILY HAIR SALONS The Company expanded into the mass merchant retail arena in May 1996 by acquiring 154 salons operating within Wal-Mart stores and supercenters. Wal-Mart salons share many operating characteristics with MasterCuts: pricing is promotional, services are focused on family hair cutting, and product revenues contribute solidly to overall revenues. In fiscal 1998, the Company introduced a new brand name, SmartStyle Family Hair Salons, for its Wal-Mart salons and plans to rapidly expand this new brand name into its Wal-Mart salons in fiscal 1999. The Company operated 273 salons within Wal-Mart stores and supercenters at June 30, 1998. Revenue from Wal-Mart salons totaled $40.3 million, or 5.0 percent of the Company's total revenue. The Company anticipates constructing about 80 new SmartStyle salons in Wal-Mart stores and supercenters in fiscal 1999. 7 INTERNATIONAL SALON OPERATIONS The Company operated 392 hair care salons in eight countries outside of the United States at June 30, 1998, including 322 salons in the United Kingdom. Canadian salons operate under the Regis Hairstylists, MasterCuts and Trade Secret tradenames and revenues are included within the respective operating divisions, while salons in the remaining seven countries operate in freestanding locations and department stores under license arrangements. Revenues from the International salon operations were $106.2 million, or 13.3 percent of the Company's total revenues, in fiscal 1998. The Company expects to continue to modestly increase its International salon base in fiscal 1999. NEW SALON DEVELOPMENT The table on the following page sets forth the number of Company salons opened at the beginning and end of each of the last five years, as well as the number of salons opened, closed, relocated, converted and acquired during each of these periods. 8
SALON LOCATION SUMMARY 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- REGIS Open at beginning of period 802 801 787 797 811 Salons constructed 24 17 31 28 33 Acquired 6 9 9 18 15 Less: Relocations 11 11 11 10 15 ---- ---- ---- ---- ---- Net salon openings 19 15 29 36 33 Conversions (3) (10) (4) (4) Salons closed or sold (17) (19) (15) (18) (24) ---- ---- ---- ---- ---- Open at end of period 801 787 797 811 820 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- STRIP CENTERS (PRIMARILY SUPERCUTS) Company-Owned: Open at beginning of period 185 326 464 507 419 Salons constructed 87 107 44 4 4 Acquired 16 1 47 ---- ---- ---- ---- ---- Net salon openings 87 123 45 4 51 Conversions (1) 59 21 9 (61) 38 Salon closed or sold (5) (6) (11) (31) (15) ---- ---- ---- ---- ---- Open at end of period 326 464 507 419 493 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Franchised Salons: Open at beginning of period 646 617 629 661 757 Salons added 35 41 41 37 41 Acquired 3 30 Less: Relocations 3 ---- ---- ---- ---- ---- Net salon openings 35 41 44 37 68 Conversions (1) (59) (21) (9) 61 (38) Salon closed or sold (5) (8) (3) (2) (12) ---- ---- ---- ---- ---- Open at end of period 617 629 661 757 775 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- MASTERCUTS Open at beginning of period 229 257 283 327 362 Salons constructed 25 21 33 36 50 Acquired 3 1 12 2 8 Less: Relocations 3 2 3 3 4 ---- ---- ---- ---- ---- Net salon openings 25 20 42 35 54 Conversions 3 10 3 3 Salon closed or sold (4) (1) (3) (4) ---- ---- ---- ---- ---- Open at end of period 257 283 327 362 412 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- TRADE SECRET Company-Owned: Open at beginning of period 55 106 152 219 302 Salons constructed 22 28 40 56 32 Acquired 30 19 11 11 14 Less: Relocations 2 1 4 4 4 ----- ----- ----- ----- ----- Net salon openings 50 46 47 63 42 Conversions (1) 1 2 20 24 2 Salon closed or sold (2) (4) (6) ----- ----- ----- ----- ----- Open at end of period 106 152 219 302 340 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Franchised Salons: Open at beginning of period 64 68 55 38 Salons added 1 7 8 6 Acquired 64 Less: Relocations 1 ----- ----- ----- ----- ----- Net salon openings 65 7 7 6 Conversions (1) (1) (2) (19) (23) (2) Salon closed or sold (1) (1) (2) ----- ----- ----- ----- ----- Open at end of period 64 68 55 38 34 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- WAL-MART/SMARTSTYLE Open at beginning of period 157 181 Salons constructed 3 24 45 Acquired 154 47 ----- ----- ----- ----- ----- Net salon openings 157 24 92 Open at end of period 157 181 273 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- INTERNATIONAL(2) Open at beginning of period 225 251 244 408 423 Salons constructed 6 9 9 26 17 Acquired 27 2 178 3 Less: Relocations 1 ----- ----- ----- ----- ----- Net salon openings 33 11 186 29 17 Salons closed or sold (7) (18) (22) (14) (48) ----- ----- ----- ----- ----- Open at end of period 251 244 408 423 392 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Grand total, system-wide 2,422 2,627 3,131 3,293 3,539 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Major remodelings & conversions 35 46 65 72 97 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(1) Represents primarily the acquisition of franchise locations. (2) Canadian salons are included in the Regis, MasterCuts and Trade Secret divisions and not included in the International salon totals. 10 Of the 181 new company-owned salons constructed in fiscal 1998, 33 were Regis Hairstylists salons, 4 were Strip Center Salons, 50 were MasterCuts, 32 were Trade Secret, 45 were Wal-Mart/SmartStyle and 17 were International salons. The Company intends to construct approximately 275 new company-owned salons during fiscal year 1999. The Company has a program of modernizing its existing salons, ranging from redecoration to substantial reconstruction, in order to raise its older salons to the standards of its newly constructed locations. This program is implemented as management determines that a particular location will benefit from such modernization, or as required by lease renewals. HAIRCARE PRODUCTS In recent years, the Company has placed emphasis on the sales of higher-margin haircare products, with the result that such revenues have become an increasingly important part of the Company's business, having grown from 5.4 percent of total company-owned revenues in fiscal 1987 to 28.7 percent in fiscal 1998. A significant portion of this growth has resulted from the introduction of national brand merchandise in 1988 and the acquisition of Beauty Express in November 1992 and Trade Secret in December 1993. The haircare products offered are primarily shampoos, hair conditioners, fixatives and hair sprays. Regis, MasterCuts, and Trade Secret private label products, as well as lines of salon branded products are sold only through licensed beauty salons, including Matrix-Registered Trademark-, Paul Mitchell-Registered Trademark-, Redken-Registered Trademark-, Sebastian-Registered Trademark-, and Nexxus-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. 11 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 1,850 enclosed malls which meet the Company's performance criteria with several new shopping malls developed each year. At June 30, 1998, the Company's 1,606 United States and Canadian mall- based salons were located in 1,047 shopping malls. Because the Company's different salon concepts target different customer groups depending on the size and location of the shopping malls, more than one of the Company's salon concepts may be located in the same mall. As a result, there are numerous leasing opportunities in shopping malls for its Regis Hairstylists, MasterCuts and Trade Secret salons, of which the Company has penetrated less than 50 percent. The Company generally locates its Regis, MasterCuts and Trade Secret salons in fully enclosed, climate-controlled shopping malls classified as "regional" having 400,000 or more square feet of leasable area and at least two full-line department store anchor tenants. The Company's experience has been that selecting the proper mall and obtaining a favorable, high-traffic location within the mall are important determinants of the success of a new salon. For existing malls, the Company evaluates the current sales per square foot of selected tenants, the stature and strength of the anchor stores and the other major 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, traffic patterns 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 steadily descended. Also, many larger tenants are downsizing their leased areas to make better use of costly space, thereby creating available floor space which can be leased for other uses. Additionally, many existing malls are being expanded, renovated and remerchandised. Because of these factors, the Company believes that it has ample expansion opportunities and therefore can be selective in establishing new locations. In evaluating specific locations for Supercuts company-owned and franchise stores, the Company seeks conveniently located, highly visible strip shopping centers which allows customers adequate parking and quick and easy store access. The Company believes strip shopping centers anchored by the number one or two grocery chain in the specific market, or a major mass merchant, provide a profitable customer flow. Supercuts' customers are destination shoppers and, as a result, Supercuts is not dependent upon expensive regional shopping mall locations. Various other factors are considered in evaluating sites, including trade area demographics, availability and cost of space, location of competitors, traffic count, visibility, signage and other leasehold factors in a given center or area. All franchisee sites must be approved by the Company. 12 SUPERCUTS FRANCHISING PROGRAM GENERAL The Company provides its Supercuts franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, professional marketing, promotion and advertising programs, and other forms of support designed to help the franchisee build a successful business. The Company employs field staff personnel to assist franchisees in all aspects of operations, training and supervision. STANDARDS OF OPERATIONS All Supercuts franchisees are required to conform to Company-established operational policies and procedures relating to quality of service, training, design and decor of stores, and trademark usage. The Company's field personnel make periodic visits to franchised stores to ensure that the stores are operating in conformity with Supercuts standards. In addition, to further ensure such conformity, the Company enters into the lease for the store site directly with the landlord, and subsequently subleases the site to the franchisee. The sublease provides the Company with the right to terminate the sublease and gain possession of the store if the franchisee fails to comply with the Company's operational policies and procedures. See Note 5 of "Notes to the Consolidated Financial Statements" for further information. FRANCHISE SALES Franchise expansion is now being encouraged and will continue to be a significant focus of the Company in the future. Existing franchisees and new franchisees who open more than one salon receive a reduction in franchise fees. FRANCHISEE TRAINING The Company provides new Supercuts franchisees with training, focusing on the various aspects of store management, including operations, personnel management, marketing fundamentals and financial controls. Existing franchisees receive training, counseling and information from the Company on a continuous basis. The mechanisms include mail, "800" number information lines and E-mail. In addition, the Company provides store managers and stylists with extensive training. For a further description of the Company's education and training programs, see "Education and Training" below. 13 FRANCHISE TERMS Supercuts franchisees pay monthly royalty fees based on service and product revenues. In addition, franchisees pay an advertising fee of five percent of service revenues, which is held in a separate account and administered by the Company. In calendar 1997, franchisees contributed approximately $10.9 million to the advertising fund. All royalties and advertising fees are due monthly. The franchisees pay an initial franchise fee for each new franchise location. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory and certain other items, including initial working capital. New franchisees also must pay an initial fee for franchisee training. The existing franchise agreements have an initial term of 10 years with the option by the franchisee to renew for one additional ten-year period. Upon renewal, franchisees pay a renewal fee of four percent of the franchisee's total store revenues for the prior 12 months. During fiscal 1998, all agreements eligible for renewal were renewed. The agreements also provide the Company a right of first refusal if the store is to be sold. The franchisee must obtain the Company's approval in all instances where there is a sale of the franchise. The current franchise agreement is site specific and does not provide any territorial protection to a franchisee, although some older franchise agreements do include limited territorial protection. The Company has a comprehensive impact policy that resolves potential conflicts among franchisees and/or the Company regarding proposed salon sites. MARKETS AND MARKETING Approximately half of the Company's North American salons are situated in "middle markets" with service area populations between 80,000 and 800,000. Approximately one-fourth of the Company's salons are located in smaller markets with a service area population below 80,000, and about one-fourth are located in major metropolitan areas with populations in excess of 800,000. The Company believes that the geographic dispersion of its salons throughout the United States may diminish the impact of fluctuations in regional business cycles. The Company maintains various advertising, sales and promotion programs for its salons, budgeting a predetermined percent of revenues for such programs. The Company has developed promotional tactics and institutional sales messages for each of its divisions targeting certain customer types and positioning each concept in the marketplace. Print, radio and television and billboard advertising are developed and supervised at the Company's headquarters, but most advertising is done in the immediate area of the particular salon. Supercuts maintains an Advertising Fund (the "Fund") that provides comprehensive advertising and sales promotion support for the Supercuts system. All Supercuts stores, company-owned and franchised, contribute five percent of service revenues to the Fund, 80 percent of which is allocated to the contributing market for media placement and local marketing activities and 20 percent of which is allocated for national advertising campaigns and system-wide activities. Each new franchised salon opened by a new franchisee or by an existing franchisee in a new market, contributes $5,000 for grand opening expenses. Additionally, stores may contribute supplemental funds to pay for advertising costs above their total market contributions. The Company's marketing department administers (at no additional cost to the franchisees or the Fund) the development of 14 system-wide advertising and promotion, working with McCann-Erickson San Francisco, as agency of record. This intensive advertising program creates significant consumer awareness, a strong brand image and high loyalty. In calendar 1997, $15.2 million was paid into the Fund, by both franchised and company-owned Supercuts stores. Supercuts conducts regular, system-wide promotional programs for markets and an initial grand opening program for new stores. Each includes broadcast, print, direct mail and public relations campaigns. In many of the Company's salons, stylists volunteer their time to support charitable events for breast cancer research. Proceeds collected from such events are distributed through the Regis Foundation for Breast Cancer Research. In a unique three-year agreement, the Company will support three postdoctoral fellows known as Regis Scholars, to conduct research in the field of breast cancer at the Mayo Foundation, Rochester, MN. The goal of the Regis Scholars program is to further the prevention, diagnosis and treatment of breast cancer, and to recruit and train future leaders in the biology of the disease. The Company's community involvement also includes a major sponsorship role for the Susan G. Komen Breast Cancer Foundation Twin Cities Race for the Cure. This 5K run and one-mile walk is held in Minneapolis on Mother's Day to help fund breast cancer research, education, screening and treatment. The Company has reached nearly $2.2 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. Supercuts provides extensive initial and ongoing training to stylists through its system of field educators. Every stylist must attend a training course at one of the Supercuts' designated training centers at which they are taught the Supercuts' haircutting technique and customer service principles. Stylists may be recertified every six to nine months. For annual re-certification each stylist must participate in a combination of store seminars and studio visits. 15 STAFF RECRUITING AND RETENTION Recruiting quality managers and hairstylists is essential to the establishment and operation of successful salons. The Company's supervisory team seeks to recruit entrepreneurial salon managers who display initiative and imagination. The Company has been successful in recruiting capable managers and stylists for a number of reasons. To employ and retain qualified and productive employees, the Company utilizes a broad compensation system including cash incentives, merchandise awards, Company-sponsored trips and benefit programs. The Company believes that its compensation structure for salon managers and hairstylists is competitive within the industry. Stylists benefit from the Company's high-traffic locations in quality malls, as well as name-recognition from Supercuts and Wal-Mart, and receive a steady source of new business from walk-in customers. In addition, the Company offers a career path with the opportunity to move into managerial and training positions within the Company. SALON DESIGN The Company's salons are designed, built and operated in accordance with uniform standards and practices developed by the Company based on its experience. New salons are designed and constructed according to the Company's standard specifications, thereby reducing design and construction costs and enhancing operating efficiencies. Salon fixtures and equipment are also uniform, allowing the Company to place large orders for these items with attendant cost savings. The size of the Company's salons ranges from 500 to 2,300 square feet, with the typical salon having about 1,100 square feet. At present, the cost to the Company of constructing and furnishing a new salon, including inventories, averages in the range of approximately $40,000 to $173,000, 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 storefronts and have limited 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 wood and marble floors, mirrors and contrasting black and creme colors. Supercuts salons are functional in design and tastefully furnished, consistent with its image of a quality provider of affordable haircutting services. MasterCuts salons are family oriented and include extensive use of woodwork and warm, comfortable colors. Trade Secret salons use many of the same design techniques as Regis Hairstylists salons, and also have open and easily accessible product displays. Wal-Mart/SmartStyle salons, which are strategically located near the check out counters in the front of Wal-Mart stores and supercenters, are efficiently designed and brightly colored to complement the Wal-Mart retail environment. 16 OPERATIONS Company-owned and franchised salons located in the United States, Puerto Rico, Canada, and Mexico are operated and managed as part of the Company's North American operations. All other salons, located in department stores in the United Kingdom, South Africa, Switzerland, Ireland, France and the United Arab Emirates are operated and managed through the Company's United Kingdom subsidiary. For each salon division, the Company's operations are divided into geographic regions throughout the United States. Each region is headed by one of the Company's salon directors, assisted by regional field managers and area supervisors, who coordinate the operations of the salons in the particular region. The area supervisors are responsible for hiring and training the managers for each salon. Over the years, the Company has developed uniform procedures for opening new salons in such a manner as to maximize revenues from a new location as rapidly as possible. After opening, all salons are operated according to standard procedures which the Company has learned are desirable for the operation of an efficient, high-quality, profitable salon. MANAGEMENT INFORMATION SYSTEMS The Company utilizes a retail point-of-sale information system in all its salons. This system collects data daily from each salon and consolidates the data into several management reports. The Company's automated system polls terminals nightly and all salon cash receipts are transferred automatically into a centralized bank account, thereby significantly reducing administrative expenses. Point-of-sale information is also used both to monitor salon performance and to generate customer data for use in identifying and anticipating industry trends for purposes of pricing and marketing. The Company has expanded the system to deliver on-line information as to sales of products to improve its inventory and control system, including suggested monthly product purchase recommendations for a salon, a monthly report of sales and a perpetual inventory. Management believes that its information systems provide advantages in planning and analysis which are not available to a majority of its competitors which do not have management information systems. COMPETITION The haircare industry is highly competitive. In every area in which the Company has a salon, there are competitors offering similar haircare services and products at similar prices. The Company faces competition within malls from companies which operate salons as departments within department stores and from smaller chains of salons, independently owned salons and, to a lesser extent, salons which, although independently owned, are operating under franchises from a franchising company that may assist such salons in areas of training, marketing and advertising. Significant entry barriers exist for new chains due to the need to establish brand identification, systems and infrastructure, recruitment of experienced haircare management and adequate store staff, and leasing of quality sites. The principal factors of competition in the affordable haircare category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of difference versus the competition. 17 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," "Supercuts," "MasterCuts" and "Trade Secret." The Company believes the use of these trademarks is important in establishing and maintaining its reputation as a national operator of high-quality hairstyling salons, and is committed to protecting these trademarks by vigorously challenging any unauthorized use. EMPLOYEES As of June 30, 1998, the Company had 28,000 full- and part-time employees worldwide, of which approximately 23,000 employees were located in the United States. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its employee relations are good. GOVERNMENTAL REGULATIONS The Company is subject to various federal, state and local laws affecting its business as well as a variety of regulatory provisions relating to the conduct of its cosmetology business, including health and safety. As a franchisor, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the "FTC Rule") and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which such registration is required. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees, and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations. The Company believes it is operating in substantial compliance with applicable laws and regulations governing operations. 18 ITEM 1a. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Directors of the Company and Exchange Act Section 16(a) filings is included on pages 3 and 4 of the Registrant's Proxy Statement dated September 17, 1998, and is incorporated herein by reference. Information relating to Executive Officers of the Company follows:
Name Age Position - ---------------- --- ---------------------------------- Myron Kunin 69 Chairman of the Board of Directors Paul D. Finkelstein 56 President, Chief Executive Officer and Director Christopher A. Fox 48 Executive Vice President and Director Randy L. Pearce 43 Senior Vice President, Finance and Chief Financial Officer William E. Halfacre 57 Senior Vice President, Retail and Purchasing Bruce Johnson 45 Senior Vice President, Design and Construction Mark Kartarik 42 Senior Vice President and President, Supercuts Inc. Gordon Nelson 47 Senior Vice President, Fashion and Education Anthony W.E. Rammelt 61 Senior Vice President, International Bert M. Gross 68 Senior Vice President, General Counsel Mary Andert 43 Senior Vice President, Marketing Sharon Kiker 53 Chief Operating Officer, Regis Hairstylists Kris Bergly 37 Chief Operating Officer, Wal-Mart/SmartStyle Robert Ribnick 37 Chief Operating Officer, MasterCuts
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. 19 Paul D. Finkelstein has served as President, Chief Operating Officer and as a director of the Company since December 1987, as Executive Vice President of the Company from June 1987 to December 1987 and has served as Chief Executive Officer since July 1, 1996. Christopher A. Fox was elected Executive Vice President in 1994, was Senior Vice President, Real Estate of the Company from 1988 to 1994, has served as Vice President from 1984 to 1988 and has served as a director of the Company since 1989. Randy L. Pearce was elected Chief Financial Officer and Senior Vice President, Finance in January 1998, has served as Vice President of Finance from 1995 to 1997 and as Vice President of Financial Reporting from 1991 to 1994. William E. Halfacre has served as Senior Vice President, Retail and Purchasing of the Company since 1993 and as Vice President from 1990 to 1993. Bruce Johnson was elected a Senior Vice President of Design and Construction in 1997 and has served as Vice President from 1988 to 1997. Mark Kartarik has served as Senior Vice President, Operations of the Company since 1994 and as Vice President from 1989 to 1994. He was elected President of Supercuts, Inc. in 1998 and served as Chief Operating Officer of Supercuts, Inc. in 1997. Gordon Nelson has served as Senior Vice President, Fashion and Education of the Company since 1994 and as Vice President from 1989 to 1994. Anthony W. E. Rammelt has served as Senior Vice President, International of the Company since 1994 and as Vice President from 1993 to 1994. Bert M. Gross was elected Senior Vice President, General Counsel in 1997 and acted as outside legal counsel to the Company from 1957 to 1997. Sharon Kiker was elected Chief Operating Officer, Regis Hairstylists in April 1998 and has served as Vice President, Salon Operations from 1989 to 1998. Kris Bergly was elected Chief Operating Officer, Wal-Mart/SmartStyle in April 1998 and has served as Vice President, Salon Operations from 1993 to 1998. Robert Ribnick was elected Chief Operating Officer, Mastercuts in April 1998 and has served as Vice President, Salon Operations from 1993 to 1998. 20 ITEM 2. PROPERTIES The Company's corporate executive and administrative offices are headquartered in a 100,000 square foot building in Edina, Minnesota owned by the Company. In December 1997, the Company acquired two buildings, totaling 70,000 square feet of office space, located adjacent to the Company's current headquarters in Edina. This office space is currently leased to nine tenants. As leases terminate and additional office space is required, the Company plans to remove or relocate existing tenants to provide additional administrative office space for its own purposes. The Company also leases warehouse space in Eden Prairie, Minnesota for storing and distributing inventory. The Company completed construction of a new distribution center in Chattanooga, Tennessee during fiscal 1998. The Company believes that these two facilities will be adequate for inventory storage needs for the near future. The Company operates all of its salon locations under leases or licenses. All of its North American locations opened in regional malls during the past five years are operating under leases with an original term of at least ten years. Salons operating within strip centers and Wal-Mart stores and supercenters have leases with original terms of at least five years. Salons in the U.K. operations which are located in department stores operate under license agreements with the host department stores. The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. Future minimum lease payments for the next five years, which are reimbursable from the franchisees, are approximately $17 million annually. All additional lease costs are passed through to the franchisees. None of the Company's salon leases is individually material to the operations of the Company, and the Company expects that it will be able to renew its leases on satisfactory terms as they expire. See Note 5 of "Notes to the Consolidated Financial Statements". ITEM 3. LEGAL PROCEEDINGS During fiscal 1997, the Company resolved the litigation brought by David E. Lipson and DEL Holding Corporation (DEL), a corporation controlled by Mr. Lipson, against Supercuts. The Company paid Mr. Lipson and DEL $6.7 million in complete settlement of all claims of Mr. Lipson, DEL or any other entity controlled by Mr. Lipson. See Note 10 to the Consolidated Financial Statements. This was funded through the issuance of the Company's common stock. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. On October 14, 1997, at the annual meeting of the shareholders of the Company, the shareholders approved an increase in the authorized shares available under the Company's Stock Option Plan from 1,650,000 to 2,200,000. There were 20,511,534 shares voted in favor of the proposal and 701,120 shares against the proposal. The elections of the Company's directors also took place with the following results: Election of Directors:
FOR WITHHOLD AUTHORITY Rolf F. Bjelland 21,104,277 108,377 Frank E. Evangelist 21,099,647 113,007 Paul D. Finkelstein 21,101,155 111,499 Christopher A. Fox 21,097,072 115,582 Thomas L. Gregory 21,101,269 111,385 Van Zandt Hawn 21,105,435 107,219 Susan Hoyt 21,105,207 107,447 David B. Kunin 21,093,070 119,584 Myron Kunin 21,100,047 112,607
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Data relating to Market Stock Data Information and dividends as set forth in the sections included on Page 36 of the Registrant's 1998 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, are incorporated herein by reference. As of June 30, 1998, Regis shares were owned by approximately 13,000 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 1998 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, is incorporated herein by reference. 22 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 23 of the Registrant's 1998 Annual Report to Shareholders, a copy of which is included as Exhibit 13 hereto, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Accountants on page 35, the Consolidated Financial Statements on pages 24 to 35 and the Quarterly Financial Data on page 36 of the Registrant's 1998 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. 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See Part I for information regarding Directors and Executive Officers of the Registrant. ITEM 11. EXECUTIVE COMPENSATION Executive compensation included on pages 6 through 8 of the Registrant's Proxy Statement dated September 17, 1998 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial owners and Management on page 10 of the Registrant's Proxy Statement dated September 17, 1998 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is included on page 9 of the Registrant's Proxy Statement dated September 17, 1998 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1). The following Consolidated Financial Statements of Regis Corporation, and the Report of Independent Accountants thereon, included on pages 24 to 35 of the Registrant's 1998 Annual Report to Shareholders, are incorporated by reference in Item 8: Report of Independent Accountants Consolidated Balance Sheet as of June 30, 1998 and 1997 Consolidated Statement of Operations for each of the three years in the period ended June 30, 1998 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended June 30, 1998 Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 1998 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, 1998, 1997 and 1996 24 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. (3). Listing of Exhibits:
EXHIBIT NUMBER 3(a) Election of the registrant to become governed by Minnesota Statutes Chapter 302A and Restated Articles of Incorporation of the registrant, dated March 11, 1983; Articles of Amendment to Restated Articles of Incorporation, dated October 29, 1984; Articles of Amendment to Restated Articles of Incorporation, dated August 14, 1987; Articles of Amendment to Restated Articles of Incorporation, dated October 21, 1987. (Filed as Exhibit 3(a) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 3(b) By-Laws of the registrant. (Filed as Exhibit 3(c) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 4(a) Three-for-two stock split. (Incorporated by reference to Exhibit A to May 2, 1996, Form 8-K.) 4(b) Shareholder Rights Agreement dated December 23, 1996 (Incorporated by reference to Exhibit 4 of the Company's report on Form 8-A12G dated February 4, 1997) 10(a) Employment and Deferred Compensation Agreement, Dated as of April 14, 1998, between the Company and Paul D. Finkelstein. 10(b) Form of Employment and Deferred Compensation Agreement between the Company and six executive officers. (Incorporated by reference to Exhibit 10(b) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(c) Northwestern Mutual Life Insurance Company Policy Number 10327324, dated June 1, 1987, face amount $400,000 owned by the registrant, insuring the life of Paul D. Finkelstein and providing for division of death proceeds between the registrant and the insured's designated beneficiary (split-dollar plan). (Filed as Exhibit 10(g) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 25 10(d) Schedule of omitted split-dollar insurance policies. (Filed as Exhibit 10(h) to the Registrant's Registration Statement on Form S-1 (Reg. No. 40142) and incorporated herein by reference.) 10(e) Note Agreement dated as of June 21, 1991 between the registrant and The Prudential Insurance Company of America (Incorporated by reference to Exhibit 10(o) as part of the Company's Report on 10-K dated September 26, 1991 for the year ended June 30, 1991). 10(f) Employee Stock Ownership Plan and Trust Agreement dated as of May 15, 1992 between the registrant and Myron Kunin and Paul D. Finkelstein, Trustees (Incorporated by reference to Exhibit 10(q) as part of the Company's Report on 10-K dated September 27, 1993 for the year ended June 30, 1993). 10(g) Executive Stock Award Plan and Trust Agreement dated as of July 1, 1992 between the registrant and Myron Kunin, Trustee (Incorporated by reference to Exhibit 10(r) as part of the Company's Report on 10-K dated September 27, 1993 for the year ended June 30, 1993). 10(h) Revolving Credit Agreement as of June 21, 1994 between the registrant and LaSalle National Bank and Bank Hapoalim. (Incorporated by reference to Exhibit 10(r) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(i) Employee Profit Sharing Plan and Trust agreement, amended June 22, 1994 between the registrant and Myron Kunin, Trustee. (Incorporated by reference to Exhibit 10(t) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(j) Survivor benefit agreement dated June 27, 1994 between the Company and Myron Kunin. (Incorporated by reference to Exhibit 10(t) part of the Company's report on 10-K dated September 28, 1994 for the year ended June 30, 1994.) 10(k) Modification to Revolving Credit Agreement in 10(h) dated July 20, 1995. (Incorporated by reference to Exhibit 10(n) part of the Company's report on 10-K dated September 27, 1995 for the year ended June 30, 1995.) 10(l) Modification of Note Agreement in 10(e) dated July 21, 1995. (Incorporated by reference to Exhibit 10(g) part of the Company's report on 10-K dated September 27, 1995 for the year ended June 30, 1995.) 10(m) Private Shelf Agreement dated as of July 25, 1995 between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(m) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(n) Agreements for Sale and Purchase dated as of December 29, 1995, between the Company and Steiner Salons Limited and Steiner Hairdressing Limited. (Incorporated by reference to Exhibit 10(r) of the Company's report on 10-Q dated February 13, 1996, for the quarter ended December 31, 1995.) 26 10(o) Series A Senior Note drawn from Private Shelf Agreement dated as of February 21, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(s) of the Company's report on 10-Q dated May 3, 1996, for the quarter ended March 31, 1996.) 10(p) Modification to Revolving Credit agreement in 10(k) dated March 19, 1996. (Incorporated by reference to Exhibit 10(t) of the Company's report on 10-Q dated May 3, 1996, for the quarter ended March 31, 1996.) 10(q) Asset purchase agreement between the Company and National Hair Care Centers LLC. (Incorporated by reference to Exhibit B to May 9, 1996, Form 8-K.) 10(r) Series B Senior Note drawn from Private Shelf Agreement dated as of June 10, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(v) of the Company's report on 10-K dated September 16, 1996, for the year ended June 30, 1996.) 10(s) Modification to Revolving Credit agreement in 10(p) dated July 9, 1996. (Incorporated by reference to Exhibit 10(w) of the Company's report on 10-K dated September 16, 1996, for the year ended June 30, 1996.) 10(t) Agreement and plan of merger between the Company and Supercuts, Inc. (Incorporated by reference to Exhibit 2.1 to July 15, 1996, Form 8-K.) 10(u) Series C Senior Note drawn from Private Shelf Agreement dated as of October 28, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(x) of the Company's report on 10-Q dated November 5, 1996, for the quarter ended September 30, 1996.) 10(v) Term Note A Agreement between the registrant and LaSalle National Bank dated October 28, 1996. (Incorporated by reference to Exhibit 10(y) of the Company's report on 10-Q dated November 5, 1996, for the quarter ended September 30, 1996) 10(w) Series D Senior Note drawn from Private Shelf Agreement dated as of December 13, 1996, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(w) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(x) Modification to Revolving Credit agreement in 10(s) dated March 19, 1997. (Incorporated by reference to Exhibit 10(x) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(y) Series E Senior Note drawn from Private Shelf Agreement dated as of April 7, 1997, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(y) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 27 10(z) Compensation and non-competition agreement dated May 7, 1997, between the Company and Myron Kunin. (Incorporated by reference to Exhibit 10(z) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(aa) Term Note B Agreement between the registrant and LaSalle National Bank dated July 11, 1997. (Incorporated by reference to Exhibit 10(aa) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(bb) Modification of Private Shelf Agreement in 10(m) dated July 11, 1997. (Incorporated by reference to Exhibit 10(bb) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(cc) Series F Senior Note drawn from Private Shelf Agreement dated as of July 28, 1997, between the registrant and the Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(cc) of the Company's report on 10-K dated September 24, 1997, for the year ended June 30, 1997.) 10(dd) Modifications of Private Shelf Agreement in 10(bb) dated October 1, 1997. (Incorporated by reference to Exhibit 10(ff) of the Company's report on 10-Q dated February 9, 1998, for the quarter ended December 31, 1997.) 10(ee) Private Shelf Agreement dated as of December 19, 1997 between the registrant and ING Investment Management, Inc. (Incorporated by reference to Exhibit 10(gg) of the Company's report on 10-Q dated February 9, 1998, for the quarter ended December 31, 1997.) 10(ff) Series R-1 Senior Note drawn from Private Shelf dated as of December 19, 1997, between registrant and ING Investment Management, Inc. (Incorporated by reference to Exhibit 10(hh) of the Company's report on 10-Q dated February 9, 1998, for the quarter ended December 31, 1997.) 10(gg) Series R-2 Senior Note drawn from Private Shelf dated as of December 19, 1997, between registrant and ING Investment Management, Inc. (Incorporated by reference to Exhibit 10(ii) of the Company's report on 10-Q dated February 9, 1998, for the quarter ended December 31, 1997.) 10(hh) Modifications to Revolving Credit Agreement in 10 (x) dated December 30, 1997. (Incorporated by reference to Exhibit 10(jj) of the Company's report on 10-Q dated February 9, 1998, for the quarter ended December 31, 1997.) 10(ii) Revolving Credit Agreement dated as of May 5, 1998 between the registrant and Bank of America National Trust and Savings Association. 10(jj) Series G Senior Note dated as of July 10, 1998 between the registrant and Prudential Insurance Company of America. 10(kk) Modifications to Revolving Credit Agreement in 10(hh) dated September 1, 1998. 28 10(ll) Variation and Restatement Agreement dated as of August 10, 1998 between Regis Europe Limited and National Westminster Bank Plc. 13 Select pages of the 1998 Annual Report to Shareholders. 23 Consent of Independent Accountants. 27 Financial Data Schedule (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed during fiscal 1998.
29 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/ Randy L. Pearce --------------------------- Randy L. Pearce, Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) DATE: September 17, 1998 ------------------- 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/ Christopher A. Fox - ----------------------------- Christopher A. Fox, Director /s/ David Kunin - ----------------------------- David Kunin, Director /s/ Rolf F. Bjelland - ----------------------------- Rolf F. Bjelland, Director /s/ Van Zandt Hawn - ----------------------------- Van Zandt Hawn, Director /s/ Susan Hoyt - ----------------------------- Susan Hoyt, Director /s/ Tom Gregory - ----------------------------- Tom Gregory, Director 30 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Directors of Regis Corporation: Our report on the consolidated financial statements of Regis Corporation has been incorporated by reference in this Form 10-K from page 35 of the 1998 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/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota August 21, 1998 31 REGIS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS as of June 30, 1998, 1997 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, 1998: Valuation Account, Receivable from Premier Salons $2,899 xx xx $2,899 (1) $0 Valuation Account, Premier Salons Preferred Stock $500 xx xx $500 (2) $0 Valuation Account, Allowance for doubtful accounts $200 xx xx $122 $78 JUNE 30, 1997: Valuation Account, Receivable from Premier Salons $3,800 xx xx $901(3) $2,899 Valuation Account, Premier Salons Preferred Stock $500 xx xx xx $500 Valuation Account, Allowance for doubtful accounts $344 $236 xx $380 $200 JUNE 30, 1996: Valuation Account, Receivable from Premier Salons $4,500 xx xx $700(3) $3,800 Valuation Account, Premier Salons Preferred Stock $500 xx xx xx $500 Valuation Account, Allowance for doubtful accounts $73 $360 xx $89 $344
NOTES: (1) Includes a payment of $156,000 and salon assets totalling $629,000 received in partial settlement of previously reserved balance. (2) Redemption of Preferred Stock by Premier Salons. (3) Payments received on previously reserved balance. 32 EX-10.(A) 2 EXHIBIT 10(A) EMPLOYMENT AND DEEERRED COMPENSATION AGREEMENT AGREEMENT, made as of April 14, 1998, between REGIS CORPORATION, hereinafter referred to as the "Corporation", and Paul D. Finkelstein, hereinafter referred to as "Finkelstein". IN CONSIDERATION of the mutual agreements hereinafter contained, the parties hereby agree as follows: 1. DEFINITIONS. "ADJUSTED MONTHLY BENEFIT" shall mean Finkelstein's Monthly Benefit increased annually after the first year during which Monthly Benefits are paid in proportion to any increase in the Consumer Price Index for the preceding year. "CAUSE" shall mean (i) the willful and continued failure by Finkelstein to substantially perform his duties for the Corporation after a written warning specifically identifying the lack of substantial performance is delivered to him by the Corporation, (ii) the willful engaging by Finkelstein in illegal conduct which is materially and demonstrably injurious to the Corporation, or (iii) conviction of a felony. "CHANGE IN CONTROL" shall be deemed to have occurred at such time as any of the following events occur: (i) any person within the meaning of Section 2(a)(2) of the Securities Act of 1933 and Section 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than Curtis Squire, Inc. or the present shareholders of Curtis Squire, Inc., is or has become the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of twenty percent (20%) or more of the common stock of the Corporation, or (ii) approval by the stockholders of the Corporation of (a) any consolidation or merger of the Corporation in which the Corporation is not the continuing or surviving corporation or pursuant to which shares of stock of the Corporation would be converted into cash, securities or other property, or (b) any consolidation or merger in which the Corporation is the continuing or surviving corporation but in which the common stockholders of the Corporation immediately prior to the consolidation or merger do not hold at least a majority of the outstanding common stock of the continuing or surviving corporation, or (c) any sale, lease, exchange or other transfer of all or substantially all the assets of the Corporation, or (iii) individuals who constitute the Corporation's Board of Directors on January 1, 1998 (the Incumbent Board") have ceased for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to January 1, 1998 whose election, or nomination for election by the Corporation's stockholders, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by specific vote or by approval of the proxy statement of the Corporation in which such person is named as nominee for director) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board. "CONSUMER PRICE INDEX" shall be the "Consumer Price Index for all urban consumers, U.S. city average, for all Items, 1982-1984 equals 100%" published by the Bureau of Labor Statistics of the United States Department of Labor. If publication of such Index is discontinued, the Consumer Price Index shall be based upon comparable statistics on the cost of living as computed and published by an agency of the United States or by a responsible financial periodical of recognized authority. "DISCOUNTED VESTED MONTHLY BENEFIT" shall be an amount determined by discounting Finkelstein's Vested Monthly Benefit to present value based on the number of months between (a) Finkelstein's age at the time of his termination of employment, and (b) the date of his 65th birthday. The discount rate to be used for this purpose shall be equal to the yield to maturity, at the date of termination of Finkelstein's employment, of U.S. Treasury Notes with a maturity date nearest the date of Finkelstein's 65th birthday. "MONTHLY BENEFIT" shall be an amount equal to sixty percent (60%) of Finkelstein's average monthly compensation, excluding bonuses, for the sixty (60) months immediately preceding his termination of employment or disability. "VESTED MONTHLY BENEFIT" shall be a percentage of Finkelstein's Monthly Benefit determined on the basis of the number of Finkelstein's completed years of service with the Corporation according to the following schedule:
Years of Service Percentage ---------------- ---------- Less than 7 years 0% 7 years 5% 8 years 10% 9 years 15% 10 years 20% 11 years 25% 12 years 30% 13 years 35% 14 years 40% 15 years 50% 16 years 60% l7 years 70% 18 years 80% 19 years 90% 20 or more years 100%
-2- A year of service for purposes of vesting shall be a consecutive 12-month period during which Finkelstein is employed by the Corporation. 2. EMPLOYMENT. The Corporation agrees to continue to employ Finkelstein, and Finkelstein agrees to continue to serve the Corporation as President and Chief Executive Officer of the Corporation, upon the terms and conditions hereinafter set forth. 3. TERM. The employment of Finkelstein pursuant to this Agreement has commenced as of the date of this Agreement and shall continue until terminated by either of the parties hereto. The parties agree and acknowledge that the employment of Finkelstein pursuant to this Agreement is at will and may be terminated by either party without notice. Notwithstanding the termination of employment of Finkelstein, this Agreement shall remain in full force and effect during such time as Finkelstein is entitled to any Monthly Benefit under this Agreement. 4. DUTIES. Finkelstein shall continue to serve the Corporation faithfully and to the best of his ability as President and Chief Executive Officer under the direction of the Board of Directors of the Corporation. devoting his entire business time, energy and skill to such employment. After attaining age 65. Finkelstein shall continue to render services to the Corporation in an executive capacity, including but not limited to serving on the Corporation's Board of Directors (subject to election to such office by the shareholders of the Corporation), actively participating in the Corporation's growth and acquisition strategies, and performing such other duties as may be mutually agreed upon between Finkelstein and the Corporation's Board of Directors from time to time. The parties contemplate that Finkelstein's services shall continue at least until he attains age 70, but his inability or failure to continue providing services to the Corporation after attaining age 65 shall not adversely affect any deferred compensation or other benefits to which he is otherwise entitled under this Agreement. 5. BASE COMPENSATION. The Corporation agrees to pay to Finkelstein during the term of his employment hereunder as base salary for his full time active services the sum of $500,000 for the fiscal year beginning July 1, 1999. Such base salary shall be increased for each year thereafter by the greater of (i) four percent (4%), or (ii) the percentage increase in the Consumer Price Index from July 1, 1999 to each July 1 thereafter in which Finkelstein is employed by the Corporation. 6. INCENTIVE-BASED COMPENSATION. Finkelstein shall participate with other senior executive officers of the Corporation in the Corporation's incentive-based bonus plan. 7. STOCK OPTIONS. During each year of employment with the Corporation, subject to implementation of an appropriate stock option plan for other senior executive officers of the Corporation, Finkelstein shall be granted stock options to acquire shares of the Corporation's stock with the number of shares subject to such options to be determined by the Compensation Committee of the Corporation's Board of Directors. The exercise price for such options shall be the price of the shares on each date when such options are granted. If the Corporation at any time ceases to maintain a stock option plan for its senior executives, Finkelstein shall receive in lieu -3- of such options other annual benefits at least equal in value to the value of the stock options annually granted to him while such plan was in effect. 8. SPLIT DOLLAR LIFE INSURANCE. Finkelstein and the Corporation shall participate in a split dollar life insurance program whereby a trust established by Finkelstein will acquire a $5 million combined whole-life/term policy insuring the joint lives of Finkelstein and his spouse. The split dollar insurance agreement shall provide for payments of premiums and distribution of death benefits in accordance with Schedule A attached hereto. 9. DEFERRED COMPENSATION. The Corporation shall pay to Finkelstein, if living, or to his spouse in the event of his death, the following sums upon the terms and conditions and for the periods hereinafter set forth: a] PAYMENTS UPON RETIREMENT OR INVOLUNTARY TERMINATION. Commencing upon the last day of the month next following the month in which Finkelstein (i) retires from employment with the Corporation after attaining age 65, (ii) reaches age 65 if he is then disabled within the meaning of Section 9(d), or (iii) is terminated by the Corporation without Cause, the Corporation shall pay to Finkelstein his Adjusted Monthly Benefit and shall continue to pay him such amounts monthly on the same date of each succeeding month for the remainder of his life. If Finkelstein's spouse survives him, the Corporation shall pay to such spouse for the remainder of her life one-half of Finkelstein's Adjusted Monthly Benefit. b] EARLY VOLUNTARY TERMINATION. In the event Finkelstein voluntarily terminates his employment with the Corporation before reaching age 65, and prior to any Change of Control, the Corporation shall pay to Finkelstein two-thirds of his Discounted Vested Monthly Benefit commencing upon the last day of the month next following the month in which the date such termination occurs, and shall continue to pay him such amount monthly on the same date of each succeeding month for a total of 240 months. If Finkelstein dies before receiving all 240 monthly payments specified herein, the Corporation shall pay to his surviving spouse, or to such other person or persons as Finkelstein shall have designated in writing, the remaining monthly payments as they become due. c] SPOUSAL PAYMENTS. If Finkelstein dies while employed by the Corporation, the Corporation shall pay to his surviving spouse one-half of the Adjusted Monthly Benefit to which Finkelstein would have been entitled were he living, such payments to commence within thirty (30) days after Finkelstein's death and to continue monthly for the remainder of her life. d] PAYMENTS DURING DISABILITY. In addition to the payments provided in Subsections (a) and (b), should Finkelstein become disabled while -4- employed by the Corporation, and such disability continues for a period of six months the Corporation shall pay to Finkelstein his Monthly Benefit during each month that Finkelstein remains disabled until he attains age 65 or until his death prior to attaining such age, at which time the payments provided in Subsections (a), (b) or (c) (whichever is applicable) shall begin. The first payment under this Section (d) shall be made during the seventh month of such disability, and each succeeding payment shall be made on the same date of each succeeding month thereafter. Payments shall be made under this Section (d) only if Finkelstein is disabled within the meaning of the disability clause of the Corporation's disability insurance policy, as set forth in the waiver of premium provision. e] TERMINATION FOR CAUSE. If Finkelstein's employment with the Corporation is terminated at any time for Cause, the Corporation shall have no obligation to make any payments to him under this Agreement and all such future payments shall be forfeited. f] REDUCTION IN STATUS. The Corporation shall be deemed to have terminated Finkelstein's employment without Cause at such time as (i) he is removed as Chief Executive Officer of the Corporation, or (ii) the corporate prerequisites and benefits afforded him, including but not limited to office space and facilities suitable to his position as Chief Executive Officer of the Corporation, are reduced so as to be less favorable than those presently afforded him, except if such action is taken specifically for Cause. The Corporation is the owner and beneficiary of certain insurance policies on Finkelstein's life and insuring against his disability. No payments shall be required under Sections (a), (c) or (d) of this Section 9, if because of any act by Finkelstein, either (i) the applicable policy is canceled by the insurance company issuing such policy or (ii) the insurance company refuses to pay the proceeds of said policy. 10. TERMINATION AFTER CHANGE IN CONTROL. Notwithstanding any other provision of the Agreement, Finkelstein, and upon his death, his surviving spouse (as provided in Section 9(c) above) shall be entitled to immediate payment of his Adjusted Monthly Benefit if his employment terminates following a Change in Control, whether such termination is by Finkelstein or by the Corporation, unless the termination is by the Corporation for Cause. 11. RESTRICTIVE COVENANT. a] Finkelstein expressly agrees, as a condition to the performance by the Corporation of its obligations hereunder, that during the term of this Agreement and during the further period that such payments to him are provided by this Agreement, he will not, directly or indirectly, own any interest in, render any services of any nature -5- to, become employed by, or participate or engage in the licensed beauty salon business, except with the prior written consent of the Corporation. b] If Finkelstein voluntarily terminates his employment with the Corporation and violates the restrictive covenant set forth in subparagraph a] above during the first twenty-four (24) months after such termination of employment, and such violation continues for thirty (30) days after Finkelstein is notified in writing by the Company that he is in violation of the restrictive covenant, then the Corporation shall have no further obligation to make any payments to him under this Agreement and all such future payments shall be forfeited. If such violation occurs after twenty-four (24) months after such termination and continues for thirty (30) days after notice as provided hereinabove, Finkelstein shall forfeit one (1) month of his Adjusted Monthly Benefit for each month that he is in violation of the restrictive covenant. c] If Finkelstein's employment with the Corporation is terminated by the Corporation without Cause, and if he at any time after such termination continues to violate the restrictive covenant for thirty (30) days after being notified in writing by the Corporation that he is in violation of the restrictive covenant, he shall forfeit one (1) month of his Adjusted Monthly Benefit for each month or portion of a month that he continues in violation of the restrictive covenant. 12. TRUST AGREEMENT. The Corporation has established a Trust Agreement under the Regis Corporation Deferred Compensation Agreement and said Trust Agreement is hereby incorporated by reference into this Agreement and made a part hereof. 13. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Minnesota. 14. ARBITRATION. All controversies or claims arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in Minneapolis, Minnesota, administered by the American Arbitration Association under its then current Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in the District Court of Hennepin County, Minnesota. 15. PROHIBITION AGAINST ASSIGNMENT. Finkelstein agrees, on behalf of himself and his personal representatives, and any other person claiming any benefits under him by virtue of this Agreement, that this Agreement and the rights, interests and benefits hereunder shall not be assigned, transferred or pledged in any way by Finkelstein or any person claiming under him by virtue of this Agreement and shall not be subject to execution, attachment, garnishment or similar process. 16. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successor of the Corporation, and any successor shall be deemed substituted for the -6- Corporation under the terms of this Agreement. As used in this Agreement, the term "successor" shall include any person, firm, corporation or other business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the capital stock or assets of the Corporation. 17. PRIOR AGREEMENTS. This Agreement supersedes all prior Employment and Deferred Compensation Agreements, and any amendments or supplements thereto, between the parties to this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. REGIS CORPORATION By: /s/ [ILLEGIBLE] ---------------------------- Chief Financial Officer /s/ Paul D. Finkelstein -------------------------------- Paul D. Finkelstein -7- SPLIT DOLLAR PLAN PREPARED FOR REGIS INC. Barbara Finkelstein Age 55 Page 1 Paul D. Finkelstein Age 55 $5,000,000 Joint CompLife Plan - ES $100,000.00 Initial Contract Premium $3,000,000 Basic Amount Incl. $33,000.00 Additional Premium $1,500,000 Additional Protection Based on dividend interest rates which changes and are less than or equal to the current dividend interest rate Dividends initially used to purchase paid-up additions This illustration assumes payment of all premiums when due. Policy paid-up at age 100.
(1) (2) (3) (4) (5) (6) (7) (8) CORPORATE CUMULATIVE ANNUAL CORPORATE EXECUTIVE CUMULATIVE SPLIT SPLIT CORPORATE CORPORATE ANNUAL EXECUTIVE EXECUTIVE EXECUTIVE DOLLAR DOLLAR DEATH CASH AFTER TAX AFTER TAX DEATH CASH YEAR AGE PAYMENT* PAYMENT* BENEFIT* VALUE* COST* COST* BENEFIT* VALUE* - --------------------------------------------------------------------------------------------------------- 1 55 99,069 99,069 99,069 33,033 931 931 4,900,931 0 2 56 98,896 197,964 197,964 135,099 1,104 2,036 4,802,036 0 3 57 98,730 296,694 296,694 244,044 1,270 3,306 4,703,306 0 4 58 93,526 395,221 395,221 360,664 1,474 4,779 4,604,779 0 5 59 98,333 493,554 493,554 485,075 1,667 6,446 4,506,446 0 6 60 98,060 591,614 591,614 591,614 1,940 8,386 4,408,386 26,299 7 61 97,753 689,372 689,372 689,372 2,242 10,628 4,310,628 69,901 8 62 97,333 786,760 786,760 786,760 2,612 13,240 4,213,240 123,044 9 63 96,995 883,755 883,755 883,755 3,005 16,245 4,116,245 186,358 10 64 96,543 980,298 930,298 980,298 3,457 19,702 4,019,702 260,549 11 65 95,998 1,076,296 1,076,296 1,076,296 4,002 23,704 3,923,704 344,577 12 66 95,406 1,171,702 1,171,702 1,171,702 4,594 23,298 3,828,293 444,759 13 67 94,528 1,266,231 1,266,231 1,266,231 5,472 33,769 3,826,257 556,077 14 68 93,440 1,359,671 1,359,671 1,359,671 6,560 40,329 3,881,541 681,415 15 69 92,112 1,451,713 1,451,783 1,451,783 7,888 43,217 3,943,993 821,768 16 70 90,416 1,542,269 1,542,269 1,542,269 9,514 57,731 4,014,310 978,135 17 71 88,539 1,630,808 1,630,808 1,630,808 11,461 69,192 4,093,278 1,155,663 18 72 86,091 1,716,899 1,716,899 1,716,899 13,909 83,101 4,189,386 1,355,838 19 73 83,091 1,799,990 1,799,990 1,799,990 16,909 100,010 4,302,621 1,530,133 20 74 79,380 1,879,369 1,879,369 1,179,369 20,620 120,631 4,434,476 1,763,216 21 75 -1,879,369 0 0 0 0 120,631 3,533,997 1,382,271 22 76 0 0 0 0 0 120,631 3,569,822 2,007,301 23 77 0 0 0 0 0 120,631 3,615,094 2,138,252 24 78 0 0 0 0 0 120,631 3,669,291 2,275,015 25 79 0 0 0 0 0 120,631 3,731,954 2,417,611 - ---------------------------------------------------------------------------------------------------------
(SEE SPECIFICATIONS PAGES FOR PERTINENT INFORMATION) *ILLUSTRATED VALUES AND BENEFITS INCLUDE DIVIDENDS. ILLUSTRATED DIVIDENDS REFLECT CURRENT (1998 SCALE) CLAIM AND EXPENSE EXPERIENCE AND ARE NOT ESTIMATES OR GUARANTEES OF FUTURE RESULTS. DIVIDENDS ACTUALLY PAID MAY BE LARGER OR SMALLER THAN THOSE ILLUSTRATED. THIS ILLUSTRATION DOES NOT RECOGNIZE THAT, BECAUSE OF INTEREST, A DOLLAR IN THE FUTURE HAS LESS VALUE THAN A DOLLAR TODAY. 7.39% 1998 VARIABLE RATE LOAN PROVISIONS. RP S/N SELECT/SELECT PREPARED BY MICHAEL L. FINKELSTEIN, CLU, 2/17/98 ILLUSTRATION NO. MN1320-LRSHD-092409 THE NORTHWESTERN MUTUAL LIFE - MILWAUKEE (13.2) EX-10.(II) 3 EXHIBIT 10(II) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BANK OF AMERICA MULTICURRENCY DEMAND LOAN AGREEMENT NATIONAL TRUST AND SAVINGS ASSOCIATION 231 South LaSalle Street Chicago, Illinois 60697 - ------------------------------- May 5, 1998 Regis Corporation 7201 Metro Boulevard Edina, Minnesota 55439 Attention: Kyle Didier Ladies/Gentlemen: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "BANK") is pleased to confirm that the Bank may, in its sole and absolute discretion, make loans to REGIS CORPORATION (the "Borrower") from time to time, on the following terms and conditions: 1. DEFINITIONS "APPLICABLE CURRENCY": As to any particular Advance, Dollars or the Offshore Currency in which it is denominated or is payable. "BANKING DAY": A day other than a Saturday or a Sunday on which the Bank is open for business in Chicago, Illinois and (a) with respect to disbursements and payments in Dollars, a day on which dealings are carried on in the applicable offshore Dollar interbank market, and (b) with respect to disbursements and payments in and calculations pertaining to any Advance denominated in an Offshore Currency, a day on which commercial banks are open for foreign exchange business in London, England, and on which dealings in the relevant Offshore Currency are carried on in the applicable offshore foreign exchange interbank market. All payments received on a day which is not a Banking Day will be applied to the line of credit on the next Banking Day. "DOLLAR" and the sign "$": The lawful currency of the United States of America. "DOLLAR EQUIVALENT": At any time, (a) as to any amount denominated in Dollars, the amount thereof at such time, and (b) as to any amount denominated in an Offshore Currency, the equivalent amount in Dollars as determined by the Bank at such time on the basis of its spot rate of exchange (including all related costs of conversion) for the purchase of Dollars with such Offshore Currency at approximately 11:00 a.m., Chicago time, on the date on which such calculation would be necessary for the delivery of Dollars on the applicable date contemplated in this Agreement. "OFFSHORE CURRENCY": The lawful currencies constituting eurocurrencies (other than Dollars) set forth in SCHEDULE 1 to this Agreement, and any other eurocurrency which is, in the sole discretion of the Bank, freely traded in the offshore interbank foreign exchange markets and is freely transferable and freely convertible into Dollars. "REFERENCE RATE": The rate of interest publicly announced from time to time by the Bank in Chicago, Illinois, as its Reference Rate. The Reference Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Reference Rate. Any change in the Reference Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Reference Rate. Regis Corporation May 5, 1998 Page 2 2. LINE OF CREDIT AMOUNT AND TERMS 2.1 LINE OF CREDIT AMOUNT. The Borrower may borrow, repay and reborrow from the Bank to and including the Termination Date (defined below), unless sooner notified by the Bank of the termination of this line of credit, such amounts (the "ADVANCES") as the Borrower may from time to time request, but not exceeding the Dollar Equivalent amount of $20,000,000, or such reduced amount as may be fixed by the Bank by written notice to the Borrower (the "LINE OF CREDIT AMOUNT") in the aggregate at any one time outstanding. If at any time the Bank determines that the aggregate Dollar Equivalent amount of all Advances hereunder exceeds the Line of Credit Amount due to a change in applicable rates of exchange between Dollars and any Offshore Currency, then the Bank shall give notice to the Borrower that a prepayment is required and the Borrower will make such prepayment such that, after giving effect to such prepayment, the aggregate Dollar Equivalent amount of all Advances does not exceed the Line of Credit Amount. 2.2 "TERMINATION DATE" means May 4, 1999 or such later date to which the Termination Date may be extended by the Bank in its sole and absolute discretion and based on such review of the Borrower's financial performance and condition and such other factors as the Bank considers relevant (which may include, but not be limited to, future loan policies and other policies adopted by the Bank unrelated to the Borrower's financial condition). Any such extension must be in writing signed by the Bank and acknowledged by the Borrower. In the case of any such extension, the Termination Date will be the date to which such extension has been granted. The Bank is under no obligation or commitment to extend the Termination Date and no such obligation or commitment on the part of the Bank may be inferred from this provision. 2.3 NOTE EVIDENCING ADVANCES. The Advances will be evidenced by the Borrower's promissory note (the "Note") in the form set forth as EXHIBIT A, and will be payable on the earlier of the Termination Date or demand. The Bank will record all Advances (and the Applicable Currency) made pursuant to this Agreement and all payments of principal in its records, which records will be rebuttable presumptive evidence of the subject matter thereof. 2.4 ADVANCES. The Borrower may elect to have an Advance denominated in Dollars or in an Offshore Currency. 2.5 ELECTION TO MAKE ADVANCES; ALL ADVANCES PAYABLE ON DEMAND. The Borrower agrees that its compliance with and its performance of the provisions of this Agreement do not obligate the Bank to make any Advances and that the Bank will make any Advance in its sole and absolute discretion. The Borrower further agrees that, notwithstanding the Borrower's compliance with and performance of the provisions of this Agreement, the Bank has the right to demand payment of the Advances at any time. 2.6 INTEREST RATE. (a) REFERENCE RATE. For any Advance denominated in Dollars, unless the Borrower elects the Offshore Rate described below, the interest rate is the Reference Rate, defined below, per annum. (b) OFFSHORE RATE. The Borrower may elect to have any Advance denominated in Dollars bear interest at the Offshore Rate plus 1.00% per annum. All Advances denominated in an Offshore Currency will bear interest at the Offshore Rate plus 1.00% per annum. At the end of any interest period, unless the Borrower has designated another interest period, any Advance denominated in an Offshore Currency will be redenominated into Dollars (using the Dollar Equivalent) and the interest rate for any Advance denominated in Dollars will revert to the rate based on the Reference Rate. Designation of an Offshore Rate Advance is subject to the following requirements: (1) The interest period during which the Offshore Rate will be in effect will be 1, 2 or 3 months, as agreed between the Bank and the Borrower. The last day of the interest period will be determined by the Bank using the practices of the inter-bank eurocurrency market. (2) Each Offshore Rate Advance will be for an amount not less than the Dollar Equivalent amount of $500,000 and in integral multiples of the Dollar Equivalent amount of $100,000. Regis Corporation May 5, 1998 Page 3 (3) The Borrower must irrevocably request an Offshore Rate Advance no later than 12:00 noon, Chicago time, three Banking Days before the commencement of the interest period. (4) "OFFSHORE RATE" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of 1% (all amounts in the calculation will be determined by the Bank as of the first day of the interest period): Offshore Rate = Interbank Rate --------------------------- (1.00 - Reserve Percentage) Where, (A) "INTERBANK RATE" means the interest rate (rounded upward to the nearest 1/16th of 1%) at which deposits in the Applicable Currency for the applicable interest period are offered to the Bank by major banks in the inter-bank eurocurrency market two Banking Days prior to commencement of the interest period. (B) "RESERVE PERCENTAGE" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of 1%. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (5) Any Advance already bearing interest at an Offshore Rate will not be converted to a different rate during its interest period. (6) Each prepayment of an Offshore Rate Advance, whether voluntary, by reason of demand or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid and a prepayment fee as described below. A "prepayment" is a payment of any amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee will be equal to the amount (if any) by which: (A) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (B) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the inter-bank eurocurrency market for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Advance, or the scheduled payment date for the amount prepaid, if earlier. (7) The Bank will have no obligation to accept an election for an Offshore Rate Advance if any of the following described events has occurred and is continuing: (A) deposits in the Applicable Currency in the principal amount, and for periods equal to the interest period, of an Offshore Rate Advance are not available in the inter-bank eurocurrency market; or (B) the Offshore Rate does not accurately reflect the cost of an Offshore Rate Advance. (c) INTEREST CALCULATION. Except as otherwise stated in this Agreement, all interest will be computed on the basis of a 360-day year and the actual number of days elapsed. (d) DEFAULT RATE. After demand, the unpaid principal balance of the Note will bear interest at a rate per annum which is 2% percent higher than the rate of interest otherwise provided under this Agreement. 2.7 REPAYMENT TERMS. Regis Corporation May 5, 1998 Page 4 (a) INTEREST. Interest accruing prior to demand on a Reference Rate Advance will be payable monthly on the first day of each month and at the time of demand, beginning with the first such date to occur after the initial Advance. Interest accruing prior to demand on an Offshore Rate Advance will be paid on the last day of each interest period. Interest accruing after demand will be payable on demand. (b) PRINCIPAL. If demand for payment is not sooner made, the Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this Agreement no later than the Termination Date; PROVIDED, HOWEVER, that any amount bearing interest at the Offshore Rate may be repaid at the end of the applicable interest period, which will be no later than the Termination Date. 2.8 CURRENCY EQUIVALENTS GENERALLY. For all purposes of this Agreement, the equivalent in any Offshore Currency of an amount in Dollars, and the equivalent in Dollars of an amount in any Offshore Currency, shall be determined by the Bank on the basis of the spot rate of exchange (including all related costs of conversion) at approximately 11:00 a.m., Chicago time, on the date on which such calculation would be necessary for the delivery of Dollars or such Offshore Currency on the applicable date contemplated in this Agreement. Any determination made by the Bank pursuant to this SECTION 2.7 will be conclusive and binding in the absence of manifest error. 3. DISBURSEMENTS, PAYMENTS AND COSTS 3.1 REQUESTS FOR ADVANCES. Each request for an Advance will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 3.2 DISBURSEMENTS AND PAYMENTS. Each Advance made by the Bank, in its sole and absolute discretion, will be made in immediately available funds in the Applicable Currency. Each payment by the Borrower will be made without set-off or counterclaim in immediately available funds in the Applicable Currency not later than 2:00 p.m., Chicago time, on the dates called for under this Agreement at the Bank's office at 231 South LaSalle Street, Chicago, Illinois 60697. Funds received on any day after such time will be deemed to have been received on the next Banking Day. Whenever any payment to be made hereunder or on the Note is stated to be due on a day which is not a Banking Day, such payment will be made on the next succeeding Banking Day and such extension of time will be included in the computation of any interest. 3.3 TELEPHONE AUTHORIZATION. (a) The Bank may honor telephone instructions for Advances or repayments given by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in the Borrower's account number 1233227795 (the "ACCOUNT") or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) At the request of the Bank, the Borrower will promptly provide written confirmation to the Bank of any telephone instructions. If there is a discrepancy and the Bank has already acted on the telephone instructions, the telephone instructions will prevail over the written confirmation. (d) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone instructions it reasonably believes are made by any individual authorized by the Borrower to give such instructions. This indemnity and excuse will survive this Agreement. 3.4 DIRECT DEBIT. The Borrower agrees that interest and principal payments will be deducted automatically on the due date from the Account. The Bank will debit the Account on the dates the payments become due. If a due date does not fall on a Banking Day, the Bank will debit the Account on the first Banking Day following the due date. If there are insufficient funds in the Account on the date the Bank enters any debit the debit will be reversed. Regis Corporation May 5, 1998 Page 5 3.5 TAXES. The Borrower will not deduct any taxes from any payments it makes to the Bank. If any government authority imposes any taxes on any payments made by the Borrower, the Borrower will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. Upon request by the Bank, the Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. The Borrower will not pay the Bank's net income taxes. 4. AGREEMENTS OF BORROWER. 4.1 FINANCIAL INFORMATION. The Borrower agrees to provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as requested by the Bank from time to time. (a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements. These financial statements must be audited (with an unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to the Bank. The statements shall be prepared on a consolidated and consolidating basis. (b) Within 45 days of the period's end, the Borrower's quarterly financial statements. These financial statements must be reviewed by a CPA acceptable to the Bank. The statements shall be prepared on a consolidated and consolidating basis. (c) Within 30 days of the period's end, the Borrower's monthly financial statements, including a report summarizing same store comparable sales for mature salons from period to period, new salon openings as compared to the Borrower's business plan, and new store operating performance as compared to such business plan. These financial statements may be Borrower prepared. The statements shall be prepared on a consolidating basis. (d) Within the period(s) provided in (a) and (b) above, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in sufficient detail) to establish that the Borrower is in compliance with all financial covenants set forth in that certain Amended and Restated Credit Agreement, dated as of December 30,1997 (the "LASALLE CREDIT AGREEMENT"), among the Borrower, LaSalle National Bank, as Agent and the lenders thereunder, at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under the LaSalle Credit Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto. 4.2 LIENS. The Borrower agrees that Section 8C(1) ("Liens") of the LaSalle Credit Agreement (and all definitions associated with such section) is incorporated by reference herein as if set forth herein. 5. CONDITIONS Prior to requesting the initial Advance, the Borrower will furnish the Bank with each of the following documents, each duly executed and dated as of the date of the Borrower's acceptance of this Agreement: 5.1 NOTE. The Note payable to the order of the Bank. 5.2 AUTHORIZATIONS. Evidence that the execution, delivery and performance by the Borrower of this Agreement and the Note and any instrument or agreement required under this Agreement have been duly authorized. 5.3 GOOD STANDING. Certificates of good standing for the Borrower from its state of incorporation and from any other state in which the Borrower is required to qualify to conduct its business. 5.4 OFFSET SHARING AGREEMENT. An Offset Sharing Agreement, in form and content satisfactory to the Bank, among the Bank and the Lenders under the LaSalle Credit Agreement. Regis Corporation May 5, 1998 Page 6 5.5 OTHER ITEMS. Any other items that the Bank reasonably requires. 6. ENFORCING THIS AGREEMENT; MISCELLANEOUS 6.1 ILLINOIS LAW. This Agreement is governed by the internal laws of the State of Illinois. 6.2 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement. 6.3 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. 6.4 EXPENSES. The Borrower agrees to reimburse the Bank upon demand, whether or not any Advance is made under this Agreement, for all reasonable expenses and reasonable attorneys' fees, including any allocated costs of in-house counsel, incurred by the Bank in (a) the preparation, negotiation and execution of this Agreement, the Note and all other documents delivered in connection with this Agreement; (b) enforcing the Borrower's obligations under this Agreement, the Note or any other document delivered in connection with this Agreement; and (c) participating in any proceeding (whether instituted by the Bank, the Borrower or any other person and whether in bankruptcy or otherwise) or responding to any claim in any way relating to this Agreement, the Note or any document delivered in connection with this Agreement. The Borrower further agrees to pay, and save the Bank harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Note, which obligations will survive any termination of this Agreement. 6.5 JUDGEMENT. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due under this Agreement or the Note in one currency into another currency, the rate of exchange used will be that at which the Bank could purchase the first currency with such other currency on the Banking Day preceding that on which final judgment is given. The obligation of the Borrower in respect of any such sum due from it to the Bank under this Agreement or the Note will, notwithstanding any judgment in a currency (the "JUDGMENT CURRENCY") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "AGREEMENT CURRENCY"), be discharged only to the extent that on the Banking Day following receipt by the Bank of any sum adjudged to be so due in the Judgment Currency, the Bank may purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Bank in the Agreement Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Bank against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Bank in such currency, the Bank agrees to return the amount of any excess to the Borrower. 6.7 ONE AGREEMENT. This Agreement and any related other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this line of credit; and (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this line of credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 6.8 NOTICES. All notices required under this Agreement will be personally delivered or sent by first class mail, postage prepaid, to the addresses set forth above, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. Regis Corporation May 5, 1998 Page 7 6.9 HEADINGS. Article and paragraph headings are for reference only and will not affect the interpretation or meaning of any provisions of this Agreement. 6.10 COUNTERPARTS. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, will be deemed an original but all such counterparts will constitute but one and the same agreement. 6.12 CONSENT TO JURISDICTION. To induce the Bank to accept this Agreement, the Borrower irrevocably agrees that subject to the Bank's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF, FROM OR RELATED TO THIS AGREEMENT OR THE NOTE WILL BE LITIGATED IN COURTS HAVING SITUS WITHIN CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN CHICAGO, ILLINOIS, WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESS STATED ABOVE AND SERVICE SO MADE WILL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT. 6.13 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS AGREEMENT OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THE BORROWER FURTHER AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST THE BANK ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES. If the foregoing is acceptable, please indicate the Borrower's agreement by signing a copy of this Agreement where indicated below. Very truly yours, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ [ILLEGIBLE] --------------------------- Title: Vice President ------------------------ The foregoing is agreed to this 5 day of May, 1998. REGIS CORPORATION By: /s/ Randy L. Pearce --------------------------------- Title: RANDY L. PEARCE SENIOR VICE PRESIDENT-FINANCE CHIEF FINANCIAL OFFICER ---------------------------- Regis Corporation May 5, 1998 Page 8 [USE NOTARY BLOCK WHEN DOCUMENTS WILL BE DELIVERED BY MAIL] STATE OF MINNESOTA ) )SS COUNTY OF HENNEPIN ) Subscribed, sworn to and acknowledged before me this 5 day of May 1998 by Randy L. Pearce as Chief Financial Officer of Regis Corporation who personally appeared before me. Witness my hand and official seal. /s/ Joyce L. Wallace My commission expires: July 31, 2000 ----------------------------- Notary Public [SEAL] EXHIBIT A PROMISSORY NOTE $20,000,000 Chicago, Illinois: May 5, 1998 On the earlier of the Termination Date or demand, for value received, REGIS CORPORATION (the "BORROWER") hereby promises to pay to the order of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "BANK"), the Dollar Equivalent principal sum of TWENTY MILLION AND NO/100 DOLLARS ($20,000,000) or, if less, the aggregate unpaid principal amount of all Advances made by the Bank to the undersigned hereunder. The initial Advance, all subsequent Advances and all payments made on account of principal will be recorded by the holder in its records. Capitalized terms used herein and not otherwise defined herein have the meanings given such terms in the Loan Agreement. The Borrower further promises to pay to the order of the Bank interest on the aggregate unpaid principal amount of this Note outstanding from time to time, from the date of this Note until paid in full, at the rates per annum which will be determined in accordance with the provisions of the Loan Agreement. Accrued interest will be payable on the dates specified in the Loan Agreement. All payments of principal and interest under this Note will be made in the Applicable Currency in immediately available funds at the Bank's office at 231 South LaSalle Street, Chicago, Illinois 60697, or at such other place as may be designated by the Bank to the Borrower in writing. This Note is the Note referred to in, and evidences indebtedness incurred under, a Multicurrency Demand Loan Agreement (as it may be amended, modified or supplemented from time to time, the "LOAN AGREEMENT"), dated as of May54, 1998, between the Borrower and the Bank, to which Loan Agreement reference is made for a statement of the terms and provisions thereof. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is governed by the internal laws of the State of Illinois. REGIS CORPORATION By: --------------------------- Title: ------------------------ Address: 7201 Metro Boulevard Edina, Minnesota 55439 Attention: Kyle Didier Telephone: Fax No.: Regis Corporation May 5, 1998 Page 10 SCHEDULE I OFFSHORE CURRENCIES Canadian Dollars British Pounds Sterling Mexican Pesos EX-10.(JJ) 4 EXHIBIT 10(JJ) REGIS CORPORATION SERIES G SENIOR NOTE No.G-1 ORIGINAL PRINCIPAL AMOUNT: $14,000,000 ORIGINAL ISSUE DATE: July 10, 1998 INTEREST RATE: 7.14% per annum INTEREST PAYMENT DATES: 2nd day of each October, January, April and July. FINAL MATURITY DATE: July 2, 2008 PRINCIPAL PREPAYMENT DATES AND AMOUNTS: $9,000,000 on July 2, 2007 and $5,000,000 on July 2, 2008 FOR VALUE RECEIVED, the undersigned, Regis Corporation (herein called the "Company"), a corporation organized and existing under the laws of the State of Minnesota, hereby promises to pay to The Prudential Insurance Company of America, or registered assigns, the principal sum of FOURTEEN MILLION DOLLARS ($14,000,000) on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance thereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing October 2, 1998, until the principal hereof shall have become due and payable, and (b) on any overdue payment (including any overdue prepayment) of principal, any overdue payment of Yield-Maintenance Amount and any overdue payment of interest, payable on each Interest Payment Date as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 2% over the Interest Rate specified above or (ii) 2% over the rate of interest publicly announced by Morgan Guaranty Trust Company of New York from time to time in New York City as its prime rate. Payments of principal, Yield-Maintenance Amount, if any, and interest are to be made at the main office of Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to a Private Shelf Agreement, dated as of July 25, 1995, as amended by that certain amendment dated July 11, 1997 and that certain amendment dated as of January 22, 1998 (herein called the "Agreement"), between the Company, on the one hand, and The Prudential Insurance Company of America and each Prudential Affiliate (as defined in the Agreement) which becomes party thereto, on the other hand, and is entitled to the benefits thereof. This Note is subject to optional prepayment, in whole or from time to time in part, on the terms specified in the Agreement. 1 This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for the then outstanding principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. In case an Event of Default shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. Capitalized terms used and not otherwise defined herein shall have the meanings (if any) provided in the Agreement. This Note is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with the internal law of such State. REGIS CORPORATION By: /s/ Randy L. Pearce --------------------------------- Randy L. Pearce Senior Vice President-Finance 2 EX-10.(KK) 5 EXHIBIT 10(KK) AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT No.1, dated as of September 1, 1998, among REGIS CORPORATION, a Minnesota corporation ("Borrower"), the Lenders (as defined herein), and LASALLE NATIONAL BANK, a national banking association ("LNB"), as agent for the Lenders (LNB, in such capacity, together with its successors in such capacity, "Agent"). Borrower, Lenders and Agent are parties to an Amended and Restated Credit Agreement, dated as of December 30,1997 (the "Credit Agreement"). Borrower, Lenders and Agent desire to amend the Credit Agreement in certain respects and, accordingly, Borrower, Lenders and Agent agree as follows: 1. DEFINITIONS. Except as otherwise provided herein, the terms defined in the Credit Agreement are used herein as defined therein. 2. AMENDMENTS. Effective as of the date hereof, but subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended as follows: A. The following definitions in PARAGRAPH 1A are amended and restated as follows: "COMMERCIAL L/C MARGIN" means sixty-two and one-half (62.5) basis points; PROVIDED, HOWEVER, that as long as the ratio of Total Debt to the sum of Total Debt and Consolidated Net Worth does not exceed .40 to 1.00, Commercial L/C Margin shall mean fifty-five (55) basis points. "LIBOR MARGIN" means one hundred twenty-five (125) basis points; provided, HOWEVER, that as long as the ratio of Total Debt to the sum of Total Debt and Consolidated Net Worth does not exceed .40 to 1.00, LIBOR Margin shall mean one hundred (100) basis points. "LOAN" or "LOANS" means and includes all Base Rate Loans and LIBOR Loans made under the Revolving Credit Commitment and under the Term Loan B Commitment, and also means and includes Term Loan A and Term Loan C, unless the context in which such term is used shall otherwise require. "MATURITY DATE" means October 31, 2001 with respect to the Revolving Credit Commitment, July 1, 2000 with respect to Term Loan A, December 31,1998 with respect to the Term Loan B Commitment, and September 1, 2003 with respect to Term Loan C. "NOTES" means the Revolving Credit Notes, the Term Loan A Note, the Term Loan B Notes and the Term Loan C Note. "REQUIRED TERM LOAN A LENDERS" means the Term Loan A Lenders holding more than sixty-six and two-thirds percent (66-2/3 %) of the unpaid principal amount of the Term Loan A Loan. "REVOLVING CREDIT AVAILABILITY" means the positive difference, if any, between (i) the Total Revolving Credit Commitment and (ii) the sum of the aggregate principal amounts outstanding in respect of the Revolving Credit Loans plus the outstanding Letter of Credit Obligations. "REVOLVING CREDIT COMMITMENT" means the LNB Revolving Credit Commitment and the Paribas Revolving Credit Commitment. "REVOLVING CREDIT NOTES" means those certain Replacement Revolving Credit Notes dated as of the date of Amendment No. 1 to this Agreement in the original aggregate maximum principal amount of $50,000,000 made payable by Borrower to the order of the Revolving Credit Lenders, as such Revolving Credit Notes may be amended, modified or supplemented from time to time, and together with any renewals thereof, and exchanges or substitutions therefor. "REVOLVING CREDIT PERCENTAGE" means the percentage set opposite such Lender's name on the respective signature pages hereof under the caption "Revolving Credit Percentage", as such percentage may be adjusted by assignments permitted pursuant to Paragraph 12E. "STANDBY L/C MARGIN" means one hundred twenty-five (125) basis points; provided, however, that as long as the ratio of Total Debt to the sum of Total Debt and Consolidated Net Worth does not exceed .40 to 1.00, Standby L/C Margin shall mean one hundred (100) basis points. "TOTAL REVOLVING CREDIT COMMITMENT" means the sum of the commitments of all Revolving Credit Lenders with respect to the Revolving Credit Commitment. 2 B. The following definitions are added to PARAGRAPH 1A: "CONSOLIDATED NET INCOME" means, with respect to any period, the net income of Borrower and its Restricted Subsidiaries on a consolidated basis, all determined in accordance with GAAP; provided that any non-recurring charges related to acquisitions shall be excluded from the determination of such net income. "DEBT SERVICE" means, with respect to any period, an amount equal to the sum of (a) Consolidated Interest Expense for such period and (b) the scheduled amortization of Term Loans A and C. "DEBT SERVICE COVERAGE RATIO" means, with respect to any period, the ratio of (1) EBIT for such period to (ii) Debt Service for such period. "LNB REVOLVING CREDIT COMMITMENT" means the obligations of LNB to make Revolving Credit Loans in an aggregate amount at any one time outstanding up to but not exceeding (a) $15,000,000 during the period from the date of Amendment No. 1 to this Agreement, to and including December 30, 1999, (b) $25,000,000 during the period from December 31, 1999, to and including December 30, 2000, and (c) $30,000,000 during the period from December 31, 2000, to and including the Revolving Credit Maturity Date. "PARIBAS REVOLVING CREDIT COMMITMENT" means the obligations of Paribas to make Revolving Credit Loans in an aggregate amount at any one time outstanding up to but not exceeding $20,000,000. "REQUIRED TERM LOAN C LENDERS" means the Term Loan C Lenders holding more than sixty-six and two-thirds percent (66-2/3 %) of the unpaid principal amount of the Term Loan C Loan. "TERM LOAN C" shall have the meaning assigned to such term in Paragraph 5-1A hereof. "TERM LOAN C LENDER" means the holder of the Term Loan C Note. "TERM LOAN C NOTE" means that certain Term Loan C Note dated as of the date of Amendment No.1 to this Agreement in the principal amount of $7,500,000 made payable by Borrower to the order of LNB, as such Term Loan C Note may be amended, modified or supplemented from time to time, and together with any renewals thereof, and exchanges or substitutions therefor. C. PARAGRAPH 2A is amended and restated as follows: 2A. REVOLVING CREDIT COMMITMENTS. On the terms and subject to the conditions set forth in this Agreement, each Revolving Credit Lender, severally and not jointly, agrees to make revolving credit available to Borrower from time to time prior to the Revolving Credit Termination Date in such aggregate amounts as Borrower may from time to time request but in no event exceeding such Lender's Revolving Credit Percentage of the Total Revolving Credit Commitment minus the outstanding Letter of Credit Obligations. The Total Revolving Credit Commitment shall be available to Borrower by means of the Revolving Credit Loans, it being understood that the Revolving Credit Loans 3 may be repaid and used again during the period from the date hereof to and including the Revolving Credit Termination Date, at which time the Revolving Credit Commitments shall expire. D. PARAGRAPH 4A(9) is amended and restated as follows: 4A(9) TERMINATION DATES: CONTINUANCE OF OBLIGATIONS. ETC. This Agreement, each Lender's obligation to loan monies to Borrower, and Borrower's ability to borrow monies from the Lenders shall be in effect until the Revolving Credit Termination Date, as to the Revolving Credit Commitment, the Term Loan B Termination Date, as to Term Loan B, July 1, 2000, as to Term Loan A, and September 1, 2003, as to Term Loan C. Notwithstanding the foregoing and until such date when Borrower's Liabilities shall be paid in full, Borrower's obligations hereunder and under the Other Agreements shall continue, interest shall continue to be paid in accordance with the foregoing and the Lenders shall retain all of their rights and remedies under this Agreement. E. PARAGRAPH 4A(14) is amended and restated as follows: 4A(14) PREPAYMENT. (a) PREPAYMENT. The principal, accrued interest and all other amounts of the Revolving Credit and Term Loan B Loans may be prepaid at any time by Borrower, in whole or in part, without premium or penalty. Term Loan A may be prepaid subject to the provisions of Paragraph 5E. Term Loan C may be prepaid subject to the provisions of Paragraph 5-1E. (1) APPLICATION AFTER DEFAULT. Notwithstanding anything contained in this Agreement to the contrary, upon the occurrence and during the continuance of an Event of Default, any prepayments made under this Paragraph 4A(14) shall be applied to Borrower's Liabilities in such order of priority as Lenders, in their sole discretion, shall determine, and, unless otherwise agreed by Lenders, to Term Loan A, Term Loan B, Term Loan C and the Revolving Credit Loans pro rata based upon the principal amount outstanding on each. F. The following Article 5-1 is added to the Credit Agreement: 5-1 TERM LOAN C 5-1A. TERM LOAN C: TERM LOAN C NOTE. On the terms and subject to the conditions set forth in this Agreement, LNB agrees to make a term loan (the "Term Loan C") to Borrower in the principal amount of Seven Million, Five Hundred Thousand 4 Dollars ($7,500,000). Term Loan C shall be evidenced by a promissory note to be executed and delivered by Borrower at or before the funding date substantially in the form set forth in Exhibit 5-lA hereto (the "Term Loan C Note"). 5-1B. BORROWING PROCEDURE UNDER TERM LOAN C. Borrower shall give LNB irrevocable telephonic notice, written notice or telecopied notice by no later than 12:00 p.m., Chicago time, on the date it requests the Term Loan C to be made. 5-1C. INTEREST RATE: DEFAULT RATE. Borrower hereby promises to pay interest on the unpaid principal amount of Term Loan C at the rate of 6.55% per annum (the "Fixed Rate"). If any payment of principal on Term Loan C is not paid when due, Term Loan C shall bear interest from the date such payment was due until paid in full, payable on demand, at a rate per annum equal to the sum of 3 % plus the Fixed Rate. Interest on Term Loan C shall be computed for the actual number of days elapsed on the basis of a 360-day year. Interest shall be payable in arrears on the last Business Day of each calendar month. 5-1D. INSTALLMENT PAYMENTS OF PRINCIPAL. The principal amount of Term Loan C shall be payable in quarterly installments of $93,750 on each December 31, March 31, June 30 and September30, commencing December 31,1998, and with a final installment on September 1, 2003, in the amount of the unpaid principal balance. 5-1E. PREPAYMENTS. Borrower may, from time to time, prepay Term Loan C in whole or in part and shall pay a prepayment fee equal to the "Make Whole Amount", if any. Prepayments of less than all of the outstanding balance of Term Loan C shall be applied to Term Loan C in reverse order of application. The Make Whole Amount shall mean as of any prepayment date, to the extent that the "Reinvestment Yield" on such date is lower than the "Base Rate", the product of (a) the number of days remaining until maturity of Term Loan C, multiplied by (b) the product of (i) the principal balance being prepaid, multiplied by (ii) a percentage obtained by dividing (X) the difference between the Reinvestment Yield and the Base Rate by (Y) 360. To the extent that the Reinvestment Yield on any prepayment date is equal to or higher than the interest rate payable on or in respect of such Term Loan C less 150 basis points, the Make Whole Amount is zero. Base Rate shall mean the Fixed Rate less 150 basis points. Reinvestment Yield shall mean the yield as set forth on page "USD" of the Bloomberg Financial Markets Service at 10:00 A.M. (Chicago time) on the prepayment date for actively traded U.S. Treasury securities having a maturity equal to the "Weighted Average Life to Maturity" of the Term Loan C Note Rounded to the nearest month, or if such yields shall not be reported as of such time or the yields as of such time are not ascertainable in accordance with the preceding clause, then the arithmetic mean of the yields published in the statistical release designated H. 15(519) of the Board of Governors of the Federal Reserve System under the caption "U.S. Government Securities--Treasury Constant 5 Maturities" for the maturity corresponding to the remaining Weighted Average Life to Maturity of Term Loan C Note as of the date of such prepayment rounded to the nearest month. If no maturity exactly corresponding to such rounded Weighted Average Life to Maturity shall appear therein, yields for the two most closely corresponding published maturities (one of which occurs prior and the other subsequent to the Weighted Average Life to Maturity) shall be calculated pursuant to the foregoing sentence and the Reinvestment Yield shall be interpolated from such yields on a straight-line basis (rounding, in each of such relevant periods, to the nearest month). For purposes hereof, Weighted Average Life to Maturity shall mean the number of years obtained by dividing (a) the then outstanding principal amount of the Term Loan C Note to be prepaid into the sum of the products obtained by multiplying (i) the amount of each then remaining other required prepayment, installment or payment, including payment at final maturity, foregone by such prepayment by (ii) the number of years (calculated to the nearest 1/12th) which would have elapsed between such date and the making of such prepayment or payment. 5-1F. USE OF PROCEEDS. Borrower shall apply the proceeds of Term Loan C to the prepayment of Term Loan B. No prepayment fee shall be payable with respect to such prepayment. G. PARAGRAPH 7A(iii) is amended and restated as follows: (a) together with each delivery of financial statements pursuant to clauses (i) and (ii) of this PARAGRAPH 7A, an officer's certificate executed by a Responsible Officer (a) stating that the Responsible Officer has reviewed the terms of this Agreement and the Notes and has made, or caused to be made under his or her supervision, a review in reasonable detail of the transactions and condition of Borrower and its Restricted Subsidiaries during the fiscal period covered by such financial statements and that such review has not disclosed the existence during or at the end of such fiscal period, and that the Responsible Officer does not have knowledge of the existence as at the date of the officer's certificate, of any condition or event which constitutes an Event of Default or with the giving of notice or passage of time or both would constitute an Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Borrower has taken or is taking or proposes to take with respect thereto, and (b) demonstrating (with computations in reasonable detail) compliance by Borrower with the provisions of PARAGRAPHS 8A(i), 8A(ii), 8A(iii), 8A(iv), 8C(v), 8C(2), 8C(3)(vii), 8C(3)(viii) and 8C(6)(iii) of this Agreement (herein called the "COMPUTATION PARAGRAPHS"); H. PARAGRAPH 7K is amended and restated as follows: 7K. MAINTENANCE OF ACCOUNTS. Borrower agrees to maintain its primary operational accounts with Agent and shall maintain an average balance of collected, 6 available funds in a non-interest bearing demand deposit account with Agent (the "Operating Account"). Borrower acknowledges that Agent will charge Borrower negotiated service charges in effect from time to time for various services performed by Agent in connection with any aspect of the relationship between Borrower and Agent. Agent may cause interest and other amounts payable on the obligations of Borrower to Agent and the Lenders hereunder to be paid by making a direct charge to the applicable Operating Account in accordance with the terms hereof. Subject to the provisions of the Offset Sharing Agreement, Agent shall apply its offset rights to Term Loan A, Term Loan B, Term Loan C and the Revolving Credit Loans pro rata based upon the principal amount outstanding on each. I. PARAGRAPH 8A is amended and restated as follows: 8A. (i) INTEREST COVERAGE. Permit the Interest Coverage Ratio determined as at each December 31, March 31, June 30 and September 30 for the four quarters then ended to be less than 4.0 to 1.0. (ii) CONSOLIDATED NET WORTH. Permit Consolidated Net Worth at any time to be less than $145,508,000 plus, to the extent positive, 80% of Consolidated Net Income for the period (taken as one accounting period) commencing July 1, 1998 and ending on the last day of the fiscal quarter most recently ended as of any date of determination. (iii) TANGIBLE NET WORTH. Permit Tangible Net Worth at any time to be less than $10,000,000, which Tangible Net Worth amount shall be determined at each September 30, December 31, March 31 and June 30. (iv) DEBT SERVICE COVERAGE. Permit the Debt Service Coverage Ratio determined as at each December 31, March 31, June 30 and September 30 for the four quarters then ended to be less than 2.0 to 1.0. J. The following paragraph is added to Article 9: 9X. YEAR 2000 COVENANT. Each of Borrower and its Restricted Subsidiaries has reviewed the areas within its business and operations which could be adversely affected by, and has developed or is developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by it may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), and has made related appropriate inquiry of material suppliers and vendors. Based on such review and program, each of Borrower and its Restricted Subsidiaries believes that the Year 2000 Problem will not have a material adverse effect on it. From time to time, at the request of Agent, Borrower shall 7 provide to Agent such updated information or documentation as is requested regarding the status of the efforts of Borrower and each of its Restricted Subsidiaries to address the Year 2000 Problem. K. PARAGRAPH 10A is amended and restated as follows: 10 DEFAULT 1OA. EVENTS OF DEFAULT. The occurrence of any one of the following events shall constitute a default ("Event of Default") by Borrower under this Agreement: (a) if Borrower fails or neglects to perform, keep or observe any covenant or agreement contained in PARAGRAPHS 7A, 7B, 7C or 7D or any subparagraph of PARAGRAPH 8 of this Agreement which is required to be performed, kept or observed by Borrower; (b) if Borrower fails or neglects to perform, keep or observe any covenant or agreement contained in PARAGRAPH 7E through PARAGRAPH 7J, inclusive, and such failure or neglect shall not be cured within; twenty (20) days after Borrower obtains actual knowledge thereof; (c) if Borrower fails or neglects to perform, keep or observe any other covenant or agreement contained in this Agreement or the Other Agreements and such failure or neglect shall not be cured within (90) days after Borrower obtains actual knowledge thereof; (d) if any representation or warranty made by Borrower herein or in any Other Agreement is breached or is false or misleading in any material respect when made, or any exhibit, schedule, certificate, financial statement, report, notice or other writing furnished by Borrower or any of its Responsible Officers to Agent or any Lender is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified; (e) if Borrower fails to pay Borrower's Liabilities when due and payable or declared due and payable; provided, however, that in the case of the payment of interest, costs, fees and expenses payable hereunder, such failure continues for five (5) days after any such payment is due; (f) if any of the property of Borrower or its Restricted Subsidiaries having an aggregate value in excess of $500,000 is attached, seized, subjected to a writ or distress warrant or is levied upon, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not terminated or dismissed within twenty (20) days thereafter; (g) if a petition under any section or chapter of the Bankruptcy Reform Act of 1978, as amended, or any similar law or regulation shall be filed by Borrower or any of its Restricted Subsidiaries or if Borrower or any of its Restricted Subsidiaries shall make an assignment for the benefit of creditors or if any case or proceeding is filed by Borrower or any of its Restricted Subsidiaries for their respective dissolution or liquidation; (h) if Borrower or any of its Restricted Subsidiaries is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business affairs or if a petition under any section or chapter of the Bankruptcy Reform Act of 1978, as amended, or any similar law or regulation is filed against Borrower or any of its Restricted Subsidiaries or if any case or proceeding is filed against Borrower or any of its Restricted Subsidiaries for its dissolution or liquidation and such injunction, restraint or petition is not dismissed or 8 stayed within ninety (90) days after the entry or filing thereof; (i) if an application is made by Borrower or any of its Restricted Subsidiaries for the appointment of a receiver, trustee or custodian for any assets of Borrower or its Restricted Subsidiaries; Q) if an application is made by any Person other than Borrower or its Restricted Subsidiaries for the appointment of a receiver, trustee or custodian for the property of the Borrower or its Restricted Subsidiaries having an aggregate value in excess of $500,000 and the same is not dismissed within ninety (90) days after the application therefor; (k) if a notice of lien, levy, or assessment is filed of record with respect to any of the property of the Borrower or its Restricted Subsidiaries having an aggregate value in excess of $500,000 by the United States or any department, agency or instrumentality thereof or by any state, county, municipal or other governmental agency, including without limitation the PB GC, or if any taxes or debts owing at any time or times thereafter to any one of them becomes a lien or encumbrance upon any of the property of the Borrower or its Restricted Subsidiaries having an aggregate value in excess of $500,000 and the same is not released within ninety (90) days after the same becomes a lien or encumbrance; (l) if Borrower or any Restricted Subsidiary becomes insolvent or is generally unable to pay its debts as they become due; (m) a final judgment in an amount in excess of $500,000 is rendered against Borrower or any Restricted Subsidiary and, within ninety (90) days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within ninety (90) days after the expiration of any such stay, such judgment is not discharged; (n) the Borrower or any Restricted Subsidiary defaults beyond any period of grace provided with respect thereto in any payment of principal of or premium or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extensions of credit), or the Borrower or any Restricted Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity, provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration shall occur and be continuing exceeds $500,000; (o) the occurrence of a material breach, a default or an event of default by Borrower under any of the Other Agreements after any cure period applicable to any such default or event of default has expired; (p) the occurrence of a Change of Control; and (q) the occurrence of a "Default" or "Event of Default" (as defined by the Note Agreement) by Borrower under the Note Agreement (after the expiration of any applicable cure periods thereunder). L. Paragraphs 12E(i) and (ii) are amended and restated as follows: 9 (i) This Agreement amends and restates in its entirety the Original Credit Agreement and, upon effectiveness of this Agreement, the terms and provisions of the Original Credit Agreement shall, subject to this PARAGRAPH 12E(i), be superseded hereby and thereby. All references to "Credit Agreement" contained in the Other Agreements delivered in connection with the Original Credit Agreement shall be deemed to refer to this Amended and Restated Credit Agreement. Notwithstanding the amendment and restatement of the Original Credit Agreement by this Agreement, the Loans owing to the Lenders by Borrower under the Original Credit Agreement remain outstanding as of the date hereof and constitute continuing Borrower's Liabilities hereunder. The Loans shall in all respects be continuing, and this Agreement shall not be deemed to evidence or result in a novation or repayment and reborrowing of the Loans. In furtherance of and without limiting the foregoing, from and after the date of this Agreement, the terms, conditions and covenants governing the Loans, the Revolving Credit Commitment and the Term Loan B Commitment shall be solely as set forth in this Agreement, which shall supersede the Original Credit Agreement in its entirety. (ii) This Agreement and the Other Agreements may not be modified, altered or amended except by an agreement in writing signed by Borrower, Agent and the Required Lenders, or by Borrower and Agent acting with the consent of the Required Lenders, and no provision of this Agreement may be waived except with the consent of the Required Lenders or by the Agent acting with the consent of the Required Lenders; PROVIDED, that: (a) no amendment or waiver shall, unless signed by each Lender directly affected thereby, increase or decrease any Commitment of any Lender, reduce the amount of or rate applicable to or postpone the date for payment of, any principal of or interest on any Loan or of any fee payable hereunder, alter, amend or modify the provisions of this SECTION 12E, the definitions of Required Lenders, Required Revolving Credit Lenders or Required Term Loan B Lenders, or any condition precedent set forth in Sections 4A(6) and 4B hereof or the provisions of Sections 4(A)(4), 7C, 8C(l), 8C(2), 8C(4), 8C(5) and 8C(l0), or affect the number of Lenders required to take any action hereunder; (b) any amendment of PARAGRAPH 3L hereof, or which increases the obligations of L/C Issuer, shall require the consent of the L/C Issuer; (c) any amendment of ARTICLE 11 hereof, or which increases the obligations of the Agent hereunder, shall require the consent of the Agent; (d) any provision of ARTICLE 5 hereof (Term Loan A) may be amended or waived by a writing signed by Borrower, Agent and the Required Term Loan A Lenders; (e) any provision of Article 6 hereof (Term Loan B) may be amended or waived by a writing signed by Borrower, Agent and the Required Term Loan B Lenders; and (f) any provision of Article 5-1 hereof (Term Loan C) may be amended or waived by a writing signed by Borrower, Agent and the Required Term Loan C Lenders. M. Exhibit 3A to the Credit Agreement is amended and restated in the form attached hereto as Exhibit A and a new Exhibit 5-lA in the form attached hereto as Exhibit B is added to the Credit Agreement. 3. CONDITIONS PRECEDENT. This Amendment No.1 shall become effective upon the satisfaction of the following conditions precedent: 10 3.1 PREPAYMENT OF TERM LOAN B. Term Loan B shall have been prepaid in full, and all accrued interest thereon shall have been paid. 3.2 EXECUTION AND DELIVERY OF AMENDMENT NO.1. This Amendment No.1 or counterparts thereof shall have been duly executed and delivered to Agent, Lenders and Borrower. 3.3 DOCUMENTS AND OTHER AGREEMENTS. Lenders shall have received all of the following, each in form and substance satisfactory to Lender: a. $30,000,000 Replacement Revolving Credit Note payable to LaSalle National Bank in the form of Exhibit A hereto. b. $20,000,000 Replacement Revolving Credit Note payable to Paribas in the form of Exhibit A hereto. c. $7,500,000 Term Loan C Note payable to LaSalle National Bank in the form of Exhibit B hereto. d. The legal opinion of Borrower's counsel in the form of Exhibit C hereto. 4. CONFIRMATION OF REPRESENTATIONS AND WARRANTIES. Borrower hereby confirms that the representations and warranties of Borrower contained in the Credit Agreement were correct in all material respects on and as of December 30, 1997, and that such representations and warranties are correct on the date hereof, except (i) to the extent that any such representation or warranty expressly relates to an earlier date, and (ii) for changes resulting from transactions contemplated or permitted by the Credit Agreement and changes occurring in the ordinary course of business that in the aggregate are not materially adverse. 5. NO DEFAULT. Borrower represents and warrants that no default or Event of Default exists as of the date hereof. 6. MISCELLANEOUS. The Credit Agreement is, and shall be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the date of this Amendment No. 1 (i) all references in the Credit Agreement to "this Agreement', "hereto", "hereof", "hereunder" or words of like import referring to the Credit Agreement shall mean the Credit Agreement as amended by this Amendment No. 1, and (ii) all references in the other Loan Documents to the "Credit Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Credit Agreement shall mean the Credit Agreement as amended by this Amendment No.1. The execution, delivery and effectiveness of this Amendment No.1 shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Agent or any Lender under the Credit Agreement or any other Loan Document, nor constitute a waiver of any provision of the Credit Agreement or any other Loan Document. This Amendment No.1 and the obligations arising hereunder shall be governed by, and construed and enforced in 11 accordance with, the laws of the State of Illinois applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. 7. COUNTERPARTS. This Amendment No.1 may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. [SIGNATURE PAGES FOLLOW] 12 IN WITNESS WHEREOF, this Amendment No.1 has been duly executed as of the date first above written. REGIS CORPORATION By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- Address for Notices: 7201 Metro Boulevard Minneapolis, Minnesota 55439 Telecopier No.: (612) 947-7900 Attention: Paul Finkelstein, President 5-1 LASALLE NATIONAL BANK, as Lender and as Agent By: /s/ David G. Killpack ------------------------------------ Name: David G. Killpack ------------------------------ Title: Vice President ----------------------------- Lending Office for all Loans: 135 South LaSalle Street Chicago, Illinois 60603 Address for Notices: 135 South LaSalle Street Chicago, Illinois 60603 Telecopier No.: (312) 904-6457 Attention: Mr. David G. Vice President BANQUE PARIBAS, as Lender and as L/C Issuer By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- 227 West Monroe Street, Suite 3300 Chicago, Illinois 60606 Address for Notices: 227 West Monroe Street, Suite 3300 Chicago, Illinois 60606 Telecopier No.: (312) 853-6020 Attention: Ms. Karen E. Coons Vice President S-2 EXHIBIT A TO AMENDMENT NO.1 EXHIBIT 3A TO AMENDED AND RESTATED CREDIT AGREEMENT REPLACEMENT REVOLVING CREDIT NOTE $______________ Chicago, Illinois September ,1998 FOR VALUE RECEWED, on or before October 31, 2001 (or, if such day is not a Business Day, on the next following Business Day), the undersigned, REGIS CORPORATION, a Minnesota corporation (herein, together with its successors and assigns, called the "Borrower"), promises to pay to the order of _____________________, a __________________ (herein, together with its successors and assigns, called the "Bank"), the maximum principal sum of _____________________ DOLLARS ($ ---------), or, if less, the aggregate unpaid principal amount of all Revolving Credit Loans made by the Bank to the undersigned pursuant to that certain Amended and Restated Credit Agreement dated as of December 30, 1997, between the Borrower, the Lenders signatory thereto from time to time, and LaSalle National Bank, as Agent for the Lenders (the "Agent") (herein, as the same may be further amended, modified or supplemented from time to time, called the "Credit Agreement"), as shown in the Bank's records. The Borrower further promises to pay to the order of the Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at such rates and at such times as shall be determined in accordance with the provisions of the Credit Agreement. Accrued interest shall be payable on the dates specified in the Credit Agreement. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at the Agent's principal office at 135 South LaSalle Street, Chicago, Illinois 60603, for the benefit of the Bank pursuant to the Credit Agreement, or at such other place as may be designated by the Agent to the Borrower in writing. This Note is the one of the Revolving Credit Notes referred to in, evidences indebtedness incurred under, and is subject to the terms and provisions of the Credit Agreement, including, without limitation, the provisions in ARTICLES 2 AND 3 therein. The Credit Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. In addition to, and not in limitation of, the foregoing and the provisions of the Credit Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. This Note replaces in its entirety and is in substitution for but not in payment of that certain Replacement Revolving Credit Note dated as of December 30,1997 (the "Prior Note") made by Borrower in favor of Bank in the maximum principal amount available of $________, and does not and shall not be deemed to constitute a novation thereof. Such Prior Note shall be of no further force and effect upon the execution of this Note; PROVIDED, HOWEVER, that all outstanding indebtedness, including, without limitation, principal and interest, under the Prior Note as of the date of this Note is hereby deemed indebtedness evidenced by this Note and is incorporated herein by this reference. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of the Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. REGIS CORPORATION By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- 2 EXHIBIT B TO AMENDMENT NO.1 EXHIBIT 5-1A TO AMENDED AND RESTATED CREDIT AGREEMENT TERM LOAN C NOTE $7,500,000 Chicago, Illinois September ___ 1998 FOR VALUE RECEIVED, the undersigned, REGIS CORPORATION, a Minnesota corporation (herein, together with its successors and assigns, called the "Borrower"), promises to pay to the order of LASALLE NATIONAL BANK, a national banking association (herein, together with its successors and assigns, called the "Bank"), the principal sum of SEVEN MILLION, FIVE HUNDRED THOUSAND DOLLARS ($7,500,000), together with interest on the unpaid principal amount of this Note outstanding from time to time. This Note is the Term Loan C Note refereed to in, evidences indebtedness incurred under, and is subject to the terms and provisions of, that certain Amended and Restated Credit Agreement dated as of December 30, 1997, as amended, between the Borrower, the Lenders signatory thereto from time to time, and LaSalle National Bank, as Agent for the Lenders (the "Agent") (herein, as the same may be further amended, modified or supplemented from time to time, called the "Credit Agreement"), including, without limitation, the provisions in Article 5-1 therein. The Credit Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Term Loan C Note may or must be paid prior to its due date or may have its due date accelerated. Terms used but not otherwise defined herein are used herein as defined in the Credit Agreement. The Borrower further promises to pay to the order of the Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at such rates and at such times as shall be determined in accordance with the provisions of the Credit Agreement. Accrued interest shall be payable on the dates specified in the Credit Agreement. The principal amount of the indebtedness evidenced hereby shall be payable in installments in the amounts and on the dates specified in the Credit Agreement and, if not sooner paid in full, on, September 1, 2003. Payments of both principal and interest are to be made in the lawful money of the United States of America in immediately available funds at the Bank's principal office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as may be designated by the Bank to the Borrower in writing. In addition to, and not in limitation of, the foregoing and the provisions of the Credit Agreement hereinabove referred to, the Borrower further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including attorneys' fees and expenses, incurred by the holder of this Note in seeking to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. This Note is binding upon the undersigned and its successors and assigns, and shall inure to the benefit of the Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois without regard to conflict of laws principles. REGIS CORPORATION By: ------------------------------------ Name: ------------------------------ Title: ----------------------------- 2 EXHIBIT C TO AMENDMENT NO.1 FORM OF OPINION OF BORROWER'S COUNSEL September __ 1998 Each of the Lenders under the Credit Agreement refereed to below LaSalle National Bank, as Agent for the Lenders under the Credit Agreement refereed to below 135 South LaSalle Street Chicago, IL 60603 Re: REGIS CORPORATION Ladies and Gentlemen: I have acted as legal counsel to Regis Corporation (the "Borrower") in connection with the preparation, execution and delivery of an Amendment No.1 to Amended and Restated Credit Agreement (the "Credit Agreement") dated as of September , 1998, by and between the Borrower, the Lenders signatory thereto from time to time, and LaSalle National Bank, as Agent for the Lenders (the "Agent"), replacement Revolving Credit Notes dated September ,1998, payable to each of the Lenders: and the Term Loan C Note payable to Lasalle National Bank (the Credit Agreement, ~ Replacement Revolving Credit Notes and the Term Loan C Note are collectively refereed to herein as the "Loan Documents"). In connection with that representation, I have examined the Articles of Incorporation and Bylaws of the Borrower and its Subsidiaries, the corporation records of the meetings of the Board of Directors of said corporations, the Credit Agreement, the replacement Revolving Credit Notes and the Term Loan C Note and such other documents, records, instruments, laws and regulations, and have made such inquiries, as I have deemed appropriate for purposes of this opinion. Except for the signatures on behalf of the Borrower on the Credit Agreement, the Replacement Revolving Credit Notes and the Term Loan C Note, I have assumed and not independently verified that all signatures on all signed documents are genuine. All defined terms used herein, except as otherwise defined herein, are used with the same meaning as defined in or used in the Credit Agreement. September __, 1998 Page 2 Based on the foregoing, and relying thereon, I am of the opinion that under current law: I. Each of the Borrower and its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its state of incorporation, and is in good standing, duly licensed and qualified to transact business in all jurisdictions where the character of the property owned or leased by it or the nature of the business transacted by it makes such licensing or qualification necessary. Each of the Borrower and its Subsidiaries has all requisite power and authority, corporate or otherwise, to conduct its business and to own its properties, and to execute, deliver and perform all of its obligations under the Credit Agreement. II. The execution, delivery and performance by the Borrower of the Loan Documents and all documents relating to the Loan Documents have been duly authorized by all necessary action and do not (i) require any consent or approval of the stockholders of any entity, or any consent or approval by any governmental entity, or any consent or approval of any party to any indenture, instrument or agreement known to me to which the Borrower or any of its Subsidiaries is a party or by which any of them or their property may be bound, (ii) violate any provision of any law, rule or regulation, order or decree presently in effect having applicability to the Borrower, (iii) to the best of my knowledge, conflict with, result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower or any of its Subsidiaries is a party or by which any of them or their properties may be bound or affected, or (iv) result in or require the creating or imposition of any mortgage, deed or trust, pledge, lien, security interest, or other charge or encumbrance of any nature (other than in favor of the Lenders) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower and its Subsidiaries. III. The Credit Agreement constitutes the legal, valid and binding obligations of the Borrower and is enforceable against the Borrower in accordance with its terms, subject only to the application of bankruptcy, insolvency, moratorium, reorganization and other laws affecting creditors' rights generally and to usual equity principles. Each of the Loan Documents has been duly executed and delivered by the Borrower. IV. To the best of my knowledge, there are no actions, suits or proceedings pending or threatened against the Borrower or any of its Subsidiaries before any court or governmental entity which, if determined adversely to the Borrower or any of its Subsidiaries, could have a material adverse effect on the financial condition, properties or operations of the Borrower or any of its Subsidiaries. September __,1998 Page 3 V. Borrower is not an "investment company" registered or required to be registered under the Investment Company Act of 1940, as amended, or, to our knowledge, controlled by such a company. VI. Borrower is not a "holding company" or a "subsidiary company" of a "holding company" or an "AFFILIATE" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. Very truly yours, Bert M. Gross EX-10.(LL) 6 EXHIBIT 10(LL) NATWEST ACQUISITION FINANCE Thc Directors Regis Europe Limited 110 Park Street London W1Y 3RB 10 August 1998 Dear Sirs CREDIT AGREEMENT DATED 22 SEPTEMBER 1995 AS VARIED AND RESTATED BY VARIATION AND RE-STATEMENT AGREEMENTS DATED 22 MARCH 1996 AND 10 AUGUST 1998 MADE BETWEEN (1) REGIS EUROPE LIMITED (THE "BORROWER") AND (2) NATIONAL WESTMINSTER BANK PLC (THE "BANK") (THE "CREDIT AGREEMENT") We refer to the Credit Agreement. This letter is the Overdraft Facility Letter referred to in the Credit Agreement and this letter replaces the overdraft facility letter of 6th February 1997. Words and expressions defined in the Credit Agreement shall have the same meaning when used herein, unless otherwise defined. The following facilities are to be granted on the Bank's usual banking terms and are repayable on demand. For the avoidance of doubt, the Borrower by signing this letter, agrees that it will comply with the obligations expressed to be undertaken or imposed upon it under the Credit Agreement as if such obligations were set out in this letter and, without prejudice to the Bank's right to make demand, if the Borrower fails to comply with the said obligations then the Bank's rights shall be those under the Credit Agreement. The overdraft facility granted pursuant to this letter (the "Overdraft Facility") is available through the Bank's Mayfair branch at P0 Box 4ND, 18a Curzon Street, London W1A 4ND for the purpose of financing the overdraft requirements of the Borrower from time to time and, without prejudice to our right to make demand, it is our present intention to review the Overdraft Facility annually. No utilisation under the Overdraft Facility may be used for any unlawful purpose including, in particular, for any purpose in breach of section 151 of the Act. BORROWER: The Borrower FACILITY Overdraft LIMIT The maximum amount of the Overdraft Facility (the "Limit") shall be L2,750,000. [LETTERHEAD] INTEREST 1.75 per cent per annum over the Bank's base lending rate from time to time. Interest will be debited to the Borrower's current account on each quarter day in accordance with the Bank's usual practice. PAYMENTS: All payments under these facilities by the Borrower are to be made free and clear of any set-off, deduction and withholdings. SECURITY: The Overdraft Facility ranks pari passu with the Term Loan Facility and is to be secured under the Guarantees and Debentures granted by each of the Borrower and Target and the Keyman Insurance Assignment granted by the Borrower. GOVERNING LAW: The Overdraft Facility is to be governed by and construed in accordance with English law. AVAILABILITY: These facilities are available on the later of the date when a signed copy of this letter is received by the Bank and the Effective Date (as defined in the Second Variation and Restatement Agreement). Yours faithfully /s/ [ILLEGIBLE] For and on behalf of NATIONAL WESTMINSTER BANK PLC Accepted and Agreed, /s/ [ILLEGIBLE] For and on behalf of REGIS EUROPE LIMITED -2- DATED 10 August 1998 -------------------- REGIS EUROPE LIMITED - and - NATIONAL WESTMINSTER BANK Plc ------------------------------------ SECOND VARIATION AND RESTATEMENT AGREEMENT relating to a Credit Agreement dated 22nd September 1995 (as amended and restated by an amendment and restatement agreement dated 22nd March 1996) ------------------------------------ W I L D E S A P T E ---- LONDON
TABLE OF CONTENTS CLAUSE DESCRIPTION PAGE NO. 1. INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . 1 2. AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . 2 3. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . 2 4. FEES AND EXPENSES. . . . . . . . . . . . . . . . . . . . . 2 5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . 3 6. CREDIT AGREEMENT TO REMAIN IN FULL FORCE AND EFFECT . . . 3 7. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . 3 8. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . 3 9. LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SCHEDULE 1 - REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . 4 SCHEDULE 2 - RESTATED CREDIT AGREEMENT . . . . . . . . . . . . . . . 6
THIS AGREEMENT is made the 10 day of August 1998 BETWEEN: (1) REGIS EUROPE LIMITED, a company incorporated under the laws of England and Wales with registered number 02108396 (the "BORROWER"); (2) NATIONAL WESTMINSTER BANK Plc acting through its Mayfair Branch at P0 Box 4ND, 18a Curzon Street, London W1A 4ND (the "BANK"); WHEREAS (A) Pursuant to a Credit Agreement dated 22nd September 1995 (as amended and restated by an amendment and restatement agreement dated 22nd March 1996) made between (1) the Borrower and (2) the Bank, (the "CREDIT AGREEMENT") the Bank has made available to the Borrower loan facilities upon the terms and conditions thereof. (B) The Borrower has requested and the Bank has agreed to vary and amend certain provisions of the Credit Agreement, and to restate the Credit Agreement as so amended and varied. NOW IT IS HEREBY AGREED as follows: 1. INTERPRETATION 1.1 References herein to this Agreement shall include the Schedules hereto and words and expressions defined in the Credit Agreement shall have the same meanings in this Agreement unless otherwise defined herein and in addition the following words and expressions shall have the following meanings: "AMENDING DOCUMENTS" means this Agreement and the Overdraft Facility Letter. "CONDITIONS PRECEDENT" means each of the conditions set out in Clause 3. "EFFECTIVE DATE" means the date on which the Bank confirms in writing to the Borrower that each of the Conditions Precedent has been satisfied in full or waived. "OVERDRAFT FACILITY LETTER" means the letter dated on or about today's date under which an overdraft facility in an amount of L2,750,000 is to be made available to the Borrower by the Bank. 1.2 For the avoidance of doubt only, but without prejudice to the generality of Clause 2.1 below, it is hereby agreed and declared that the provisions set out in Clauses 1.3 and 1.4 of the Credit Agreement shall apply to this Agreement save that references in that Clause to "this Agreement" are deemed to be references to this Agreement and not to the Credit Agreement. -1- 2. AMENDMENT 2.1 With effect from the Effective Date, the Credit Agreement shall be amended and varied so as to be in the form set out in Schedule 2. 2.2 The terms of this Agreement shall be deemed to have been incorporated into the Credit Agreement as of and with effect from the Effective Date. The Credit Agreement as amended, varied and restated by this Agreement shall remain in full force and effect and any reference therein to "this Agreement", "hereof", "hereunder" and expressions of similar import shall, unless the context otherwise requires, be read and construed as references to the Credit Agreement amended and restated by this Agreement. 2.3 Clause 2.1 and the amendment and variation of the Credit Agreement effected thereby shall not reduce, extinguish or otherwise adversely affect any of the rights or remedies of the Bank, under the Credit Agreement prior to the Effective Date. 3. CONDITIONS PRECEDENT This Agreement shall only take effect upon the satisfaction of each of the following conditions on or prior to 14th August 1998 (unless waived in writing by the Bank on or prior to that date): (a) The Bank shall have received each of the following in form and substance satisfactory to the Bank: (i) this Agreement duly executed by the parties hereto; (ii) the Overdraft Facility Letter duly executed by the parties hereto; (iii) certified copies of the Certification of Incorporation and the Memorandum and Articles of Association of each company in the Charging Group or a certificate from the Company Secretary of such company certifying that such Memorandum and Articles of Association have not been amended since the date on which copies of the same were last provided or so certified to the Bank; (iv) a Certified Copy of the minutes (in the agreed form) of a meeting of the board of directors of the Borrower, approving and authorising the execution and performance of the Amending Documents and authorising a person or persons to sign or otherwise attest the due execution of such documents; and (b) The Bank shall have received the arrangement fee referred to in Clause 4. 4. FEES AND EXPENSES 4.1 In consideration of the Bank entering into this Agreement, the Borrower shall on the date hereof pay to the Bank an arrangement fee of L36,000. -2- 4.2 The Borrower shall pay on demand all costs, fees and expenses (including but not limited to legal fees) and any VAT thereon incurred by the Bank in connection with the negotiation, preparation and execution of this Agreement. 5. REPRESENTATIONS AND WARRANTIES 5.1 The Borrower hereby acknowledges that the Bank has entered into this Agreement and accepted the security, guarantees and indemnities granted in favour of the Bank in full reliance of the representations and warranties made under this Clause 5. 5.2 The Borrower represents and warrants to the Bank in relation to itself and each of the companies of the Charging Group that on the Effective Date the representations and warranties made in Schedule 1 of this Agreement are true and accurate. 6. CREDIT AGREEMENT TO REMAIN IN FULL FORCE AND EFFECT Save as expressly amended by this Agreement, the Credit Agreement shall remain in full force and effect. 7. SEVERABILITY If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction and the legality, validity or enforceability of the remaining provisions hereof nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be effected or impaired thereby. 8. COUNTERPARTS This Agreement may be executed in any number of counterparts which taken together shall constitute one Agreement. 9. LAW This Agreement shall be governed by and construed in accordance with English law. IN WITNESS whereof the parties hereto have caused this Agreement to be duly executed the day and year first written above. -3- SCHEDULE 1 REPRESENTATIONS AND WARRANTIES 1. It is a limited company incorporated under the laws of its jurisdiction of incorporation, which possesses the capacity to sue and be sued in its own name and which has the power to carry on its business and to own its property and other assets. 2. It has power and capacity to execute, deliver and perform its obligations under the Amending Documents to which it is a party and all necessary corporate, shareholder and other action has been taken and consents given to authorise the execution, delivery and performance of the same. 3. Its obligations under the Amending Documents to which it is a party constitute its legal, valid and binding obligations and are in full force and effect. 4. Its execution and delivery and performance and discharge of its obligations and liabilities under the Amending Documents to which it is a party do not and will not: (i) contravene any law or regulation or any order of any governmental or other official authority, body or agency or any judgment, order or decree of any court having jurisdiction over it; or (ii) conflict with, or result in any breach of any of the terms of, or constitute a default under, any agreement or other instrument to which it is a party or any licence or other authorisation to which it is subject or by which it or any of its property is bound; or (iii) contravene or conflict with any provision of its memorandum and articles of association and, in particular, it has no limit on its power to incur Indebtedness. 5. All licences, consents, exemptions, clearances, filings, registrations, payments of duties or taxes, notarisations and authorisations as are or may be necessary or desirable for the proper conduct of its business, trade and ordinary activities and for the performance and discharge of its obligations and liabilities under the Amending Documents to which it is a party and which are required in connection with the execution, delivery, validity, enforceability or admissibility in evidence of the Amending Documents to which it is a party are in full force and effect; 6. It has not taken any action nor have any steps been taken or legal proceedings been started or threatened in writing against it for winding-up, dissolution or re-organisation, the enforcement of any Encumbrance over its assets or for the appointment of a receiver, administrative receiver, or administrator, trustee or similar officer of it or of any or all of its assets or any other procedure under which it obtains protection from any of its creditors. 7. It is not in breach or in default under any of any deed, instrument or agreement to which it is a party or which is binding on it or any of its assets. 8. No action, litigation, arbitration or administrative proceeding has been started or (so far as it is aware having made all appropriate enquiry) is pending or threatened against it, nor is there -4- subsisting any unsatisfied judgment or award given against it by any court, board of arbitration or other body. 9. All of its assets are free from any Encumbrances, other than Permitted Encumbrances. 10. It has no Indebtedness outstanding other than Permitted Indebtedness. 11. No Default or Default Occurrence has occurred or is continuing unwaived. -5- SCHEDULE 2 RESTATED CREDIT AGREEMENT -6- 22ND SEPTEMBER 1995 REGIS EUROPE LIMITED - and - NATIONAL WESTMINSTER BANK PLc ------------------------------------------------ CREDIT AGREEMENT (as amended by amendment and restatement agreements dated 22nd March 1996 and 10 August 1998) ------------------------------------------------ WILDE SAPTE London TABLE OF CONTENTS
CLAUSE HEADING PAGE NO. - ------ ------- -------- 1. DEFINITONS AND INTERPRETATION . . . . . . . . . . . . . . . 1 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Financial Undertakings Definitions. . . . . . . . . . . . . 9 1.3 Clause Headings . . . . . . . . . . . . . . . . . . . . . . 9 1.4 Interpretation. . . . . . . . . . . . . . . . . . . . . . . 9 2. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . 10 2.1 Satisfaction of Conditions Precedent. . . . . . . . . . . . 10 3. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . 10 3.1 Acknowledgement of Reliance on all Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . 10 3.2 Original Representations and Warranties . . . . . . . . . . 10 4. THE TERM LOAN FACILITY. . . . . . . . . . . . . . . . . . . 10 4.1 The Term Loan Facility. . . . . . . . . . . . . . . . . . . 10 4.2 Purpose of the Term Loan Facility . . . . . . . . . . . . . 10 4.3 Availability and Drawdown of the Term Loan. . . . . . . . . 11 5. INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 Duration of Interest Periods. . . . . . . . . . . . . . . . 11 5.3 Default Interest. . . . . . . . . . . . . . . . . . . . . . 12 5.4 Calculation and Payment of Interest . . . . . . . . . . . . 12 5.5 Bank's Determination. . . . . . . . . . . . . . . . . . . . 13 6. REPAYMENT AND PREPAYMENT. . . . . . . . . . . . . . . . . . 13 6.1 Repayment of the Term Loan. . . . . . . . . . . . . . . . . 13 6.2 Voluntary Prepayment of the Term Loan . . . . . . . . . . . 14 6.2.5 Order of Application of Prepayments . . . . . . . . . . . . 14 6.3 No re-borrowing . . . . . . . . . . . . . . . . . . . . . . 14 7. MARKET DISRUPTION, ILLEGALITY, INCREASED COSTS, GROSSING UP AND OTHER INCREASED COSTS AND EXPENSES. . . . . . . . . . . 14 8. PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 14 8.1 Funds and Place . . . . . . . . . . . . . . . . . . . . . . 14 8.2 Business Day. . . . . . . . . . . . . . . . . . . . . . . . 14 8.3 Breakage Costs. . . . . . . . . . . . . . . . . . . . . . . 15 8.4 Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.5 Appropriation . . . . . . . . . . . . . . . . . . . . . . . 15 9. UNDERTAKINGS. . . . . . . . . . . . . . . . . . . . . . . . 15 9.1 Information Undertakings. . . . . . . . . . . . . . . . . . 15 9.2 Financial Undertakings. . . . . . . . . . . . . . . . . . . 18 9.3 Positive Undertakings . . . . . . . . . . . . . . . . . . . 28 9.4 Negative Undertakings . . . . . . . . . . . . . . . . . . . 29 10. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.1 Default . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.2 Acceleration. . . . . . . . . . . . . . . . . . . . . . . . 33 11. SET-OFF . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12. FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . 34 12.1 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 34 12.2 Arrangement Fee . . . . . . . . . . . . . . . . . . . . . . 34 12.3 Monitoring Fee. . . . . . . . . . . . . . . . . . . . . . . 34 13. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . 34 13.1 Severance . . . . . . . . . . . . . . . . . . . . . . . . . 34 13.2 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . 35 14. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . 35 14.1 Method. . . . . . . . . . . . . . . . . . . . . . . . . . . 35 14.2 Delivery. . . . . . . . . . . . . . . . . . . . . . . . . . 35 14.3 Addresses . . . . . . . . . . . . . . . . . . . . . . . . . 35 14.4 Deemed Receipt. . . . . . . . . . . . . . . . . . . . . . . 36 15. ASSIGNMENTS AND TRANSFERS . . . . . . . . . . . . . . . . . 36 15.1 Benefit of Agreement. . . . . . . . . . . . . . . . . . . . 36 15.2 Assignments and Transfers by the Borrower . . . . . . . . . 36 15.3 Assignments and Transfers by the Bank . . . . . . . . . . . 36 15.4 Disclosure of Information . . . . . . . . . . . . . . . . . 37 15.5 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . 37 16. LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SCHEDULE 1 - Details of the Group. . . . . . . . . . . . . . . . . . 38 SCHEDULE 2 - Conditions Precedent for the purpose of Clause 2. . . . 39 SCHEDULE 3 - Mandatory Liquid Assets Costs Formula . . . . . . . . . 41 SCHEDULE 4 - Part 1- Drawdown Notice . . . . . . . . . . . . . . . . 43 SCHEDULE 5 - Representations and Warranties made under Clause 3.2. . 44 SCHEDULE 6 - Part 1 Auditors' Confirmation . . . . . . . . . . . . . 46 Part 2 Certificate for Clause 9.1(e). . . . . . . . . . 49 SCHEDULE 7 - Market Disruption/Increased Costs etc. . . . . . . . . 55 SCHEDULE 8 - Base Case Model . . . . . . . . . . . . . . . . . . . . 59
THIS AGREEMENT is made the 22nd day of September 1995 BY: (1) REGIS EUROPE LIMITED, a company incorporated in England and Wales and registered under number 02108396 (the "BORROWER"); and (2) NATIONAL WESTMINSTER BANK PLc acting through its Mayfair Branch at P0 Box 44ND, 18a Curzon Street, London W1A 4ND (the "BANK"). 1. DEFINITIONS AND INTERPRETATION 1.1 DEFINITIONS In this Agreement, unless otherwise expressly provided: "ACCOUNTANTS' REPORT" means the report prepared by Coopers & Lybrand relating to the Group dated on or about 19th September and addressed to the Bank; "ACCOUNTING PERIOD" has the meaning given to it in Clause 9.1(b); "ACCOUNTING PRINCIPLES" means the Generally Accepted Accounting Principles used in the preparation of the Business Plan as such principles may be amended; modified or supplemented in the way contemplated in Clause 9.2.3; "ACCOUNTS" means, for each Financial Year of the Borrower, the Borrower's audited consolidated accounts (including all additional information and notes thereto) for that Financial Year, audited by the Auditors, together with the relative directors' report and Auditors' report; "ACQUISITION AGREEMENT" means the sale and purchase agreement dated 9th August 1995 relating to the sale by the Vendor and purchase by the Borrower of the Target Shares and under which Regis Corporation has guaranteed the obligations of the Borrower to the Vendor on the terms and subject to the conditions of that agreement; "ACQUISITION DOCUMENTS" means all of: (a) the Acquisition Agreement including the Exhibits referred to in that agreement; (b) a letter dated 9th August 1995 signed by Wella Aktiengesellschaft; and (c) a letter dated 9th August 1995 addressed to Regis Corporation from the Vendor; "ACQUISITION PURCHASE PRICE" means the aggregate purchase consideration payable by the Borrower for the Target Shares under clause 4 of the Acquisition Agreement; "ACT" means the Companies Act 1985; "AUDITORS" means, in relation to any company in the Charging Group, Coopers & Lybrand or any other firm of chartered accountants which shall have been previously approved by the Bank; -1- "BASE CASE MODEL" means the base case model set out in Schedule 8; "BUSINESS DAY" means a day on which banks are open for business in London (excluding Saturdays and Sundays); "BUSINESS PLAN" means the business plan for the Charging Group (in the agreed form) "CERTIFICATE DATE" has the meaning given to it in Clause 9.1(e); "CERTIFIED COPY" means, in relation to any document, a copy of such document bearing the endorsement "Certified on [specify date **] a true, complete and accurate copy of the original, which has not as at the above date been amended, varied, novated or supplemented otherwise than by each document, a Certified Copy of which is attached hereto", signed by a duly authorised officer of the company in question (or solicitors acting on behalf of the company in question) and which complies with such endorsement; "CHANGE" means in relation to the Bank (or any company of which the Bank is a Subsidiary), the introduction, implementation, repeal, withdrawal or change in, or in the interpretation or application of, (a) any law, regulation, practice or concession, or (b) any directive, requirement, request or guidance (whether or not having the force of law but if not having the force of law, one which applies generally to a class or category of financial institutions of which the Bank (or that company) forms part and compliance with which is in accordance with the general practice of those financial institutions) of the European community, any central bank including the European Central Bank, or any other fiscal, monetary, regulatory or other authority. "CHANGE OF CONTROL" means a change in the ownership of the issued share capital of the Borrower where a person, other than a person which is beneficial owner of shares in the capital of the Borrower on the date of this Agreement, (whether alone or together with any associated person or persons) becomes the beneficial owner of shares in the issued share capital of the Borrower carrying the right to exercise more than 50 per cent. of the votes exercisable at a general meeting of the Borrower: (for the purposes of this definition, "associated person" means, in relation to any person, a person who is either (a) acting in concert (as defined in the City Code on Take-Overs and Mergers) with such aforesaid person, or (b) "a connected person" of such aforesaid person as defined in section 839 of the Income and Corporation Taxes Act 1988); "CHARGING GROUP" means: (a) the companies details of which are set out in Schedule 1; and (b) any other company within the Group which shall have granted a Guarantee and a Debenture in favour of the Bank; "COMPLETION DATE" means 22nd September 1995; "CONDITIONS PRECEDENT" means each of the conditions precedent listed in Schedule 2; "DEBENTURE" means a debenture in the Banks standard form NWB 1014; "DEFAULT" means any of the events specified in Clause 10.1; -2- "DEFAULT OCCURRENCE" means any event which would constitute a Default if all notices required to be given and periods of time required to have expired under Clause 10.1 to make such event a Default, had been given, or expired; "DORMANT SUBSIDIARY" means a company in the Group incorporated in England and Wales which is dormant within the meaning of section 250(3) of the Act and has assets the aggregate gross value of which do not exceed L5,000; "DRAWDOWN DATE" means the Business Day on which any Term Loan Tranche is or is proposed to be borrowed pursuant to a Drawdown Notice; "DRAWDOWN NOTICE" means a notice substantially in the form set out in Part 1 of Schedule 4; "EMPLOYMENT CONTRACT" means the service agreement made or to be made between the Borrower and Anthony Rammelt; "ENCUMBRANCE" means any mortgage, charge, assignment for the purpose of security, pledge, lien, right of set-off, retention of title provisions or hypothecation or preferential right or trust arrangement for the purpose of, or which has the effect of, granting security or other security interest of any kind whatsoever, and any agreement, whether conditional or otherwise to create or grant any of the same; "FINANCIAL YEAR" has the meaning given to it in section 223 of the Act; "FINANCING DOCUMENTS" means this Agreement, the Overdraft Facility Letter, the Interest Rate Protection Agreements, any Drawdown Notice and the Security Documents; "FIRST VARIATION AND RESTATEMENT AGREEMENT" means the variation and restatement agreement relating to this Credit Agreement between (1) the Borrower and (2) the Bank dated 22nd March 1996. "FRS" means a financial reporting standard issued by the Accounting Standards Board for application in England and Wales and where referenced by a number means that particular financial reporting standard; "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means, in relation to companies incorporated anywhere in the United Kingdom, accounting principles, concepts, bases and policies generally adopted and accepted in England for the preparation and presentation of audited financial statements; "GROUP" means the Borrower, all of the companies details of which are set out in Schedule 1 and their respective Subsidiaries from time to time; "GUARANTEE" means a guarantee in the Bank's standard form NWB 1019; "INDEBTEDNESS" means, in relation to any person, its obligation (whether present or future, actual or contingent and whether incurred as principal or surety) for the payment or repayment of money (whether in respect of interest, principal or otherwise) incurred in respect of any of: (a) monies borrowed or raised; -3- (b) any bond, note, loan stock, debenture or similar instrument; (c) acceptance credit, bill-discounting, note purchase, factoring facilities and documentary credit facilities; (d) any liability for the supply of any goods and services which is more than 30 Business Days past the expiry of the period customarily allowed by the relative supplier after the due date; (e) payment obligations under hire purchase agreements, conditional sale agreements and leases; (f) guarantees, bonds, standby letters of credit or other similar instruments issued in connection with the performance of contracts; (g) interest rate or currency swap agreements and any other hedging instruments in respect of interest rates or currencies; and (h) counter-indemnities, guarantees or other assurances against financial loss in respect of the liability of obligation of any person; "INFORMATION PACKAGE" means: (a) the Accountants' Report; and (b) the Business Plan; "INSTALLMENT" has the meaning given to it in Clause 6.1; "INSTALLMENT REPAYMENT DATE" has the meaning given to it in Clause 6.1; "INTEREST DATE" means the last day of an Interest Period; "INTEREST PERIOD" means each period ascertained in accordance with Clause 5.2 for the purpose of calculating interest on the Term Loan or as the context requires, each period ascertained in accordance with Clause 5.3 for the purpose of calculating interest on any sum which is due and payable and unpaid; "INTEREST RATE PROTECTION AGREEMENTS" means each of the agreements, entered into or to be entered into by the Borrower and the Bank for the purpose of hedging the Borrower's interest rate liabilities in relation to all or any part of the Term Loan Facility; "KEYMAN INSURANCE" means a keyman life assurance policy (in form and content satisfactory to the Bank and with such insurer as the Bank has approved) maintained or to be maintained by the Borrower in respect of the death and disability of Anthony Rammelt or his successor, in the amount of L300,000 and for a period of 4 years: "KEYMAN INSURANCE ASSIGNMENT" means an assignment by way of security (in the agreed form) of the benefit of the Keyman Insurance; "LIBOR" means in respect of the Term Loan, part thereof or other sum, the rate per annum at which the Bank offers deposits in Sterling in an amount comparable with the Term Loan, -4- such part thereof or such sum, as the case may be, for a period equal to the relative Interest Period to lending banks in the London Inter-Bank Market at or about 11.00 a.m. (London time) on the first day of the relative Interest Period; "MANAGEMENT ACCOUNTS" has the meaning given to it in Clause 9.1(b); "MANDATORY LIQUID ASSET COSTS" means the additional cost to the Bank of compliance with the reserve asset ratio required by the Bank of England from time to time (if any), expressed as a rate per cent. per annum, calculated in accordance with the formula set out in Schedule 3; "MARGIN" means 2.0 per cent. per annum; "NEW ACCOUNTANTS' REPORT" means the reports prepared by Coopers & Lybrand and Wilder Coe relating to SHL, SSL and Demigod each dated on or about 6th March 1996 and addressed to the Bank together with a letter from Coopers & Lybrand dated 6th March 1996 and addressed to the Bank; "NEW ACQUISITION AGREEMENTS" means the sale and purchase agreements dated 29th December relating to the sale by the New Vendor and the purchase by the Borrower of the Shares of SHL and SSL; "NEW ACQUISITION DOCUMENTS" means all of the New Acquisition Agreements including the Exhibits and documents referred to therein; "NEW BUSINESS PLAN" means the business plan for SHL and SSL in the agreed form; "NEW INFORMATION PACKAGE" means the New Business Plan and the New Accountants Report; "NEW TRANSACTION COSTS" means the costs and expenses (including VAT) incurred by the Borrower under the New Transaction Documents (as defined in the First Variation and Restatement Agreement) and in relation to the New Information Package; "NEW VENDOR" means Steiner Group Limited, a company incorporated in England and Wales; "OPERATING BUDGET" means: (a) in relation to the period from the Completion Date to 30th June 1996, the Business Plan and the New Business Plan projections for that period; and (b) in relation to each Financial Year of the Borrower and Target SHL and SSL starting after 30th June 1996, a projected consolidated balance sheet, projected consolidated profit and loss account, projected consolidated cash flow statement and projected Capital Expenditure (as defined in Clause 9.2.1), (each on a month by month basis) together with a summary of all material assumptions and other bases upon which those projections were made for each such Financial Year; "OVERDRAFT FACILITY LETTER" means the letter dated 10 August 1998 under which an overdraft facility in an amount of L2,750,000 is to be made available to the Borrower by the Bank; -5- "OVERSEAS APPROVED FUNDING" means funding by the Borrower of Regis S.A. or S & L out of the proceeds of: (a) subscription for shares in the Borrower by Regis Corporation; and (b) a loan or loans made to the Borrower by Regis Corporation, in each case on terms and conditions approved by the Bank; "OVERSEAS CAPITAL EXPENDITURE PROGRAMME" means expenditure by Regis S.A. and S&L on fixed assets which is incurred within 3 years of the date of this Agreement and which cumulatively does not exceed L100,000 in aggregate per annum during such 3 year's period; "PERMITTED ENCUMBRANCE" means, in relation to any company in the Group: (a) Encumbrances subsisting under or in connection with any of the Financing Documents; (b) Encumbrances granted with the consent of the Bank; (c) liens arising and subsisting by operation of law in the ordinary course of trading activities; (d) any retention of title to goods supplied to that company where such retention is agreed in the ordinary course of its trading activities and on customary terms; and (e) rights of set-off arising by operation of law; "PERMITTED INDEBTEDNESS" means: (a) Indebtedness outstanding under the Financing Documents; (b) Indebtedness outstanding under Finance Leases (as defined in Clause 9.2) not exceeding in aggregate L60,000; (c) Indebtedness outstanding under operating leases; (d) Indebtedness in favour of Regis Corporation for Overseas Approved Funding; (e) Indebtedness outstanding under the Wella Agreement; (f) Indebtedness outstanding under an unsecured loan to Barclays Bank PLC in the sum of L15,000; (g) Indebtedness in favour of Regis Corporation pursuant to Clause 9.2.2(e)(iv). "PROPERTY" means all those freehold and leasehold properties owned by companies within the Charging Group from time to time; -6- "QUALIFYING BANK" means an institution which is a bank for the purposes of section 349 of the Income and Corporation Taxes Act 1988; "QUARTERLY ACCOUNTING PERIODS" means, in each Financial Year, the third, sixth, tenth and thirteenth Accounting Periods; "REGIS CORPORATION" means Regis Corporation, a company organised and existing under the laws of the state of Minnesota, whose principal places of business is at 7201 Metro Boulevard Minneapolis, Minnesota, MN 55439, USA; "REGIS CORPORATION INDEBTEDNESS" means the sum of L955,000 provided to the Borrower on inter company account by Regis Corporation for the purposes of financing the acquisitions made under the New Acquisition Agreements; "REGIS S.A." means Regis South Africa (Proprietary) Limited, a company incorporated in the Republic of South Africa and registered under number 73/11138/07; "REGIS S.A. COMFORT LETTER" means the letter (in the agreed form) issued or to be issued by the Borrower in favour of Regis S.A.; "REPAYMENT DATE" means 10th June 2001; "RESTRUCTURING COSTS" means the costs and expenses anticipated in the Business Plan and incurred by either the Borrower or Target on or after the Completion Date in connection with the reorganisation of the Target; "S & L" means S & L du Lac, Inc., a Delaware corporation having its principal office at 220 Fifth Avenue, New York, New York 1001, USA; "SECOND VARIATION AND RESTATEMENT AGREEMENT" means the variation and restatement agreement relating to this Credit Agreement (as amended and restated by the First Amendment and Restatement Agreement) between (1) the Borrower and (2) the Bank dated 10 August 1998; "SECURITY DOCUMENTS" means each Guarantee and each Debenture executed by a company within the Group, the Keyman Insurance Assignment and any other guarantee and security documents executed and delivered to the Bank after the date hereof by any company in the Group; "SECURITY PERIOD" means the period starting on the Completion Date and ending on the date on which all of the obligations and liabilities of the Borrower and the other companies in the Charging Group under each of the Financing Documents to the Bank have been unconditionally discharged in full and the Bank has no continuing liability to the Borrower in relation to the Term Loan Facility; "SSAP" means any statement of standard accounting practice issued by the Institute of Chartered Accountants for application in England and Wales and where referenced by a number means that particular statement; "STERLING" and "L" each means the lawful currency for the time being of the United Kingdom; -7- "SUBSIDIARY" means any subsidiary within the meaning of section 736 of the Act and any subsidiary undertaking within the meaning of section 258 of the Act and "Subsidiaries" shall be construed accordingly; "TARGET" means Essanelle Limited, a company incorporated in England and Wales under registered number 1115693; "TARGET SHARES" means all of the issued share capital of the Target; "TAX" includes all present and future taxes, charges, imposts, duties, levies, deductions, withholdings, or any amount payable on account of or in connection with any of the foregoing; "TAX ON OVERALL NET INCOME" means, in relation to the Bank, Tax (other thin Tax deducted or withheld from any payment) imposed on such Bank on its net profits by the United Kingdom; "TERM LOAN" means the principal aggregate amount of the Term Loan Tranches drawn down or to be drawn down under the Term Loan Facility and thereafter the aggregate principal amount from time to time outstanding; "TERM LOAN FACILITY" means the term loan facility referred to in Clause 4.1; "TERM LOAN TRANCHE" means any of Tranche A, Tranche B and Tranche C; "TRANCHE A" means a tranche of an original principal amount of L3,800,000 made available under the Term Loan Facility; "TRANCHE B" means a tranche of an original principal amount of L500,000 made available under the Term Loan Facility under Clause 4.3.2; "TRANCHE C" means a tranche of an original principal amount of L1,000,000 made available under the Term Loan Facility under Clause 4.3.2; "TRANSACTION COSTS" means the costs and expenses (including VAT) incurred by the Borrower under the Transaction Documents and in relation to the preparation of the Information Package; "TRANSACTION DOCUMENTS" means the Financing Documents, Acquisition Documents and the New Acquisition Documents; "VALUE ADDED TAX" and "VAT" means value added tax as provided for in the Value Added Tax Act 1983 and legislation supplemental thereto; "VENDOR" means FDB Friseur Dienstleistungs Betriebe GmbH & Co. Kg., a limited liability company organised and existing under the laws of Germany; "VENDOR LOAN NOTES" means the retention note dated 29th December 1995 issued by SHL in favour of the New Vendor; and -8- "WELLA AGREEMENT" means a finance agreement dated 1st December 1995 between (1) Intercosmetic (G.B.) Limited (trading as Wella Great Britain), (2) Openpark, (3) California Lines Limited and (4) the Borrower. 1.2 FINANCIAL UNDERTAKINGS DEFINITIONS Various defined terms used for the financial undertakings in Clause 9.2 are set out in Clause 9.2. 1.3 CLAUSE HEADINGS Clause headings in the Financing Documents are not to be used for the construction or interpretation of any of the Financing Documents. 1.4 INTERPRETATION In this Agreement, unless otherwise provided: (a) references to this Agreement or any other agreement are to be construed as references to this Agreement, or agreement in force for the time being and as amended, varied, supplemented or novated from time to time; (b) references to any person are to be construed so as to include that person's assigns or transferees (in accordance with the terms of the relative agreement or deed) or successors in title; (c) references to a document being "IN THE AGREED FORM" means that the document has been approved by the Bank and which shall be attached to a letter from the Bank to the Borrower confirming that the relative document is in the agreed form; (d) accounting terms are to be construed to be consistent with Generally Accepted Accounting Principles; (e) references to liabilities are to be construed so as to include all actual, contingent, present or future liabilities of the relative person; (f) references to "COMPANY" or "COMPANIES" are to be construed to include all persons and associations which are companies (within the meaning of section 735 of the Act), bodies corporate (within the meaning of section 740 of the Act) or would constitute (if acquired by any person) subsidiary undertakings (within the meaning of section 258 of the Act); (g) references to Clauses and Schedules are to clauses and schedules in this Agreement; and (h) the words "including" and "in particular" shall be construed as being by way of illustration or emphasis only and shall not be construed as, nor shall they take effect as, limiting the generality of any foregoing words. -9- 2. CONDITIONS PRECEDENT 2.1 SATISFACTION OF CONDITIONS PRECEDENT All conditions precedent have been satisfied. 3. REPRESENTATIONS AND WARRANTIES 3.1 ACKNOWLEDGEMENT OF RELIANCE ON ALL REPRESENTATIONS AND WARRANTIES The Borrower acknowledges that the Bank has entered into each of the Financing Documents and has accepted the guarantees, indemnities and security granted in its favour under the Security Documents in full reliance on each of the representations and warranties made in this Clause 3. 3.2 ORIGINAL REPRESENTATIONS AND WARRANTIES 3.2.1 It is acknowledged by the parties to this Agreement that the representations and warranties set out in Schedule 5 of this Agreement were given and made by the Borrower on or about the Completion Date and, subject to Clause 2 of the First Variation and Restatement Agreement and Clause 2 of the Second Variation and Restatement Agreement are not, nor shall they be deemed to be given, by the Borrower at any time thereafter. 3.2.2 Pursuant to Clause 2 of the First Variation and Restatement Agreement and Clause 2 of the Second Variation and Restatement Agreement, the Bank's right in relation to the above representations and warranties continue in full force and effect. 4. THE TERM LOAN FACILITY 4.1 THE TERM LOAN FACILITY Subject to the terms and conditions of this Agreement, the Bank, in full reliance on each of the representations and warranties made by the Borrower under Clause 3 agrees to make available to the Borrower a term loan facility in the maximum principal amount of L3,040,000, to be made available as Tranche A, Tranche B and Tranche C. 4.2 PURPOSE OF THE TERM LOAN FACILITY 4.2.1 (a) Tranche A has been used, in discharge of the Borrower's obligations in relation to the Acquisition Purchase Price for the Target Shares, repayment of certain of Target's Indebtedness and payment of the Transaction Costs. (b) Tranche B has been used in and towards the discharge of the Restructuring Costs and Transaction Costs. (c) Tranche C has been used in and towards the discharge in full of the Regis Corporation Indebtedness and any balance of Tranche C after discharge of the Regis Corporation Indebtedness has been be used for the general corporate purposes of the Borrower. -10- 4.2.2 The Bank shall not be obliged to enquire into the application by the Borrower of the proceeds of any Term Loan Tranche and the Bank shall not be responsible for the application of the proceeds of any Term Loan Tranche. 4.3 AVAILABILITY AND DRAWDOWN OF THE TERM LOAN 4.3.1 Tranche A was drawn down by the Borrower in full on 25th September 1995. 4.3.2 Tranche B has been drawn down in lull by the Borrower. 4.3.3 Tranche C was drawn down in full by the Borrower in March 1996. 4.3.4 The first Interest Period for Tranche B and Tranche C respectively shall start on the respective Tranche B, or Tranche C Drawdown Date and end on the next Interest Date for Tranche A. 4.3.5 Once given, any Drawdown Notice shall be irrevocable and shall oblige the Borrower to borrow in accordance with such notice. 4.3.6 The proceeds of each Term Loan Tranche will be paid to the credit of the Borrower's account with the Bank or otherwise as the Borrower may reasonably direct. 5. INTEREST 5.1 AMOUNT Interest shall accrue on the Term Loan from and including the Drawdown Date to, but excluding, the Repayment Date, at the rate determined by the Bank to be the aggregate of (a) the Margin; (b) LIBOR; and (c) the Mandatory Liquid Asset Costs. 5.2 DURATION OF INTEREST PERIODS 5.2.1 Interest payable on the Term Loan shall be calculated by reference to successive periods ascertained in accordance with this Clause 5.2 (each an "INTEREST PERIOD"). 5.2.2 (a) Except for the purpose of Clause 4.3, each Interest Period will be of 1, 3 or 6 months' duration (or such other period as is necessary for the Borrower to comply with its obligations under Clause 5.2.6) or such other period as the Bank may allow. (b) With effect from the Interest Date relating to Tranche B and Tranche C falling on or after 31st March 1996 all the Term Loan Tranches shall be consolidated into one Term Loan Tranche which will constitute the Term Loan. -11- 5.2.3 The first Interest Period for any Term Loan Tranche shall start on the relative Drawdown Date. Each succeeding Interest Period shall start on the last day of the preceding Interest Period. 5.2.4 The Borrower shall, not less than 3 Business Days before the last Business Day of each Interest Period, notify the Bank in writing of the duration of the next Interest Period. 5.2.5 If for any reason the Borrower fails to select the duration of any Interest Period for the Term Loan, it shall be deemed to have selected an Interest Period of 3 months or such other period as is necessary for the Borrower to comply with its obligations under Clause 5.2.6. 5.2.6 The Borrower shall ensure that an Interest Period ends on each Installment Repayment Date. 5.2.7 Notwithstanding any contrary provision in this Agreement, no Interest Period may be for a period such that it would expire after the Repayment Date and if the Borrower selects an Interest Period expiring after the Repayment Date, it shall be deemed to have selected one expiring on the Repayment Date. 5.2.8 Any Interest Period which commences on the last Business Day in a month or on a Business Day for which there is no numerically corresponding day in the month in which that Interest Period is to end, shall (subject to Clause 5.2.7) end on the last Business Day in that later month. 5.2.9 Any Interest Period which would otherwise end on a day which is not a Business Day shall on the next succeeding Business Day or, if that day falls in the following month, on the immediately preceding Business Day. 5.3 DEFAULT INTEREST 5.3.1 If the Borrower defaults in the payment of any amount due and payable under any of the Financing Documents on the due date, the Borrower shall pay default interest on such amount to the Bank from the due date to the date of actual payment in full calculated by reference to successive Interest Periods (each of such duration as the Bank may from time to time select and the first beginning on the relative due date) at the rate per annum being the aggregate of: (a) 1 per cent. per annum; (b) the Margin; (c) LIBOR; and (d) the Mandatory Liquid Asset Costs. 5.3.2 So long as such default continues, such rate shall be recalculated in accordance with this Clause 5.3 on the last day of each such Interest Period and unpaid interest then payable but unpaid under this Clause shall be compounded at the end of each such Interest Period. 5.4 CALCULATION AND PAYMENT OF INTEREST 5.4.1 As soon as is practicable following the beginning of each Interest Period, the Bank will notify the Borrower of the rate and amount of interest payable for that Interest Period, (but -12- in the case of such interest calculated under Clause 5.3.1, any such notification need not be more than weekly). 5.4.2 Interest due from the Borrower to the Bank under this Agreement shall: (a) accrue from day to day on the relative amount at the appropriate rate calculated under this Clause 5; (b) except as otherwise provided in this Agreement, be paid by the Borrower to the Bank in arrear on each Interest Date, save that in the case of any Interest Period which is longer than 6 months, the Borrower shall pay interest 6 monthly in arrear and on the relative Interest Date; (c) be calculated on the basis of the actual number of days elapsed and a 365 days year; and (d) be payable after as well as before judgment. 5.5 BANK'S DETERMINATION The determination by the Bank of the amount of any interest payable under any of Clauses 5.1 and 5.3 shall, save for manifest error, be conclusive and binding on the Borrower. 6. REPAYMENT AND PREPAYMENT 6.1 REPAYMENT OF THE TERM LOAN Subject to the terms of this Agreement, the Borrower shall repay the Term Loan by payment to the Bank on each date set out in Column A below (each date being an "INSTALMENT REPAYMENT DATE"), the Sterling amount of the instalment (each an "INSTALMENT") set out in Column B below opposite the relevant Installment Repayment Date (so that the Term Loan is repaid in full on or before the Repayment Date):
COLUMN A COLUMN B 25th September 1998 L250,000 21st December1998 L250,000 25th March 1999 L250,000 l0th June 1999 L250,000 25th September 1999 L250,000 21st December 1999 L250,000 25th March 2000 L250,000 l0th June 2000 L250,000 25th September 2000 L250,000 21st December 2000 L250,000 25th March 2001 L250,000 l0th June 2001 L290,000
-13- 6.2 VOLUNTARY PREPAYMENT OF THE TERM LOAN 6.2.1 The Borrower may prepay all or any part of the Term Loan and, if part only, in a amount of L100,000 and multiples of L100,000. 6.2.2 The full amount of any such prepayment shall be made on an Interest Date. 6.2.3 The Borrower may make any such prepayment by giving not less than 10 Business Days' prior written notice. Such notice shall be irrevocable and shall specify the amount of the prepayment and the date upon which it is to be made. 6.2.4 Every prepayment must be accompanied by interest accrued on the amount prepaid and all other amounts due in relation to the amount prepaid (including amounts, if any, due under Clause 8.3) 6.2.5 ORDER OF APPLICATION OF PREPAYMENTS Each prepayment made is to be applied in or towards the discharge and reduction of the Instalments in inverse order to maturity. 6.3 NO RE-BORROWING No amount repaid or prepaid in relation to the Term Loan may be re-borrowed. 7. MARKET DISRUPTION, ILLEGALITY, INCREASED COSTS, GROSSING UP AND OTHER INCREASED COSTS AND EXPENSES All the Borrower's rights and liabilities under this Agreement are subject to the provisions of Schedule 7. 8. PAYMENTS 8.1 FUNDS AND PLACE All payments to be made by the Borrower under any of the Financing Documents shall be made on the due date to the Bank in cleared Sterling funds for value on the due date to such account, at such office or bank in London as the Bank may from time to time designate to the Borrower by not less than 2 Business Days' prior notice. 8.2 BUSINESS DAY If, but for this Clause, any sum would become due for payment under this Agreement on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day; if the next succeeding Business Day falls in a new calendar month, then such payment shall be made on the immediately preceding Business Day. -14- 8.3 BREAKAGE COSTS 8.3.1 The Borrower agrees to indemnity the Bank on demand against any loss or expense sustained or incurred by the Bank in liquidating or employing deposits required or contracted for to effect or maintain any part of the Term Loan as a consequence of any of: (a) any part of the Term Loan not being borrowed, following the service of the Drawdown Notice (unless as a result of a breach by the Bank of its obligations under this Agreement); and (b) failure to make any prepayment or repayment on an Interest Date. 8.3.2 Any certifications of the calculation of any such loss or expense issued by the Bank under this Clause shall be conclusive and binding on the Borrower. 8.4 ACCOUNTS The Bank shall maintain in accordance with its usual practice an account or accounts, which shall, as between the Borrower and the Bank be prima facie evidence of the amounts from time to time advanced by, owing to, paid and repaid to the Bank under this Agreement. 8.5 APPROPRIATION The Borrower hereby waives any rights it may have to make any appropriation as between any amounts payable under any of the Financing Documents. 9. UNDERTAKINGS 9.1 INFORMATION UNDERTAKINGS The Borrower agrees with the Bank that throughout the Security Period it shall: (a) furnish to the Bank within 120 days of the end of each of its Financial Years two copies of the Accounts together with a copy of the management letter (if any) addressed by the Auditors to the directors of the Borrower in connection with the preparation of the relative financial statements as soon as reasonably practicable after its receipt by the Borrower; (b) within 30 days following the end of each successive Accounting Period during the Security Period (none of which shall be more than 4 weeks in duration ("ACCOUNTING PERIOD") furnish to the Bank two copies of the management accounts ("MANAGEMENT ACCOUNTS") for the relative Accounting Period for the Charging Group and which shall include, without limitation, the following information in respect of such Accounting Period: 1. a statement of its consolidated profit and loss 2. its consolidated balance sheet; -15- 3. its consolidated cash flow statement and a statement showing separately all cash movements between any of the companies in the Charging Group and Regis Corporation; 4. a schedule of all Capital Expenditure incurred by companies in the Charging Group during that Financial Year and budgeted to be incurred but not at that time incurred (together with a commentary in reasonable detail on the purpose for which any such Capital Expenditure has been or is to be incurred together with a schedule of any moneys paid to Regis S.A. and S&L for the Overseas Capital Expenditure Programme), details of all BHS Receipts (defined in Clause 9.2) and receipts relating to Reverse Premia (defined in Clause 9.2) received during that Accounting Period and details of all amounts received from Regis Corporation during any one Financial Year on a cumulative basis pursuant to Clause 9.2.2(f)(iv); and 5. any revised profit and cashflow forecasts for the Charging Group for the remainder of the then current Financial Year, including a reforecast of the results for that Financial Year. together with a commentary setting out in reasonable detail a comparison of all such information with the projections, forecasts and estimates contained in the Operating Budget (or any replacement or substitution made in accordance with Clause 9.1(d)(ii)) and including an analysis explaining any material variations therefrom; and within 45 days after each calendar quarter provide to the Bank, a summary of the management information for S & L and Regis S.A., prepared on substantially the same basis as the information provided in the Management Accounts; and furnish to the Bank the audited accounts, and any other published accounts of the Regis Corporation immediately after the same are published and the quarterly results of the Regis Corporation as soon as the same are produced. (c) procure that all Management Accounts are prepared on a basis consistent with the Accounting Principles and disclose with reasonable accuracy the financial position of each company in the Charging Group; (d) (i) provide to the Bank a copy of the Operating Budget (prepared on a basis consistent with the Accounting Principles) for each of its Financial Years during the Security Period, not less than 30 days before the start of the relative Financial Year; and (ii) if the Borrower shall determine that any of the information, projections, estimates and forecasts made in relation to any of its Financial Years during the Security Period should be materially different from those set out in the relative Operating Budget, provide the Bank with revised information, projections, estimates and forecasts in respect of any part of such Financial Year in respect of which such revised information, projections, estimates and forecasts are to apply promptly following their approval by the board of directors of the Borrower and subject to their approval by the Bank, such revised information, projections, estimates or forecasts shall be -16- deemed to have replaced the projections, estimates or forecasts previously applicable to such period as part of the Operating Budget; and (iii) not less than 30 days before each such 12 months' period, provide to the Bank a cashflow forecast for the companies in the Charging Group for the 12 months' period starting on each 1st July and 1st January during the Security Period; (e) deliver to the Bank within 30 days after the end of each Quarterly Accounting Period (each a "CERTIFICATE DATE") a certificate (in substantially the terms set out in Part 2 of Schedule 6) executed under the authority of the board of directors of the Borrower certifying that in relation to the 3 months' period ending on the relative Certificate Date (or in the case of the first Certificate Date, in respect of the period from the Completion Date to the first Certificate Date) the Borrower is in compliance with all of the undertakings given by the Borrower under the Financing Documents (and including a calculation of the financial undertakings set out in Clause 9.2 falling to be complied with at the end of that 3 months' period) PROVIDED THAT for the purpose of this Clause 9.1(e): (i) the calculations for Clause 9.2 shall be made by reference to the Management Accounts prepared for the period ending on the Certificate Date in relation to which the certificate is to be given; (ii) if there have been any breaches of any undertakings at any time during the period to which such certificate relates then the Borrower shall include in such certificate relevant details of all such breaches and the steps taken to remedy the breaches; and (iii) the Borrower shall use all reasonable and practicable endeavours to procure that the Auditors shall (if they are so satisfied) within 120 days of the end of each Financial Year of the Borrower and by reference to the relative Accounts certify (if they are so satisfied) to the Bank that any certificate given under this Clause 9.1(e) in relation to the last Certificate Date in such Financial Year is correct in relation to the financial undertakings set out in Clause 9.2; (f) as soon as practicable following the Bank's request, furnish to the Bank, such information, projections, estimates or forecasts in relation to any company in the Charging Group and any of their respective businesses, turnover, assets, financial condition, ownership or prospects as the Bank may from time to time reasonably require; (g) promptly notify the Bank of: (i) any Default or any Default Occurrence which is continuing; (ii) any litigation, arbitration or administrative proceedings commenced against any company in the Charging Group involving a potential liability of at least L25,000; (iii) any Encumbrance other thin a Permitted Encumbrance attaching to any of the assets of any company in the Charging Group; -17- (iv) upon becoming aware thereof, any occurrence which will or is likely to affect the ability of any of the companies in the Charging Group to perform or discharge any of its payment obligations under any of the Transaction Documents; and (v) any Change of Control; (h) notify the Bank at least 15 Business Days before any proposed Overseas Approved Funding is made and provide to the Bank details of the amount of such proposed Overseas Approved Funding and the terms and conditions upon which it is proposed to be made; (i) notify the Bank of any notice given by Regis S.A. in relation to the Regis S.A. Comfort Letter; (j) deliver to the Bank the Closing Accounts (as defined in the Acquisition Agreement) as soon as is practicable after their being prepared in accordance with the Acquisition Agreement and no later than the Accounting Date in December 1995; (k) promptly deliver to the Bank within 30 days of the date of the First Variation and Restatement Agreement the accounts of SHL at Completion and the Completion Accounts of SSL (as Completion and Completion Accounts are defined in the New Acquisition Agreements); (l) promptly deliver to the Bank a Certified Copy of all assignments and consents that are completed in relation to Property and promptly notify the Bank of any disputes or material delays in relation to the completion of any assignment or consents regarding Property; and (m) provide regular updates on progress and a final report to the Bank within 3 months on the pension arrangements that have been made for employees previously employed by the New Vendor and who are now employed by SHL or SSL, such report to contain confirmation that the benefits accrued by such employees during the course of their employment with the New Vendor are properly secured or provided for under the New Vendor's pension arrangements and that appropriate pension arrangements have been made for them. 9.2 FINANCIAL UNDERTAKINGS 9.2.1 For the purpose of this Agreement and in particular this Clause 9.2, unless otherwise provided: "ACCOUNTING DATE" means the last date in an Accounting Period; "ACQUISITION GOODWILL" means the net goodwill arising on the acquisition of the Target Shares and the shares of SHL and SSL; "CAPITAL EXPENDITURE" means, m relation to any period for which the calculation is made, any expenditure which should be treated as capital expenditure in accordance with the Accounting Principles after deducting any amounts received by any company in the -18- Charging Group in that period in relation to reverse premia for any property leases which are capital expenditure in accordance with the Accounting Principles ("REVERSE PREMIA"); and amounts received by any company in the Charging Group from British Home Stores in connection with the termination of any licence, tenancy concession or similar agreement ("BHS RECEIPTS") where such receipts are expended in accordance with Clause 9.2.2(g); "CONSOLIDATED ADJUSTED NET WORTH" means, on any date, the aggregate amount of the paid up share capital of the Borrower including amounts standing to the credit of the share premium account and any capital redemption reserves plus or minus the aggregate amount standing in the Charging Group's capital and revenue reserves (on a consolidated basis): (a) adding back any diminution due to the writing off of Acquisition Goodwill and any diminution due to the writing off of any Restructuring Costs; (b) deducting any amounts attributable to any intangible asset included as an asset in the Borrowers consolidated balance sheet (excluding amounts attributable to Acquisition Goodwill and trade marks or similar property); (c) deducting any amounts of any capital accounts or reserves derived from any writing up of book value of any assets of any of the companies in the Group above historic cost less accumulated Depreciation at any time after the Completion Date: (d) deducting the amount of any minority interests arising on consolidation; (e) deducting the amount of any profits from Extraordinary Items and Exceptional Items since the Completion Date; (f) deducting the amount of any exchange gains or losses arising on consolidation accounted for through reserves in accordance with SSAP20; (g) adding back any finance or issue costs arising from the transaction, in accordance with FRS4, to the extent that they have been written off against either the capital or revenue reserves; (h) deducting any amounts attributable to its investment in Regis S.A. and S&L; (i) adding any management charges accrued due and payable by the Borrower in favour of Regis Corporation; and (j) any amounts written off in the Financial Year ending 26th June 1998 in respect of computer equipment. "CONSOLIDATED CASH FLOW BEFORE FINANCING" means, in relation to the Charging Group and any period for which the calculation is made, the aggregate of PBIT (but adding any loss and deducting any profit arising on the disposal of a fixed asset to the extent that such profit and loss has been included within PBIT), Depreciation charged to the profit and loss account for such period and the amount of any management charge payable by the Borrower to Regis Corporation in relation to that period which is charged to the profit and loss account, but which has not been paid: -19- (a) plus the proceeds of disposal of fixed assets during such period, to the extent that they have been included in the Business Plan for that period; (b) plus income received from associated undertakings to the extent received in cash and less any payments made to associated undertakings whether Overseas Approved Funding or otherwise; (c) plus dividends received; (d) plus any decrease or minus any increase in Net Working Capital for such period; (e) plus or minus the movement in provisions for liabilities and charges to the extent that this has been debited or credited to PBIT; (f) plus any receipts by way of Extraordinary Items and deducting payments by way of Extraordinary Items in each case made during such period; (g) minus the aggregate of Taxes paid during such period; (h) minus the amount of Capital Expenditure: (i) funded otherwise than under a Finance Lease where the Finance Lease Expenditure in respect thereof is included in such Capital Expenditure paid or contractually required to be paid during such period; (ii) and in respect of any sums made available to the Borrower by Regis Corporation in accordance with the terms of Clause 9.2.2(f)(iv); (i) plus realised exchange gains and minus realised exchange losses charged during such period; (j) plus any monies received from Regis Corporation in consideration for additional share capital in the Borrower to the extent that any monies so received from Regis Corporation do not exceed the amount of monies paid to Regis Corporation by the Borrower during the period; and (k) deducting amounts paid by the Borrower to Regis Corporation in relation to management charges that do not relate to the period being tested, to the extent not already included in PBIT for the period being tested. PROVIDED ALWAYS THAT no item shall be counted more than once and all payments in relation to Total Obligations shall be excluded; "CURRENT ASSETS" means, in relation to the companies in the Charging Group, the aggregate value of its assets which are treated as current assets in accordance with Accounting Principles; "CURRENT LIABILITIES" means, in relation to the companies in the Charging Group, the aggregate value of its liabilities which are treated as current liabilities in accordance with Accounting Principles; -20- "DEPRECIATION" has the meaning given to it by Accounting Principles; "EXTRAORDINARY ITEMS" has the meaning given to that term in FRS3, including those items listed in Paragraph 20 of FRS3; "EXCEPTIONAL ITEMS" has the meaning given to that term in FRS3, but shall exclude those items listed in Paragraph 20 of FRS3; "FINANCE LEASE" means any lease, hire agreement, credit sale agreement, purchase agreement, conditional sale agreement or instalment sale and purchase agreement which should be treated in accordance with SSAP 21 (or any successor thereto) as a finance lease or in the same way as a finance lease; "FRS" means a financial reporting standard issued by the Accounting Standards Board for application in England and Wales and, where referenced by a number, means that particular financial reporting standard; "GEARING" means at any time the Total Debt of the Charging Group divided by the Consolidated Adjusted Net Worth of the Charging Group; "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means, in relation to the companies in the Charging Group, accounting principles, concepts, bases and policies generally adopted and accepted in the United Kingdom for the preparation and presentation of audited financial statements; "NET WORKING CAPITAL" means at any time the aggregate of: (a) Current Assets (excluding all cash at a bank and in hand, all assets in relation to Tax and accrued interest receivable); (b) less the aggregate of Current Liabilities (excluding monies due in relation to Total Debt, and liabilities in relation to Tax, Extraordinary Items, and dividends payable): for the avoidance of doubt Tax excludes PAYE, VAT and Customs and Excise duty; "PBIT" means, in relation to the companies in the Charging Group and any period for which the calculation is made, the consolidated profit on ordinary trading activities (including Exceptional Items and credit interest receivable in respect of positive cash balances) before Tax and Total Debt Costs, excluding: (a) amounts written off the value of investments; (b) profit attributable to minority interests; (c) amounts written off the value attributed to Acquisition Goodwill and amounts written off in relation to Restructuring Costs; (d) Extraordinary hems; (e) any profit arising on the disposal of fixed assets; -21- (f) income from shares in interests in associated undertakings and income from any other fixed asset investment; (g) acquisition expenses required to be capitalised in accordance with Paragraph 85 of FRS7; (h) amounts amortised on finance costs and issue costs arising from this transaction in accordance with FRS4; (i) realised and unrealised exchange gains and losses; (j) any costs associated with the completion, acquisition and start up costs; and (k) excluding any payments by Openpark or the Borrower in accordance with the Wella Agreement; and (l) any amounts written off in the Financial Year ending 26th June 1998 in respect of computer equipment; PROVIDED ALWAYS THAT no item shall be counted more than once and all Total Debt Costs shall be excluded; "SSAP" means any statement of standard accounting practice issued by the Institute of Chartered Accountants for application in England and Wales and, where referenced by a number, means that particular statement; "TOTAL DEBT COSTS" means, in relation to a period of time, the aggregate of: (a) all interest, commissions, periodic fees and other financing charges (except fees and commissions due and payable on the Completion Date) paid or accrued by any member of the Charging Group during such period (including the interest element payable under Finance Leases, but excluding any amounts amortised on finance costs and issue costs arising from this transaction in accordance with FRS4); (b) less any sums receivable or plus any sums paid or accrued by the Borrower under any interest rate protection agreement of whatever description during such period; (c) excluding interest receivable; and (d) for the avoidance of doubt excluding all scheduled repayments of Total Debt and any fees and commissions paid on completion and any interest payable under the Vendor Loan Notes and the Wella Agreement; "TOTAL DEBT" means, at any time in relation to the Charging Group, the indebtedness for or in respect of: (a) monies borrowed; (b) bonds, notes, loan stock, debentures or similar instruments; -22- (c) monies raised under acceptance credit, bill discounting, factoring, note purchase and documentary credit facilities; (d) the acquisition cost of assets or services to the extent payable on deferred terms, but only to the extent the same involves deferral of payment of any sum for more than 90 days; (e) the capital element of rental payments under leases (whether in respect of land, machinery or otherwise) entered into primarily as a method of raising finance or financing the acquisition of the property or asset leased but excluding rental payments under a lease of property which would not be treated as a Finance Lease; (f) payments under hire purchase and conditional sale agreements; (g) guarantees, bonds, standby letters of credit or similar instruments issued in connection with the performance of contracts; and (h) guarantees, indemnities or other assurances against financial loss in respect of the liability of any person falling within (a) to (g) above; (i) payments under the Vendor Loan Notes; and (j) payments under the Wella Agreement; "TOTAL OBLIGATIONS" means, in relation to the Charging Group and the period for which the calculation is made, the aggregate of: (a) Total Debt Costs for such period; (b) all scheduled repayments and any prepayments of the Term Loan in that period to the extent, for the purposes of this definition only, that any scheduled repayments do not exceed, in aggregate, L1,000,000 in any such period (c) all dividends declared in that period; (d) the capital element of all rentals or, as the case may be, other payments payable or paid in that period under any Finance Leases entered into by any member of the Charging Group; and (e) any interest payments made in accordance with the Vendor Loan Notes and any payments of interest and principal in relation to the Wella Agreement; 9.2.2 The Borrower hereby undertakes with the Bank to ensure that: (a) PBIT TO TOTAL DEBT COSTS The ratio of PBIT to Total Debt Costs of the Charging Group in respect of each period referred to in Column A shall not be less than the ratio set out in Column B below opposite such period; -23-
COLUMN A COLUMN B The 4 Quarterly Accounting Periods preceding the Accounting Date in 2.50 June 1998 The 4 Quarterly Accounting Periods preceding the Accounting Date in 2.25 September 1998 The 4 Quarterly Accounting Periods preceding the Accounting Date in 2.25 December 1998 The 4 Quarterly Accounting Periods preceding the Accounting Date in 2.25 April 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 2.25 June 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 3.00 September 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 3.50 December 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 3.50 April 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 4.00 June 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 4.00 September 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 4.00 December 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 4.00 March 200l
(b) CONSOLIDATED CASH FLOW BEFORE FINANCING TO TOTAL OBLIGATIONS The ratio of Consolidated Cash Flow Before Financing to Total Obligations in respect of each of the periods set out in Column A below shall be no less than the ratio set out in Column B:
COLUMN A COLUMN B The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 June 1998 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 September 1998 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 December 1998 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 April 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 June 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 September 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 December 1999 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 April 2000 -24- The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 June 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 September 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 December 2000 The 4 Quarterly Accounting Periods preceding the Accounting Date in 1:1 March 2001
(c) CONSOLIDATED ADJUSTED NET WORTH The Consolidated Adjusted Net Worth of the Charging Group shall not at any time during the period set out in Column A below be less than the amount set out opposite the relative period in Column B below:
COLUMN A COLUMN B the Accounting Date in March 1998 to L6,660,000 the day before the Accounting Date in June 1998 the Accounting Date in June 1998 L6,965,000 the day after the Accounting Date in June L6,845,000 1998 to the day before the Accounting Date in September 1998 the Accounting Date in September 1998 L7,000,000 to the day before the Accounting Date in December 1998 the Accounting Date in December 1998 to L7,320,000 the day before the Accounting Date in April 1999 the Accounting Date in March 1999 to L7,575,000 the day before the Accounting Date in June 1999 the Accounting Date in June 1999 to the day before the Accounting Date in L8,135,000 September 1999 the Accounting Date in September 1999 L8,255,000 to the day before the Accounting Date in December 1999 the Accounting Date in December 1999 to L8,645,000 the day before the Accounting Date in April 2000 the Accounting Date in April 2000 to the L9,010,000 day before the Accounting Date in June 2000 the Accounting Date in June 2000 to the day before the Accounting Date in September 2000 L9,490,000 the Accounting Date in September 2000 L9,570,000 to the day before the Accounting Date in December 2000 -25- the Accounting Date in December 2000 to L9,975,000 the day before the Accounting Date in March 2001 the Accounting Date in March 2001 to L10,340,000 the Accounting Date in June 2001
(d) CAPITAL EXPENDITURE the aggregate amount of Capital Expenditure incurred by the companies in the Charging Group together with any expenditure incurred in relation to any acquisition permitted under Clause 9.4(g)(ii) for each period referred to in Column A below shall not exceed the amount referred to in Column B below opposite such period:
COLUMN A COLUMN B The 3 Quarterly Accounting Periods preceding L900,000 the Accounting Date in June 1998 The 6 Quarterly Accounting Periods preceding L1,400,000 the Accounting Date in December 1998 The 10 Quarterly Accounting Periods preceding L1,800,000 the Accounting Date in April 1999 The 13 Quarterly Accounting Periods preceding L2,000,000 the Accounting Date in June 1999 The 3 Quarterly Accounting Periods preceding L900,000 the Accounting Date in September 1999 The 6 Quarterly Accounting Periods preceding L1,400,000 the Accounting Date in December 1999 The 10 Quarterly Accounting Periods preceding L1,800,000 the Accounting Date in April 2000 The 13 Quarterly Accounting Periods preceding L2,000,000 the Accounting Date in June 2000 The 3 Quarterly Accounting Periods preceding L900,000 the Accounting Date in September 2000 The 6 Quarterly Accounting Periods preceding L1,400,000 the Accounting Date in December 2000 The 10 Quarterly Accounting Periods preceding L1,800,000 the Accounting Date in April 2001 The 13 Quarterly Accounting Periods preceding L2,000,000 the Accounting Date in June 2001
(e) that at no time during the Security Period will the net cash flow between Regis Corporation and the Borrower or any other company in the Charging Group (where it is a negative amount in relation to the Borrower or any other company in the Charging Group) exceed L25,000 in any one Financial Year (except during the period from the Completion Date to the Accounting Date in June 1996 in which period the negative amount which it may not exceed is L37,000) and in aggregate L50,000 throughout the Security Period. For the avoidance of doubt any calculation of the amount of such net cashflows is to exclude: (i) the payment by the Borrower of the inter company balance (not exceeding in aggregate L737,000) to Regis Corporation out of the -26- proceeds of the subscription for ordinary shares referred to in the certificate referred to in paragraph (k) of Schedule 2; (ii) any monies received by the Borrower from Regis Corporation in December 1995 in connection with acquisitions made under the New Acquisition Agreements; (iii) the payment by the Borrower of the Regis Corporation Indebtedness; (iv) subject to Clause 9.1(k), any sums made available to the Borrower either by subscription for ordinary shares in the share capital of the Borrower or by loan or loans made to the Borrower by Regis Corporation at its discretion up to a maximum aggregate of L500,000 in any one Financial Year save that such sums shall be applied exclusively in Capital Expenditure; (v) Overseas Approved Funding; (f) that BHS Receipts defined in the definition of Capital Expenditure (Clause 9.2.1) are to be applied in Capital Expenditure within 6 months after receipt. 9.2.3 If the directors of the Borrower determine at any time during the Security Period that any of the Accounting Principles applied in the preparation of any of the Accounts and the Management Accounts shall be different from the Accounting Principles or if as a result of the introduction or implementation of any SSAP or FRS or any other accounting standard or any change in any of them or in applicable law, the Accounting Principles are required to be changed, then the Borrower shall promptly give written notice to the Bank of such determination or requirement. Thereafter, in the case of any change in any of the relative Accounting Principles, and as soon as practicable after the Bank's demand, the Borrower and the Bank shall agree such adjusted or amended financial undertakings as would in the Bank1s opinion, provide the Bank with substantially the same protections as the financial undertakings set out in Clause 9.2 (but which are not materially more onerous than those set out in Clause 9.2 as at the date of this Agreement to the extent that any revised financial undertakings will, as nearly as practicable, be based on a similar differential as that between the financial projections in the Business Plan and the financial undertakings as at the date of this Agreement). 9.2.4 In the circumstances set out in Clause 9.2.3, until amended financial undertakings are agreed under Clause 9.2.3, the Borrower shall procure that there are delivered to the Bank copies of the Borrower's Accounts audited by the Auditors in accordance with the Accounting Principles prevailing before the relative determination, introduction or implementation and all Management Accounts required to be delivered to the Bank under Clause 9.1 shall also be prepared in a manner consistent with such Accounting Principles and, for the avoidance of doubt, during such period, the financial undertakings set out in this Clause 9.2 shall be calculated in accordance with the Accounting Principles prevailing before the relative determination, introduction or implementation. 9.2.5 The calculation of ratios and other amounts under this Clause 9.2 shall be made by the Bank on the basis of the latest information required to be delivered to the Bank under Clause 9.1 for the period in relation to which the calculation is to be made and such calculations shall, in the absence of manifest error, be conclusive and binding on the Borrower. -27- 9.3 POSITIVE UNDERTAKINGS The Borrower agrees with the Bank that throughout the Security Period it shall, and it shall procure that each of its Subsidiaries in the Charging Group shall, unless the Bank agrees Otherwise: (a) at all times comply with all laws and regulations applicable to it and which are required in relation to the conduct of its business, trade and activities as anticipated in the Business Plan and the New Business Plan and obtain, effect and maintain in full force and effect all governmental and other regulatory consents, licences, exemptions, clearances, filings, registrations and authorisations required for the validity and enforceability in evidence of any of the Financing Documents; (b) that where it maintains its transmission and banking business in the United Kingdom with the Bank, it continues to maintain such business with the Bank throughout the Security Period PROVIDED THAT where companies in the Charging Group use other banks and building societies authorised by the Bank of England and the Building Societies Commission respectively for the purpose of receiving cash and transferring it to the Bank credit balances with each branch of each bank or building society may never exceed L5,000 (and the aggregate of all such credit balances may never exceed L250,000) and all such credit balances are transferred to the Bank at the end of each week during the Security Period; (c) immediately upon request by the Bank permit that any one or more persons representing or instructed by the Bank, be allowed to have access to its assets, books and records and to inspect the same during normal business hours and it shall, promptly following the request of the Bank authorise and instruct any of its officers to discuss all such information relating to any of its financial condition, trading activities and prospects as the Bank may request; (d) maintain insurances as are usually maintained by prudent companies carrying on similar businesses; (e) use all practicable endeavours to procure that within 30 Business Days of the date of their appointment as auditors of the Borrower, the relative firm of chartered accountants shall deliver to the Bank a letter addressed to the Bank from such newly appointed Auditors in substantially the form set out in Schedule 6; (f) take all steps to preserve its rights arising under any of the Acquisition Documents and New Acquisition Documents and in the event of any breach of any of the warranties and indemnities given thereunder by the Vendor the New Vendor, Regis Corporation or any other person promptly and at its own cost and expense take all practicable steps to enforce such rights; (g) pay and discharge all Taxes and governmental charges before the date on which the same become overdue unless, and only to the extent that, such Taxes and charges shall be contested in good faith by appropriate proceedings, pending determination of which payment may lawfully be withheld, and there shall be set aside adequate reserves with respect to any such Taxes or charges so contested in accordance with Generally Accepted Accounting Principles; -28- (h) comply in all respects with Sections 151 to 158 of the Act including in relation to the execution of the Security Documents and the payment of amounts due under this Agreement; (i) change the Target's accounting reference date from 31st December to 30th June within 30 days after the date of this Agreement; (j) change SHL's and SSL's accounting reference date to 30th June within 30 days after the date of the Amendment and Restatement Agreement; (k) enter into the Interest Rate Protection Agreements within 14 days after the Completion Date; (l) within 14 days after the Completion Date, properly execute and deliver to the Bank the Keyman Insurance Assignment; (m) procure that all necessary assignments and other consents relating to Property are obtained expeditiously; (n) procure that equivalent pension arrangements and death in service benefits enjoyed by those employees previously employed by the New Vendor and now employed by SHL or SSL are maintained throughout the duration of their employment with SHL or SSL; 9.4 NEGATIVE UNDERTAKINGS The Borrower agrees with the Bank that during the Security Period it shall not, and it shall procure that none of its Subsidiaries in the Charging Group shall, unless the Bank agrees otherwise: (a) create or permit to subsist any Encumbrance (other than a Permitted Encumbrance) over any of its assets from time to time; (b) incur or permit to remain outstanding any Indebtedness other than Permitted Indebtedness; (c) sell, transfer, lease, factor, discount, lend or otherwise dispose of or enter into any agreement under which it may be or become obliged to sell, transfer, lease, factor, discount, lend or dispose of any of its assets (whether in a single transaction or a series of connected transactions) other than: (i) in the ordinary course of its trading activities; (ii) the exchange of assets for other assets required for or in connection with its trading activities of similar or greater value than the assets disposed of and otherwise on normal commercial terms; (iii) disposals of assets by any company in the Charging Group except to a company in the Charging Group; -29- (iv) in any such case which would not result in the companies within the Charging Group making disposals (not included in paragraphs (i) to (iii) above) of assets in any Financial Year of the Borrower with an aggregate book value or if higher the actual consideration in excess of L50,000; (v) in relation to the Overseas Capital Expenditure Progranmme during the 3 years' period starting on the date of this Agreement or Overseas Approved Funding; and (vi) any disposals arising in relation to any arrangement under which any company if the Charging Group receives payments as compensation for the undepreciated element of fixed assets used for any trading activity conducted from property in relation to which the relative licence, tenancy or occupation is terminated; (d) merge or consolidate with any other person (whether by winding-up, dissolution or other means); (e) make, pay or declare any dividend or other distribution in relation to any shares forming part of the issued share capital of the Borrower or make any payment or repayment in relation to Indebtedness owed to Regis Corporation in relation to Overseas Approved Funding; (f) make any loans or grant any credit to or for the benefit of any person other than: (i) credit allowed by the relative company in the normal course of the conduct of its trading activities (subject to Clause 9.4(m)); (ii) loans made between companies in the Charging Group; (iii) loans made to employees of any companies in the Charging Group not exceeding L50,000 in aggregate; and (iv) loans or credit for the purpose of funding the Regis S.A. Capital Expenditure Programme during the 3 years' period starting on the date of this Agreement or Overseas Approved Funding; (g) incorporate any company as its Subsidiary or acquire any business of or shares or securities issued by any company after the Completion Date or enter into any agreement under which it may be or become bound to acquire any business of, shares or securities issued by, any company except for the acquisition of businesses (similar to those carried on by the Borrower or Target at the date hereof), where the aggregate purchase consideration for any acquisition, when taken together with similar consideration incurred by any companies in the Charging Group and the gross liabilities, which when taken together with similar liabilities incurred by any companies in the Charging Group assumed at the time of the acquisition by any companies in the Charging Group in any Financial Year, do not exceed in aggregate for any period specified in Column A in Clause 9.2.2(e) the amount set out opposite that period in Column B opposite such period (on the basis that all monies used in such acquisitions are classified as Capital Expenditure); -30- (h) otherwise than in the ordinary course of the conduct of its trading activities, make any material change in the terms and conditions upon which it does business or carry on any trading activities other than the trading activities carried on at the date hereof; (i) pay any fees or commissions to any person other than: (i) those on open market terms in the ordinary course and for the purpose of its trading activities; (ii) the Transaction Costs; (iii) fees due and payable under the Acquisition Documents; and (iv) subject to Clause 9.2.2(f), management charges due and payable by the Borrower to Regis Corporation; (j) subject to Clause 9.3(i) change its accounting reference date from 30th June; (k) permit or effect any variations, novations or amendments, or waive any conditions to, any of the Acquisition Documents; (1) make any payment directly or indirectly under the Vendor Loan Notes prior to funds being received from Regis Corporation in accordance with the terms of a letter of undertaking set out in Schedule 2 of the First Variation and Restatement Agreement; (m) vary, amend, restate or extend the terms of the Wella Agreement, or repay Indebtedness in excess of L780,472 thereunder without the written consent of the Bank; (n) take any action to dissolve any member of the Charging Group without the prior written consent of the Bank and any other party to any of the Transaction Documents, the New Transaction Documents or the Wella Agreement where the consent of that other patty is required; and (o) directly or indirectly make any repayments of principal and interest under the Wella Agreement exceeding L112,000 in any Financial Year. 10. DEFAULT 10.1 DEFAULT There shall be a Default if: (a) any amount payable under this Agreement is not paid by the Borrower on the date and at the place at which it is expressed to be payable in accordance with the terms of this Agreement; or (b) any of the members of the Charging Group fails to comply with any of its obligations and undertakings under any of the Financing Documents (other than -31- the obligations and undertakings referred to in the foregoing Clause 10.1(a) and, if such failure is capable of remedy (as determined by the Bank) such default is not remedied within 5 Business Days after notice of such failure has been given by the Bank to the Borrower; or (c) any representation, warranty or statement made or deemed to be repeated by or on behalf of any of the companies in the Charging Group under any of the Financing Documents or in any notice, certificate, confirmation or statement referred to in or delivered under any of the Financing Documents is not or proves not to have been true and accurate in any respect when made or deemed to have been repeated; or (d) any of the Financing Documents is not or ceases to be in full force and effect or the validity or enforceability of any of the terms of any of the Financing Documents shall be contested by any of the companies in the Charging Group; or (e) any Indebtedness of any of the companies in the Charging Group: (i) is declared to be or otherwise becomes due and payable prior to its specified maturity; or (ii) is not paid when due or within any applicable grace period; or a creditor or any creditor or creditors of members of the Charging Group become(s) entitled to declare any such Indebtedness due and payable prior to its specified maturity; or (f) a creditor or encumbrancer attaches or takes possession of, or a distress, execution, sequestration or other process is levied or enforced upon or sued out against, any of the assets of any of the companies in the Charging Group; or (g) any of the companies in the Charging Group: (i) suspends payment of its debts or is unable or admits its inability to pay its debts as they fall due; or (ii) commences negotiations with one or more of its creditors with a view to the general readjustment or rescheduling of all or part of its Indebtedness which it would otherwise not be able to pay as it falls due; or (iii) proposes or enters into any composition or other arrangement for the benefit of its creditors generally or any class of creditors; or (h) any person takes any action or any legal proceedings are started or other steps taken for: (i) any of the companies in the Charging Group (other than a Dormant Subsidiary) to be adjudicated or found bankrupt or insolvent; or (ii) the winding-up or dissolution of any of the companies in the Charging Group (other thin a Dormant Subsidiary); or -32- (iii) the appointment of a trustee, receiver, administrative receiver, or similar officer to any of the companies in the Charging Group (other than a Dormant Subsidiary) or the whole or any part of their respective assets; or (i) any adjudication, order or, as the case may be, appointment is made under or in relation to any of the proceedings referred to in Clause 10.1(h); or (j) an application is made to the Court for an administration order under the Insolvency Act 1986 with respect to any of the companies within the Charging Group; or (k) any of the companies in the Charging Group suspends, ceases or threatens to suspend or cease to carry on its business; or (l) at any time there occurs a material adverse change in the financial condition, business condition or prospects of any of the companies in the Charging Group constituting a material adverse change to such company in the Charging Group so that it appears that any of the companies in the Charging Group may be unable to meet its obligations under any of the Financing Documents; or (m) there is any redemption, purchase or reduction of the Borrower's issued share capital or any distribution in relation to any of the Borrower's issued share capital without the Bank's prior written consent; or (n) Anthony Rammelt ceases to be both an officer and an employee of the Borrower or a company in the Charging Group or ceases to devote the whole of his working time to the activities of the companies in the Charging Group under the terms of his Employment Contract and is not replaced within 6 months of the date of such cessation with a person satisfactory to the Bank; or (o) there occurs a Change of Control; or (p) any event occurs or proceeding is taken with respect to any company in the Charging Group or Regis Corporation in any jurisdiction to which it is subject which has an effect in relation to that company equivalent or substantially similar to any of the events mentioned in Clauses 10.1(f), (g), (h), (i) or (j), or any appointment or order is made in relation to Regis Corporation for protection from its creditors generally. 10.2 ACCELERATION At any time when any Default remains unremedied the Bank may take any of the following steps: (a) by notice to the Borrower, cancel the Term Loan Facility (or part thereof) and require the Borrower immediately to repay all or part thereof together with accrued interest thereon and immediately to pay all or any other sums payable by them under this Agreement to be paid or repaid, whereupon the same shall become immediately due and payable; and (b) by notice to the Borrower, place all or any of the Term Loan on demand, so that it shall become immediately due and payable upon the Bank's demand. -33- 11. SET-OFF The Borrower authorises the Bank: (a) to apply any credit balance on any of its accounts with the Bank (by set-off, combination or otherwise) in satisfaction of any sum due and payable and unpaid from it pursuant to the terms of any of the Financing Documents; and (b) to purchase with the moneys standing to the credit of any such account such other currencies as may be necessary to effect such application. 12. FEES AND EXPENSES 12.1 EXPENSES The Borrower shall pay on demand all costs, fees and expenses (including, but not limited to, legal, valuation and accounting fees) and any VAT thereon incurred by the Bank: (a) in connection with the negotiation, preparation and execution of any of the Financing Documents and the other documents contemplated hereby or thereby; (b) in connection with the grant of any release, waiver or consent or in connection with any variation of or supplement to any of the Financing Documents; or (c) in exercising, enforcing, perfecting, protecting or preserving (or attempting so to do) any of its rights, or in suing for or recovering any sum due from the Borrower or any other person under any of the Financing Documents. 12.2 ARRANGEMENT FEE The Borrower has previously paid on 25th September 1995 an arrangement fee of L75,000 to the Bank and on 22nd March 1996 an arrangement fee of L20,000. 12.3 MONITORING FEE The Borrower shall pay to the Bank a monitoring fee of L10,000 per annum payable on the 22nd September 1997 and each anniversary thereof provided that such monitoring fee shall be reduced to L5,000 per annum from the Financial Year ending 26th June 1999 onwards if in the 12 month period preceeding such date there has been no breach of any of the financial undertakings specified in Clause 9.2 of this Agreement. In the event of such a breach, the monitoring fee shall remain at L10,000. 13. SEVERABILITY 13.1 SEVERANCE If at any time any provision hereof is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction neither the legality, validity or enforceability of the -34- remaining provisions hereof nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 13.2 WAIVERS No failure to exercise, and no delay in the exercise, by the Bank of any right or remedy under any of the Financing Documents shall operate as a waiver of such right or remedy, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies under this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 14. NOTICES 14.1 METHOD Each communication to be made under this Agreement shall be made in writing but, unless otherwise stated, may be made by facsimile message or letter. 14.2 DELIVERY Any communication or document to be made or delivered by one person to another for any purpose under this Agreement shall (unless the one has by 15 days' written notice to the other specified another address) be made or delivered to that other person at the respective addresses given in Clause 14.3. 14.3 ADDRESSES The addresses referred to in Clause 14.2 above are: (a) the Borrower: Regis Europe Limited 110 Park Street London W1Y 3RB Attention: Managing Director/Finance Director Fax: (0171 491 1647) (b) the Bank: (for the issue of Drawdown Notices and selection of the duration of Interest Periods) National Westminster Bank Plc Mayfair Business Centre 24 Albermarle Street London W1X 4JS Attention: Manager Fax: 0171 290 4690/1/2 -35- and otherwise for all other notices to National Westminster Bank Plc Acquisition Finance Unit 4th Floor Crosby Court 38 Bishopsgate London EC2N 4DP Attention: Niki Fitch/James Moody Fax: 0171 665 6161 14.4 DEEMED RECEIPT Any notice given in relation to any of the Financing Documents by the Bank shall be deemed to have been received: (a) if sent by facsimile message followed by receipt at the transmitting terminal of a confirmatory transmission report acknowledging receipt by a terminal with the facsimile number to which the relative notice was transmitted, on the Business Day on which transmitted; (b) in the case of a written notice lodged by hand, at the time of actual delivery; or (c) if posted, on the second Business Day following the day on which it was properly despatched by first class mail postage prepaid. 14.5 Any notice given to the Bank shall be deemed to have been received by the Bank only upon actual receipt by the Bank. 15. ASSIGNMENTS AND TRANSFERS 15.1 BENEFIT OF AGREEMENT This Agreement shall be binding upon and enure to the benefit of each party hereto and its successors and assigns. 15.2 ASSIGNMENTS AND TRANSFERS BY THE BORROWER The Borrower shall not be entitled to assign or transfer all or any of its rights, benefits and obligations under this Agreement. 15.3 ASSIGNMENTS AND TRANSFERS BY THE BANK The Bank may assign or transfer all or any of its rights and obligations under any of the Financing Documents provided that any transferee is a Qualifying Bank and the Borrower shall enter into such documents as the Bank may stipulate in order to effect such transfer or assignment. -36- 15.4 DISCLOSURE OF INFORMATION The Bank shall keep confidential any information furnished or made available to it under any of the Financing Documents by the Borrower other than that which is available in the public domain, or which the Bank is by law or regulation required to disclose. The Bank may disclose such information to its professional advisers and to any actual or potential assignee, transferee or sub-participant, subject to the condition that each of the same keeps confidential any such information. 15.5 PUBLICITY Save where immediate disclosure of information is required by law or by any regulatory authority or by any court of competent jurisdiction, neither the Bank nor the Borrower and any companies in the Group shall make or consent to the making of any public statement or announcement concerning the terms of this Agreement or the continuance or the provision of the Term Loan Facility or any security therefor, to the Stock Exchange or otherwise, without first obtaining the approval of the other party as to the content thereof. 16. LAW This Agreement shall be governed by, and construed in all respects in accordance with, English Law. IN WITNESS whereof the parties hereto have caused this Agreement to be duly executed the day and year first above written. -37- SCHEDULE 1 CHARGING GROUP AS AT * 1996
Jurisdiction of Name Incorporation Registered Number Shares Owned By - ---- ----------------- ----------------- --------------- Regis Europe Limited England and Wales 02108396 Regis Corporation Essanelle Limited England and Wales 1115693 Regis Europe Limited Steiner Hairdressing Limited England and Wales 3112915 Openpark Limited Steiner Salons Limited England and Wales 146422 Openpark Limited Openpark Limited England and Wales 2457287 Regis Europe Limited
-38- SCHEDULE 2 CONDITIONS PRECEDENT FOR THE PURPOSE OF CLAUSE 2 The Bank is satisfied that no Default or Default Occurrence is continuing and shall have received each of the following (in form and substance satisfactory to the Bank): (a) a Certified Copy of the certificate of incorporation (and any relative certificate of incorporation on change of name) of each member of the Charging Group; (b) a Certified Copy of the Memorandum of Association and the Articles of Association of each member of the Charging Group; (c) a Certified Copy of the minutes (in the agreed form) of a meeting of the board of directors of each member of the Charging Group approving and authorising the execution and performance of each of the Transaction Documents to which such company is a party on the terms and conditions thereof and in each case establishing: (i) that the meeting was duly convened and quorate in accordance with the relative company's articles of association; (ii) due consideration by all the directors of the relative company of the obligations and liabilities arising thereunder and in particular where necessary, the application and relative relaxation procedures in relation to the provisions of sections 151 to 158 of the Act; (iii) the making of all declarations of interests as may be required in connection with any of the Transaction Documents; and (iv) the authorisation of any of the directors of the relative company whose names and specimen signatures are set out therein to sign or otherwise duly attest the execution of such documents and any other documents to be executed or delivered pursuant thereto; (d) Certified Copies of any necessary statutory declarations made in the prescribed form (and each being in the agreed form) by all of the directors of each company listed in Part 2 of Schedule 1 as required by Section 155 of the Act together with a Certified Copy of the statutory report by its Auditors required under Section 156(4) of the Act and confirmation by the Auditors that each such company has net assets (as defined in section 152(2) of the Act) and that the relative net assets are not reduced by the giving of the financial assistance or any reduction in net assets does not exceed distributable profits; (e) a Certified Copy of each of: (i) the Acquisition Documents; (ii) the Disclosure Letter; (iii) the Employment Contract; (iv) a consultancy contract made between the Borrower and Arthur Fabricant; -39- each having been duly executed by the parties thereto; (f) a Guarantee and a Debenture duly executed by each company listed in Part 1 of Schedule 1 together, in each case, with all documents deliverable therewith; (g) evidence from the Borrower that the Keyman Insurance has been properly effected; (h) the Overdraft Facility Letter duly executed by the Borrower; (i) a certificate (in the agreed form) from a director of the Borrower to the effect that: **[number] ordinary shares in the Borrower have been duly allotted to Regis Corporation; such shares have been subscribed for an amount of at least L2,700,000 out of which the Borrower has received in cash at least L2,700.000; share certificates in respect of such shares have been issued to Regis Corporation; (j) all items forming the Information Package; (k) a letter from the Auditors addressed to the Bank in substantially the form set out in Schedule 6; (1) the Drawdown Notice duly executed by the Borrower; (m) a cheque for all fees and expenses payable on the Drawdown Date pursuant to Clause 12; (n) a cheque for all legal expenses payable to Wilde Sapte pursuant to Clause 12; (o) a letter of comfort addressed to the Bank from Regis Corporation; (p) all relative deeds of release (in the agreed form) relating to all Encumbrances over any of Target's assets (other than Permitted Encumbrances) existing on or before the Completion Date; (q) the Bank being satisfied with the provisions of all arrangements relating to all premises from which the Target conducts its business or trading activities; (r) a Certified Copy of all documents under which the Borrower is to purchase or has purchased all the issued share capital of S & L; and (s) a Certified Copy of the Regis S.A. Comfort Letter. -40- SCHEDULE 3 MANDATORY LIQUID ASSETS COSTS FORMULA The additional rate relative to the Term Loan is, subject as hereinafter provided, arrived at by applying the following formula: Additional Costs = BY + L(Y-X) + S(Y-Z) per cent. per annum ------------------- 100 - (B+S) (a) Where on the day of the application of the formula: B is the percentage of the Bank's eligible liabilities which the Bank of England then requires the Bank to hold on a non-interest-bearing deposit account in accordance with its cash ratio requirements; Y is the rate at which Sterling deposits are offered by the Bank to leading banks in the London inter-bank market at our about 11.00 a.m. on that day for the relative period; L is the percentage of eligible liabilities which (as a result of the requirements of the Bank of England) the Bank maintains as secured money with members of the London Discount Market Association or in certain marketable or callable securities approved by the Bank of England, which percentage shall (in the absence of evidence that any other figure is appropriate) be conclusively presumed to be 5 per cent.; X is the rate at which secured Sterling deposits may be placed by the Bank with members of the London Discount Market Association at or about 11.00 a.m. on that day for the relative period or, if greater, the rate at which Sterling bills of exchange (of a tenor equal to the duration of the relative period) eligible for rediscounting at the Bank of England can be discounted in the London discount market at or about 11.00 a.m. on that day; S is the percentage of the Bank's eligible liabilities which the Bank of England requires the Bank to place as a special deposit; and Z is the interest rate per annum allowed by the Bank of England on special deposits. (b) For the purposes of this Schedule: (i) "ELIGIBLE LIABILITIES" and "SPECIAL DEPOSITS" have the meanings given to them at the time of application of the formula by the Bank of England; and (ii) "RELEVANT PERIOD" in relation to each Interest Period means: (A) if it is 3 months or less, that Interest Period; or (B) if it is more than 3 months. -41- (c) In the application of the formula, B, Y, L, X, S and Z are included in the formula as figures and not as percentages, e.g. if B = 0.5 per cent. and Y = 15 per cent., BY is calculated as 0.5 x 15. (d) The formula is applied on the first day of each relative period. Each amount is rounded up to the nearest four decimal places. (e) If the Bank determines that a change in circumstances has rendered, or will render, the formula inappropriate, the Bank shall notify the Borrower of the manner in which the additional rate will subsequently be calculated. The manner of calculation so notified by the Bank shall be binding on the Borrower. -42- SCHEDULE 4 PART 1 DRAWDOWN NOTICE To: National Westminster Bank Plc Mayfair Branch P0 Box 4ND 18a Curzon Street London W1A 4ND Date: Dear Sirs, CREDIT AGREEMENT DATED 22ND SEPTEMBER 1995 (AS AMENDED FROM TIME TO TIME) MADE BETWEEN (1) REGIS EUROPE LIMITED AND (2) NATIONAL WESTMINSTER BANK PLC (THE "CREDIT AGREEMENT") Words and expressions defined in the Credit Agreement have the same meaning in this Drawdown Notice. We hereby give you notice of the borrowing of a Term Loan Tranche: (a) date: ** (b) tranche (c) amount: ** (d) duration of Interest Period: ** months (n.b. Clause 4.3.2(d)) (e) ** payment instructions For and on behalf of REGIS EUROPE LIMITED (a company incorporated in England and Wales with registered number 02108396) - ------------------------ NOTE: Where a Term Loan Tranche is a tranche within Tranche B, a schedule of the Restructuring Costs or Transaction Costs to be paid or reimbursed out of the proceeds is to be attached to this notice and the amount of the further tranche may not exceed the amount of such Restructuring Costs or Transaction Costs. -43- SCHEDULE 5 REPRESENTATIONS AND WARRANTIES MADE UNDER CLAUSE 3.2 1. It is a limited company incorporated under the laws of its jurisdiction of incorporation, which possesses the capacity to sue and be sued in its own name and which has the power to carry on its business and to own its property and other assets. 2. It has power and capacity to execute, deliver and perform its obligations under each of the Transaction Documents to which it is or is to be a party and all necessary corporate, shareholder and other action has been taken and consents given to authorise the execution, delivery and performance of the same. 3. Its obligations under each of the Transaction Documents to which it is a party constitute its legal, valid and binding obligations and are in full force and effect. 4. Its execution and delivery and performance and discharge of its obligations and liabilities under each of the Transaction Documents to which it is or is to be a party do not and will not: (i) contravene any law or regulation or any order of any governmental or other official authority, body or agency or any judgment, order or decree of any court having jurisdiction over it; or (ii) conflict with, or result in any breach of any of the terms of, or constitute a default under, any agreement or other instrument to which it is a party or any licence or other authorisation to which it is subject or by which it or any of its property is bound; or (iii) contravene or conflict with any provision of its memorandum and articles of association and, in particular, it has no limit on its power to incur Indebtedness. 5. All licences, consents, exemptions, clearances, filings, registrations, payments of duties or taxes, notarisations and authorisations as are or may be necessary or desirable for the proper conduct of its business, trade and ordinary activities and for the performance and discharge of its obligations and liabilities under each of the Transaction Documents and which are required in connection with the execution, delivery, validity, enforceability or admissibility in evidence of each of the Transaction Documents are in full force and effect; 6. It has not taken any action nor have any steps been taken or legal proceedings been started or threatened in writing against it for winding-up, dissolution or re-organisation, the enforcement of any Encumbrance over its assets or for the appointment of a receiver, administrative receiver, or administrator, trustee or similar officer of it or of any or all of its assets or any other procedure under which it obtains protection from any of its creditors. 7. It is not in breach or in default under any of any deed, instrument or agreement to which it is a party or which is binding on it or any of its assets. 8. No action, litigation, arbitration or administrative proceeding has been started or (so far as it is aware having made all appropriate enquiry) is pending or threatened against it, nor is there -44- subsisting any unsatisfied judgment or award given against it by any court, board of arbitration or other body. 9. Since the date of Accountants' Report, there has been no material adverse change in any of its business or financial constitution, prospects and undertaking. 10. All of its assets are free from any Encumbrances, other than Permitted Encumbrances. 11. It has no Indebtedness outstanding other than Permitted Indebtedness. 12. In relation to the Information Package: (i) all assumptions and presumptions contained in the Accountants' Report were reasonable at the time they were made and in relation to the period in respect of which they were made; (ii) all factual information contained in the Information Package was, at the date of the relative reports, true and accurate in all respects and not misleading, and there are no other facts the omission of which would make any fact or statement therein misleading; and (iii) all forecasts, projections and estimates attributable to it contained or referred to in the Information Package and all assumptions and presumptions upon the basis of which the same were made, at the time they were made were reasonable and nothing has occurred since the date of the Accountants' Report which makes it necessary to change any of those forecasts, projections and estimates. 13. Immediately prior to the Completion Date, the Borrower has no Subsidiaries other than Regis S.A. 14. There are no arrangements (whether legally binding or not) between the Borrower and any of its Subsidiaries for financial support other than under the terms of the Regis S.A. Comfort Letter. 15. There is no disclosure made in any Exhibit to the Acquisition Agreement or any other disclosure to any of the Acquisition Documents that is not fully and accurately disclosed in the Information Package. -45- SCHEDULE 6 PART 1 AUDITORS' CONFIRMATION National Westminster Bank Plc 135 Bishopsgate London EC2M 3UR [Date] Gentlemen, CREDIT AGREEMENT TO BE DATED 22ND SEPTEMBER 1995 AS VARIED AND RESTATED BY VARIATION AND AGREEMENTS DATED 22ND MARCH 1996 AND [** 1998] MADE BETWEEN (1) REGIS EUROPE LIMITED AND (2) NATIONAL WESTMINSTER BANK PLC (THE "CREDIT AGREEMENT") We confirm, as auditors of Regis Europe Limited and those of its subsidiary companies that are registered in England and Wales, that we will, from time to time and at your request, issue to you a report in substantially the form enclosed. Your draft letter of instructions and our draft form of report are enclosed initialed for purposes of identification. Yours faithfully, - ------------------------------- for and on behalf of ** as Auditors -46- (TO BE SENT BY NATIONAL WESTMINSTER BANK PLC TO AUDITORS OF REGIS EUROPE LIMITED) Auditors' details ** [Date] ** Dear Sirs, REGIS EUROPE LIMITED (THE "BORROWER") We refer to the Credit Agreement entered into between the Borrower and ourselves dated 22nd September 1995 as varied and restated on 22nd March 1996 and [** 1998] an executed copy of which is enclosed with this letter (the "CREDIT AGREEMENT"). Clause 9.2 of the Credit Agreement sets out the financial undertakings of the Borrower. We or, as the case may be, the Borrower, may require you to review the covenant calculations under Clause 9.2 (whether for the purpose of Clause 9.1(e) or otherwise). In any such event, whether the request is made by either the Borrower or us we should be grateful if your review would confirm that such calculations have been made in accordance with the terms of the Credit Agreement, or if not, that any revised calculations made by you in relation to such calculations have been so made. According to the provisions of Clause 9.1(a) of the Credit Agreement the Borrower is required to send us its Accounts within 120 days of the end of each Financial Year. You should report to us the results of your review of the calculations of those covenants which fall to be tested as at the end of each such Financial Year, in the terms set forth in the enclosed draft, within 14 days following the compliance by the Borrower with that requirement. Your fees for this work are for the account of the Borrower and should be agreed with them in advance. Yours faithfully, - ------------------------------- for and on behalf of NATIONAL WESTMINSTER BANK PLC -47- [FORM OF AUDITORS' REPORT] [Date] Dear Sirs, We refer to the Credit Agreement entered into between Regis Europe Limited (the "Borrower") and yourselves, dated 22nd September 1995 as varied and restated on 22nd March 1996 and [** 1998] (the "CREDIT AGREEMENT"). The definitions set out in the Credit Agreement shall have the same meaning in this report. In accordance with your instructions set out in your letter dated ** 19** we have reviewed the enclosed schedule of calculations for the financial undertakings in Clause 9.2 for the Financial Year ended on ** 19**. The schedule has been initialed by us for purposes of identification. As Auditors of the Borrower, we confirm that the respective amounts of PBIT, Total Debt Costs, Consolidated Cash Flow Before Financing, Total Obligations, Consolidated Adjusted Net Worth, Gearing and Capital Expenditure have been calculated in accordance with the provisions set out in the Credit Agreement for the Financial Year ended ** 19**. Yours faithfully, - ---------------------------- for and on behalf of ** as Auditors -48- SCHEDULE 6 PART 2 The Manager Acquisition Finance NatWest Markets 135 Bishopsgate London EC2M 3UR Dear Sir/Madam, CREDIT AGREEMENT DATED 22ND SEPTEMBER 1995 MADE BETWEEN REGIS EUROPE LIMITED AND NATIONAL WESTMINSTER BANK PLC AS VARIED AND RESTATED ON 22ND MARCH 1996 AND [** 1997] (THE "CREDIT AGREEMENT") In accordance with Clause 9.1(e) of the Credit Agreement dated xxxxx, we hereby certify that during the period xxxx to xxxx, all of our undertakings under the Financing Documents including the financial undertakings in Clause 9.2 (calculations of which are attached) have been complied with. Signed on behalf of the Board of Regis Europe Limited -49- FINANCIAL UNDERTAKING CALCULATIONS FOR THE PERIOD XXX TO XXX 1. PBIT: TOTAL DEBT COSTS PBIT July x August x September x _ ... x x --- --- Total Debt Costs July x August x September x ... x _ x --- --- Ratio x Covenant x 2. CONSOLIDATED CASH FLOW BEFORE FINANCING TO TOTAL OBLIGATIONS Consolidated Cash Flow Before Financing PBIT July x August x September x ... x _ x --- --- +Depreciation July x August x September x ... x _ x --- --- -50- + management charges payable but not paid July x August x September x ... x _ x --- --- + receipts from Regis Corporation for share subscriptions July x August x September x ... x - x --- --- -payments to Regis Corporation not already included in PBIT July x August x September x ... x _ x --- --- +/- Net Working Capital Movement July x August x September x ... x _ x --- --- +/- Extraordinary Items July x August x September x ... x _ x --- --- -51- - Capital Expenditure July x August x September x ... x _ x --- --- - Taxes Paid July x August x September x .. x _ x --- --- Consolidated Cash Flow Before Financing _ x --- --- Total Obligations Total Debt Costs July x August x September x ... x _ x --- --- Loan Repayments July x August x September x ... x _ x --- --- -52- Loan Prepayments July x August x September x ... x - x --- --- Finance Lease Repayments July x August x September x ... x - x --- --- Total Obligations x Ratio x Covenant x 3. CONSOLIDATED ADJUSTED NET WORTH Share Capital x Regis Corp Intercompany Loan x Acquisition Goodwill Written Off x Less Intangibles (excluding Acquisition Goodwill) x Less Investment in Regis SA and S&L x Profit and Loss Reserve x Covenant x 4. GEARING Total Debt Term Loan x Overdraft Facility x Finance Leases x Other x Consolidated Adjusted Net Worth x Gearing x% Covenant x%
-53- 5. CAPITAL EXPENDITURE
Charging Regis South Total Cumulative Covenant Group Africa YTD July x x x x x August x x x x x September x x x x x ... x x x x x --- --- --- --- --- x x x x x
*Please also schedule: (i) Reverse Premia received in respect of new leases; (ii) BHS Receipts that have been reinvested as Capital Expenditure. -54- SCHEDULE 7 1. MARKET DISRUPTION If the Bank determines that, by reason of circumstances generally affecting the London inter-bank market, means do not exist for ascertaining LIBOR: (a) the Bank shall promptly notify the Borrower in writing of such event ("MARKET DISRUPTION NOTICE"); (b) the Bank and the Borrower shall, as the circumstances may require, discuss an alternative basis for calculating the relative rate of interest for the Term Loan on the basis that the net return to the Bank shall be no less (but no more) than it would have been had such event not occurred; (c) the Borrower shall either: (i) throughout any period in relation to which a market disruption notice is in effect, subject always to paragraph 1(d), pay interest to the Bank on the Term Loan at the rate per annum determined by the Bank to be the aggregate of: (x) the Margin; (y) the rate determined by the Bank to be the rate which expresses as a percentage rate per annum the cost to the Bank of funding the Term Loan from whatever sources it may select (acting reasonably); and (z) Mandatory Liquid Asset Costs; or (ii) promptly following receipt of a market disruption notice, prepay the Term Loan, together with interest accrued thereon and all other amounts payable under this Agreement (including all amounts payable under Clause 9.2); or (d) if the Borrower and the Bank shall agree an alternative basis, then such alternative basis shall take effect in accordance with its terms and shall be deemed to take effect under this Agreement until such time the circumstances giving rise to the market disruption notice have ceased. 2. CHANGES IN CIRCUMSTANCES 2.1 ILLEGALITY If by reason of the introduction of; or any change in, any applicable law or any regulation or regulatory requirement of the Bank of England or of any other governmental, monetary or other authority (with the requests or requirements of which the Bank is accustomed to -55- comply and whether in the United Kingdom or elsewhere) or any change in the interpretation or application thereof it becomes unlawful or it is prohibited for the Bank to maintain the Term Loan Facility or otherwise give effect to any of its obligations under this Agreement, the Bank shall inform the Borrower to that effect, whereupon its obligation to permit the Term Loan Facility to remain outstanding shall forthwith terminate and the Borrower shall, within such period (if any) as may be allowed by the relevant law, regulation or regulatory requirement, prepay to the Bank the Term Loan together with all other amounts payable under this Agreement (including all amounts payable under Clause 9.2). Without prejudice to the foregoing, the Bank confirms that if it informs the Borrower as aforesaid it shall thereafter use reasonable endeavours to avoid or mitigate the effects of such unlawfulness or prohibition (including, without limitation, designation of an alternative Lending Office or the transfer or assignment of the Term Loan Facility to a Qualifying Bank pursuant to Clause 15) and will enter into negotiations in good faith with the Borrower with a view to finding a means of avoiding or mitigating the effects of such unlawfulness or prohibition PROVIDED THAT the Bank shall not be obliged to continue such negotiations for a period exceeding 30 days (or if shorter, the period from notification to the date upon which the relative law, regulation or requirement comes into effect) after the day upon which the Bank informs the Borrower pursuant to this paragraph 2.1. 2.2 INCREASED COSTS If, after the date hereof, any of the implementation: introduction, abolition, withdrawal and any change in: (a) any law, regulation, practice and concession; or (b) any official directive, regulatory requirement, request and guidance (whether or not having the force of law but if not having the force of law, imposed by any body or authority with whose requirements, requests or guidance the Bank customarily complies) of the Bank of England, the European Union and of any other governmental, monetary or other authority (whether in the United Kingdom or elsewhere) having jurisdiction over the relative Bank; or (c) any change in the interpretation or application thereof, shall increase the cost to the Bank of making available the Term Loan Facility or maintaining the Term Loan or any part thereof or of carrying out any of the transactions provided for or contemplated by any of the Financing Documents or reduce the amount of any payment received or receivable by the Bank or reduce its return from the Term Loan Facility, then and in any such case the Bank shall notify the Borrower who shall pay (as additional interest) from time to time to the Bank within 5 Business Days of such notification all amounts which the Bank certifies (in a certificate which shall set out in reasonable detail so far as is practicable the basis of the computation of such amounts) to be necessary to compensate the Bank for the additional cost or reduction. Without prejudice to the foregoing, the Bank confirms that on notifying the Borrower as aforesaid the Bank shall take such steps as the Bank considers reasonable to reduce or avoid the additional cost or reduction and, if the Borrower so requests, the Bank shall consult with the Borrower with a view to finding a means of reducing or avoiding the additional cost or reduction PROVIDED THAT the Bank shall not be obliged to continue such negotiations in respect of any such notification for a period of longer than 30 days after the date of the giving of notification pursuant to this paragraph 2.2. -56- The Borrower will not be obliged to compensate the Bank under paragraph 2.2 (Increased Costs) in respect of any increased cost: (a) compensated for by payment of the MLA Costs; or (b) attributable to a change in the rate of Tax on the Overall Net Income of the Bank; or (c) compensated for by the operation of paragraph 3 (Grossing Up) or would have been so compensated for but for the operation of paragraph 3.4. 2.3 CERTIFICATES The certificate or notification of the Bank as to any of the matters referred to in paragraphs 2.1 and 2.2 shall, in the absence of manifest error, be conclusive and binding on the Borrower. 3. GROSSING UP 3.1 Subject to paragraph 3.2, all sums payable to the Bank pursuant to or in connection with any of the Financing Documents shall be paid in full without any set-off or counterclaim whatsoever and free and clear of all deductions or withholdings whatsoever. 3.2 If any deduction or withholding is required by law in respect of any payment due to the Bank pursuant to or in connection with any of the Financing Documents, the Borrower shall ensure that the deduction or withholding is made and that it does not exceed the minimum legal requirement therefor and that the full amount deducted or withheld is paid to the relevant taxation or other authority in accordance with the applicable law. 3.3 If any deduction or withholding is made in relation to any payment payable by the Borrower to the Bank, the Borrower shall pay to the Bank that amount which results in the net amount received by the Bank after the deduction or withholding (and after taking account of any further deduction or withholding which is required to be made as a consequence of the increase) being equal to the amount which the Bank would have been entitled to receive in the absence of any requirement to make any deduction or withholding. 3.4 A Borrower shall not be required to pay an additional amount under this CLAUSE 11.9 if the payment in respect of which the deduction or withholding is required is a payment of interest on an Advance and: (a) at the time that Advance was made, the Bank was not a Qualifying Bank otherwise than as a consequence of a Change occurring after the date of this Agreement (and the obligation to deduct or withhold would not have arisen if that Advance had been made by a Quilting Bank); or (b) at the time when the interest is paid, the Bank is not beneficially entitled to it or, being beneficially entitled to it, the Bank is not within the charge to United Kingdom corporation tax as respects it otherwise than as a consequence of a Change occurring after the date of this Agreement (and the obligation to deduct or withhold would not have arisen if the Bank had been beneficially entitled to the interest and had been within the charge to United Kingdom corporation tax as respects it). -57- 3.5 If the Borrower pays to the Bank any additional amount under this paragraph 3 by reason of a deduction or withholding for or on account of Taxes and the Bank determines in its absolute discretion that it has obtained a refund of Tax, or credit against Tax, by reason of the payment of that additional amount and the Bank is able to identify such refund or credit as being attributable to that payment, then the Bank shall reimburse to the Borrower such amount as the Bank shall determine in its absolute discretion to be the proportion of the credit or refund in question as will leave the Bank (after that reimbursement) in no better or worse position than that in which it would have been had the payment of the additional amount concerned not been required, but the Bank need not make any reimbursement if it believes the making of the reimbursement would cause it to lose the benefit of the credit or refund. The Bank will have an absolute discretion as to whether to claim any credit for or refund of Taxes and, if it does claim, the extent, order and manner in which it does so. The Bank will not be obliged to disclose any information regarding its tax affairs or computations to the Borrower. 4. DOCUMENTARY TAXES INDEMNITY All stamp, documentary, registration or other like duties or Taxes, including any penalties, additions, fines, surcharges or interest relating thereto, which are imposed or chargeable on or in connection with any of the Financing Documents shall be paid by the Borrower PROVIDED THAT the Bank shall be entitled but not obliged to pay any such duties or Taxes (whether or not they are its primary responsibility), whereupon the Borrower shall on demand indemnify the Bank for all costs and expenses so incurred. 5. VAT All payments made under the Financing Documents are calculated without regard to VAT. If any such payment constitutes the whole or any part of the consideration for a taxable or deemed taxable supply (whether that supply is taxable pursuant to the exercise of an option or otherwise) by the Bank, the amount of that payment shall be increased by an amount equal to the amount of VAT which is chargeable in respect of the taxable supply in question. -58- SCHEDULE 8 BASE CASE MODEL -59- THE BORROWER SIGNED BY ) and ) /s/ [Illegible] for and on behalf of ) REGIS EUROPE LIMITED ) THE BANK SIGNED BY ) ) /s/ [Illegible] for and on behalf of ) NATIONAL WESTMINSTER BANK PLC ) -60- The Borrower SIGNED by ) for and on behalf of ) /s/ [Illegible] REGIS EUROPE LIMITED ) The Bank SIGNED by ) for and on behalf of ) /s/ [Illegible] NATIONAL WESTMINSTER ) BANK PLC ) -7- EX-13 7 EXHIBIT 13 SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following table sets forth, for the periods indicated, selected financial data derived from the Company's consolidated financial statements.
1998 1997 1996 1995 1994 Revenues $ 798,144 $ 713,219 $ 617,307 $ 524,253 $ 453,561 Operating income (a) 59,929 28,447 26,167 26,644 25,712 Net income (a) 30,488 6,574 9,451 11,590 3,883 Net income per diluted share (a) 1.27 .28 .42 .53 .20 Total assets 382,350 331,535 303,954 244,836 226,944 Long-term debt, including current portion 120,736 113,462 102,381 85,092 82,991 Dividends declared .09 .08 .07 -- --
(a) The following information is provided to facilitate comparisons of operating income, net income and net income per diluted share, absent the impact of certain nonrecurring activities (See Notes 3 and 10 to the Consolidated Financial Statements). Exclusive of nonrecurring items, operating income would have been $61,908, $47,178, $38,990 in 1998, 1997 and 1996, respectively. Exclusive of nonrecurring items, net income and net income per diluted share, respectively, would have been $31,600 and $1.31 in 1998, $21,337 and $.92 in 1997, $16,981 and $.75 in 1996, $10,885 and $.50 in 1995, $9,883 and $.50 in 1994. KEY RATIOS
FOR THE YEARS ENDED JUNE 30, 1998 1997 1996 Cash flow per share* $ 2.25 $ 1.77 $ 1.50 Net income per diluted share excluding goodwill amortization** $ 1.50 $ 1.09 $ .89 Gross margin percentage 43.7% 42.8% 42.4% Product sales mix 28.7% 27.3% 25.3% Operating income as a percent of revenues** 7.8% 6.6% 6.3% Debt-to-capitalization ratio 38.9% 43.2% 36.9%
* Represents net income, excluding nonrecurring and noncash items ** Excludes nonrecurring items (see Notes 3 and 10 to the Consolidated Financial Statements) - -------------------------------------------------------------------------------- ANNUAL RESULTS The following table sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percent of revenues. The percentages are computed as a percent of total Company revenues, except as noted.
FOR THE YEARS ENDED JUNE 30, 1998 1997 1996 Company-owned service revenues(1) 71.3% 72.7% 74.7% Company-owned product revenues(1) 28.7 27.3 25.3 Franchise income 3.3 3.8 4.1 Company-owned operations: Profit margins on service(2) 43.0 41.9 41.3 Profit margins on product(3) 45.4 45.0 45.7 Direct salon(1) 9.1 9.5 10.1 Rent(1) 14.0 14.0 13.8 Depreciation(1) 3.3 3.4 3.6 Direct salon contribution(1) 17.3 15.9 14.9 Selling, general and administrative 10.8 11.0 10.6 Depreciation and amortization 1.2 1.2 1.0 Operating income 7.5 4.0 4.2 Income before income taxes 6.4 2.8 2.8 Net income 3.8 .9 1.5 Operating income, excluding nonrecurring items 7.8 6.6 6.3 Net income, excluding nonrecurring items 4.0 3.0 2.8
(1) Computed as a percent of company-owned revenues (2) Computed as a percent of service revenues (3) Computed as a percent of product revenues MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SUMMARY Regis Corporation, based in Minneapolis, is the largest owner, operator, franchisor and consolidator of hair and retail product salons in the world. The Regis worldwide operations include 3,539 hairstyling salons at June 30, 1998 operating in six divisions: Regis Hairstylists, Strip Center Salons (primarily Supercuts), MasterCuts, Trade Secret, Wal-Mart/SmartStyle and International. Worldwide operations include 816 franchised salons operating primarily as Supercuts salons. The Company has 28,000 employees worldwide. During fiscal 1998, the Company's consolidated revenues increased 11.9 percent to a record $798.1 million. Exclusive of nonrecurring items, operating income grew 31.1 percent to $61.9 million and net income increased 42.4 percent to $1.31 per share, compared to $.92 per share in the prior year. Financial data for fiscal 1997 and 1996 presented reflect the retroactive effects of the October 1996 merger with Supercuts, Inc. (Supercuts) which was accounted for as a pooling-of-interests (see Note 3 to the Consolidated Financial Statements). The financial statements have been prepared by combining the historical financial statements of Regis Corporation with those of Supercuts for each of these periods and include adjustments to conform the historical accounting policies and practices of Supercuts to those of Regis. RESULTS OF OPERATIONS REVENUES REVENUES in fiscal 1998 were a record $798.1 million, an increase of $84.9 million, or 11.9 percent, over fiscal 1997. Approximately 41 percent of this increase is attributable to increases in same-store sales, with the remaining increase due to net salon openings and acquisitions occurring in fiscal 1998 and the full year impact of fiscal 1997 net salon openings and acquisitions. Regis Hairstylists, Strip Center Salons, MasterCuts, Trade Secret and Wal-Mart/SmartStyle salons in the United States and Canada (Domestic salons) accounted for $78.1 million of the increase in total revenues. The remainder of the revenue increase of $6.8 million resulted from the Company's International operations. The Company's International salons are located in the United Kingdom, South Africa, Switzerland, Mexico, Ireland, France and The United Arab Emirates. Revenue by division for fiscal 1998, 1997 and 1996, respectively, are shown in the Business Mix table (right). During fiscal 1998, same-store sales from all Domestic company-owned salons open more than 12 months increased 5.8 percent, compared to increases of 3.1 percent and 3.6 percent in fiscal 1997 and 1996, respectively. Same-store sales for the United Kingdom salons (U.K. salons), the primary component of International salons, increased 5.3 percent in fiscal 1998. Same-store sales increases achieved during fiscal 1998, 1997 and 1996 were driven primarily by increased customer transactions, rather than price increases. A total of 71.8 million customers were served in fiscal 1998 compared to 69.0 million and 64.4 million customers served in fiscal 1997 and 1996, respectively. The Company utilizes an audiovisual-based training system in its salons. Management believes this training system provides its employees with improved customer service and technical skills, and positively contributes to the increase in customers served.
BUSINESS MIX (DOLLARS IN THOUSANDS) 1998 1997 1996 Regis $ 294,584 $ 275,258 $ 267,576 MasterCuts 107,821 94,963 83,411 Wal-Mart/ SmartStyle 40,256 30,294 2,459 Strip Centers 108,146 94,904 97,196 Trade Secret 115,024 91,412 64,960 International 106,176 99,348 76,287 Franchise Income 26,137 27,040 25,418 ----------- ------------ ----------- $ 798,144 $ 713,219 $ 617,307 ----------- ------------ ----------- ----------- ------------ -----------
REGIS CORPORATION 1998 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVENUES INCREASED 12 PERCENT IN 1998 5 YEAR COMPOUND ANNUAL GROWTH RATE:15.5%
$ MILLIONS 1996 1997 1998 FRANCHISE 25.4 27.0 26.1 PRODUCT 149.5 187.6 221.6 SERVICE 442.4 498.6 550.4 ------ ------ ------ TOTAL $617.3 $713.2 $798.1 ------ ------ ------ ------ ------ ------
COMPANY-OWNED REVENUES
COMBINED GROSS MARGINS IMPROVED 90 BASIS POINTS IN 1998 1996 42.4% 1997 42.8% 1998 43.7%
COMBINED GROSS MARGINS System-wide sales, inclusive of non-consolidated sales generated from franchisee salons, were $1.1 billion, $955.1 million, and $845.5 million in fiscal 1998, 1997 and 1996, representing increases of 10.8 percent, 13.0 percent and 17.4 percent, respectively. The increase in system-wide sales in fiscal 1998 was the result of same-store sales increases from existing salons and net salon openings as well as the total number of salons added to the system through acquisitions. System-wide same-store sales increased 5.3 percent, 2.6 percent and 3.3 percent in fiscal 1998, 1997 and 1996, respectively. SERVICE REVENUES were $550.4 million, $498.6 million and $442.4 million for 1998, 1997 and 1996, representing increases of 10.4 percent, 12.7 percent and 16.7 percent, respectively. The growth in service revenues was driven by same store-sales growth, accelerated new salon construction, and acquisitions. PRODUCT REVENUES were $221.6 million, $187.6 million and $149.5 million in fiscal 1998, 1997 and 1996, representing increases of 18.1 percent, 25.5 percent and 24.2 percent, respectively. The growth in product revenue in fiscal 1998 continues a trend of escalating product revenues due to strong product same-store sales growth, a reflection of continuous focus on product awareness, training and acceptance of national label merchandise and opening an additional 38 Trade Secret salons between the two periods. In fiscal 1998, product revenues as a percent of total company-owned revenues increased to 28.7 percent of revenues, compared to 27.3 percent and 25.3 percent of revenues in 1997 and 1996, respectively. FRANCHISE INCOME, including royalties and initial franchise fees from franchisees, and product sales made by the Company to franchisees, decreased 3.3 percent in fiscal 1998 to $26.1 million from $27.0 million in fiscal 1997. The decrease in franchise income is a result of a reduction in royalty rates charged to franchisees, partially offset by increases in franchisee sales, which are not included in the Company's consolidated revenues. The Company feels the reduction in royalty rates will not have an adverse affect on earnings due to a corresponding decrease in costs of services provided to the franchisees. In fiscal 1997, franchise income increased 6.4 percent, or $1.6 million, compared to fiscal 1996. This increase is the result of an increase in franchisee sales, which are not included in the Company's consolidated revenues. COST OF REVENUE The aggregate cost of revenues in fiscal 1998 was $434.8 million, compared to $392.8 million and $340.9 million in fiscal 1997 and 1996, respectively. As discussed in the following paragraphs, the resulting gross margin percentage for fiscal 1998 improved to 43.7 percent of company-owned revenues compared to 42.8 percent and 42.4 percent of company-owned revenues in fiscal 1997 and 1996. SERVICE MARGINS for fiscal 1998 improved 110 basis points to 43.0 percent of company-owned revenues, compared to 41.9 percent and 41.3 percent in the two preceding fiscal years. This continued improvement was driven by ongoing payroll control in all operating divisions and growth in the mix of the Company's higher service margin salon concepts, primarily Strip Center Salons, MasterCuts and Wal-Mart/SmartStyle. 18 REGIS CORPORATION 1998 PRODUCT MARGINS for fiscal 1998 improved to 45.4 percent of company-owned revenues, compared to 45.0 percent in fiscal 1997. This 40 basis point improvement was primarily driven by lower product costs in Supercuts and Wal-Mart salons resulting from the benefit of Regis' purchasing power. Product margins declined 70 basis points to 45.0 percent in fiscal 1997, compared to 45.7 in fiscal 1996. This decline was primarily a result of an increase in Trade Secret revenues as a percent of total Company revenues, as Trade Secret product margins are somewhat lower than the other divisions. Additionally, the Company responded to a disappointing Christmas season by discounting retail products in the third quarter of 1997. This bolstered the same-store sales growth but also reduced fiscal 1997 margins. DIRECT SALON This expense category includes direct costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. Direct salon increased to $70.1 million in fiscal 1998, compared to $65.0 million and $60.0 million in fiscal 1997 and 1996, but improved as a percent of company-owned revenue to 9.1 percent, compared to 9.5 percent and 10.1 percent in fiscal 1997 and 1996. The continued improvement in fiscal 1998 direct salon expenses resulted from an increased ability to leverage these costs against strong same-store sales increases and a maturing salon base, as well as the closures of under-performing stores, primarily Supercuts salons. The fiscal 1997 improvement resulted from leveraging fixed costs against increased revenues as well as reductions in advertising costs in the Regis Hairstylists and MasterCuts divisions. RENT Rent expense in fiscal 1998 was $107.9 million, compared to $95.7 million and $81.6 million in fiscal 1997 and 1996. Rent expense in fiscal 1998 remained consistent with fiscal 1997 at 14.0 percent of company-owned revenues. In fiscal 1997, rent expense increased 20 basis points due to the mid-year fiscal 1997 acquisitions in the United Kingdom, as well as the Wal-Mart acquisition in June 1996. When compared to Domestic salon operations, the U.K. salons acquired have higher rent expense and lower selling, general and administrative expense because certain costs are absorbed by department stores and passed on as rent. Wal-Mart salons acquired have a higher rent expense, as a percent of company-owned revenues, as this division has a developing salon base and, therefore, this fixed cost is spread over a lower sales volume compared to the majority of the Company's domestic salon base. DEPRECIATION--SALON LEVEL Depreciation expense at the salon level remained fairly consistent at 3.3 percent of revenues compared to 3.4 percent and 3.6 percent in fiscal 1997 and 1996. This positive trend is due to leveraging this fixed cost against increasing revenues. DIRECT SALON CONTRIBUTION For reasons described above, direct salon contribution, representing company-owned salon revenues less associated operating expenses, improved in fiscal 1998 to $133.7 million and 17.3 percent of company-owned revenues, compared to $109.3 million and 15.9 percent in fiscal 1997 and $88.4 million and 14.9 percent in fiscal 1996.
DIRECT SALON CONTRIBUTION INCREASED 140 BASIS POINTS IN 1998 1996 14.9% 1997 15.9% 1998 17.3%
DIRECT SALON CONTRIBUTION REGIS CORPORATION 1998 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING INCOME INCREASED 31% IN 1998
$ MILLIONS EXCLUDING NONRECURRING ITEMS 1996 $39.0-6.3% 1997 $47.2-6.6% 1998 $61.9-7.8%
OPERATING INCOME SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses include field supervision (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). SG&A expenses increased $7.8 million in fiscal 1998 to $86.5 million, but improved as a percent of total revenue to 10.8 percent from 11.0 percent in fiscal 1997. The 20 basis point improvement in SG&A in fiscal 1998 was primarily driven by cost reductions associated with the amalgamation of the Supercuts administrative office functions, partially offset by costs incurred to prepare the Company's internal computer systems for the year 2000. In fiscal 1997, SG&A expenses increased $13.6 million to $78.7 million and deteriorated as a percent of total revenue by 40 basis points. This deterioration was primarily a result of higher distribution center expenses due to volume increases. In addition, SG&A expense for the International division was higher in fiscal 1997 than fiscal 1996 due to an extended transition period for the associated 1996 acquisitions. DEPRECIATION AND AMORTIZATIONCORPORATE Depreciation and amortization was 1.2 percent of total revenues, compared to 1.2 percent and 1.0 percent in fiscal 1997 and 1996, respectively. Amortization expense increased in fiscal 1998 and 1997 due to the increased level of intangible assets, primarily goodwill, associated with the Company's salon acquisition activity. In fiscal 1998, depreciation expense within this category has remained relatively consistent with fiscal 1997 and 1996 as a percent of revenues. NONRECURRING ITEMS See Notes 3 and 10 to the Consolidated Financial Statements. OPERATING INCOME Operating income in fiscal 1998 increased to $59.9 million, compared to $28.4 million and $26.2 million in fiscal 1997 and 1996, respectively. Both fiscal 1997 and 1996 were significantly affected by Supercuts-related merger and transaction costs, and restructuring charges (nonrecurring items). Exclusive of nonrecurring items, operating income in fiscal 1998 improved to $61.9 million, or 7.8 percent of revenues, compared to $47.2 million and $39.0 million in fiscal 1997 and 1996. This 31.1 percent improvement was driven by improved gross margins and the overall leveraging of fixed costs. The fiscal 1997 improvement is primarily attributable to improved gross margins, the leveraging of direct salon expenses, partially offset by higher SG&A expense as a percent of revenues. INTEREST Interest expense in fiscal 1998 was $10.1 million compared to $10.3 million and $9.9 million in fiscal 1997 and 1996, representing 1.3 percent, 1.4 percent and 1.6 percent of total revenues, respectively. The decline in interest expense as a percent of total revenues in fiscal 1998 and 1997 is due to the benefit of reduced interest rates in the respective periods. 20 REGIS CORPORATION 1998 INCOME TAXES The Company's effective tax rate in fiscal 1998 was 40.2 percent of pre-tax income compared to 66.6 percent and 45.6 percent in fiscal 1997 and 1996. In fiscal 1997, the Company's effective tax rate was negatively affected by nondeductible merger and transaction costs associated with the Supercuts merger. Exclusive of nonrecurring items, the Company's effective tax rate was 40.2 percent, 43.1 percent and 42.4 percent, respectively, in fiscal 1998, 1997 and 1996. The fiscal 1997 and 1996 effective tax rates, exclusive of nonrecurring items, were negatively affected by the Company's inability to fully utilize the income tax benefits of Supercuts operating costs in certain states. Additionally, as part of its June 30, 1997 income tax provision, the Company recorded a $1.5 million change in estimate associated with income tax matters related to years prior to 1997. NET INCOME Net income in fiscal 1998 grew to a record $30.5 million, or $1.27 per diluted share, compared to net income of $6.6 million, or $.28 per diluted share, in fiscal 1997 and $9.5 million, or $.42 per diluted share, in fiscal 1996. Exclusive of nonrecurring items, net income in fiscal 1998 increased to $31.6 million, or $1.31 per diluted share, compared to net income of $21.3 million, or $.92 per diluted share, in fiscal 1997 and $17.0 million, or $.75 per diluted share in fiscal 1996. Earnings per diluted share, exclusive of nonrecurring items, increased 42.4 percent, 22.7 percent and 50.0 percent in fiscal 1998, 1997 and 1996, respectively. These increases have primarily resulted from sales increases, improved gross margins and leveraging of fixed costs, as previously discussed. EFFECTS OF INFLATION The Company compensates its Regis Hairstylists and International salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of revenues to remain relatively constant. Accordingly, this provides the Company certain protection against inflationary increases as payroll expense and related benefits (the Company's major expense components) are, with respect to these divisions, variable costs of sales. The Company does not believe inflation, due to its low rate, has had a significant impact on the results of operations associated with hourly paid hairstylists for the Strip Center, MasterCuts, Trade Secret or Wal-Mart/SmartStyle divisions. LIQUIDITY AND CAPITAL RESOURCES Customers generally pay for salon services and merchandise in cash at the time of sale, which reduces the Company's working capital requirements. Net cash provided by operating activities in fiscal 1998 rose to $67.7 million compared to $34.9 million in fiscal 1997. The increase in fiscal 1998 is due to improved operating performance during the year and to payments in fiscal 1997 associated with the Supercuts merger and restructuring costs. Cash payments associated with these costs were $18.4 million in fiscal 1997. CAPITAL EXPENDITURES AND ACQUISITIONS During fiscal 1998, the Company had worldwide capital expenditures of $65.9 million, of which $4.4 million related to acquisitions of 201 salons, $5.9 million for equipment acquired under capital leases, $9.7 million for the Company's new distribution center and $7.0 million for the purchase of additional administrative office facilities. During fiscal 1998, the Company constructed 181 new salons (33 Regis Hairstylists, 4 Strip Center Salons, 50 MasterCuts, 32 Trade Secret, 45 Wal-Mart/SmartStyle and 17 International) and added 201 salons through acquisitions. The Company also completed 97 major remodeling projects. All capital expenditures during fiscal 1998 were funded by the Company's operations and borrowings under its revolving credit facility. EARNINGS PER SHARE GREW 42% IN 1998
DILUTED EXCLUDING NONRECURRING ITEMS 1996 $0.75 1997 $0.92 1998 $1.31
EARNINGS PER SHARE CASH FLOW PER SHARE INCREASED 27% IN 1998
NET INCOME BEFORE NONRECURRING AND NONCASH ITEMS 1996 $1.50 1997 $1.77 1998 $2.25
CASH FLOW PER SHARE REGIS CORPORATION 1998 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NEW SALON CONSTRUCTION 1998 Strip Centers (primarily Supercuts) 4 Wal-Mart/SmartStyle 45 MasterCuts 50 Trade Secret 32 Regis 33 International 17
PROJECTED SALON CONSTRUCTION 1999 Strip Centers (primarily Supercuts) 45 Wal-Mart/SmartStyle 80 MasterCuts 50 Trade Secretq 40 Regis 45 International 15
The Company anticipates its worldwide salon development program for fiscal 1999 will include approximately 275 new salons and 125 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $50.0 million in fiscal 1999, excluding capital expenditures associated with acquisitions. FINANCING The Company renewed its revolving credit facility in June 1998. Under the terms of the renewal, the revolving credit facility allows for borrowings up to $25.0 million through December 1998, $35.0 million through December 1999, $45.0 million through December 2000 and $50.0 million through October 2001, and bears interest at the prime rate. The prime rate at June 30, 1998 and 1997 was 8.50 percent. The facility also allows for borrowings bearing interest at LIBOR rates plus 1.00 to 1.25 percent, based on the Company's debt to capitalization ratio. The weighted average interest rate associated with this facility was 7.67 percent and 7.63 percent, respectively, during fiscal 1998 and 1997. The revolving credit facility requires a quarterly commitment fee at the rate of 1/4 percent per year on the unused portion of the facility. Letters of credit totaling $0.9 million were outstanding at June 30, 1998, which reduces the amount available under the revolving credit facility. In May 1998, the Company also entered into an additional uncommitted revolving credit facility which allows for borrowings up to $20.0 million, bears interest at the prime rate or LIBOR plus 1.0 percent, and matures in May 1999. There are no borrowings under this facility as of June 30, 1998. In July 1998, the Company paid down its revolving credit facilities by $14.0 million with the proceeds of a 7.14 percent senior term note with interest due quarterly, and principal payments of $9.0 million and $5.0 million due in July 2007 and 2008, respectively. In March 1997, the Company entered into a treasury lock agreement for the purpose of establishing the effective interest rate on the refinancing of a $14.0 million senior term note which matured in June 1998. The contract was entered into to reduce the risk to the Company of future interest rate fluctuations. The contract had a notional amount of $14.0 million and was tied to the U.S. government ten-year treasury note rate. Upon settlement of the agreement in June 1998, the Company incurred a loss of $1.6 million on the contract. This loss will be amortized as interest expense through 2008. The Company does not enter into financial instruments for trading or speculative purposes. See merger and transaction costs discussed in Note 3 to the Consolidated Financial Statements. See nonrecurring items discussed in Note 10 to the Consolidated Financial Statements. The Company translates the financial statements of its international subsidiaries to U.S. dollars for financial reporting purposes, and accordingly is subject to fluctuations in currency exchange rates. 22 REGIS CORPORATION 1998 Management believes that cash generated from operations and amounts available under its revolving credit facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. DIVIDENDS The Company paid dividends of $.09 per share during fiscal 1998 and $.08 per share during fiscal 1997. On August 27, 1998, the Board of Directors of the Company declared a $.03 per share quarterly dividend payable September 23, 1998, to shareholders of record on September 8, 1998. YEAR 2000 The Company has initiated a comprehensive project to prepare its computer systems for the year 2000. The Company has completed the awareness and assessment phases of the project and is in the process of remediation. The remediation, validation, and implementation phases are planned to be completed by late summer of calendar year 1999. Accordingly, management believes the year 2000 will not have a significant impact on operations. If necessary modification and conversions are not completed on a timely basis, the year 2000 could have an adverse effect on the Company's operations. At this time, the Company believes it is unnecessary to adopt a contingency plan covering the possibility that the project will not be completed in a timely manner, but as part of the overall project, the Company will continue to assess the need for a contingency plan. Costs associated with the year 2000 are expensed as incurred and are funded through operating cash flows. Based on the Company's most recent assessment, the associated expense to be incurred is estimated to be approximately $5 million and will be charged to earnings, primarily over the next 18 months. In fiscal 1998, primarily in the fourth quarter, the Company charged $0.5 million in year 2000 project costs to earnings. The Company is in contact with critical suppliers of products and services to assess whether the suppliers' operations and the products and services they provide are year 2000 capable or to monitor their progress toward year 2000 compliance. There can be no absolute assurance that another company's failure to ensure year 2000 compliance would not have not have an adverse effect on the Company. Time and cost estimates are based on currently available information and are management's best estimates. However, there is no guarantee that these estimates will be achieved, and actual results may differ materially from those anticipated. Developments which could affect estimates include, but are not limited to, the availability and cost of trained personnel; the ability to locate and correct all relevant computer code and equipment; and planning and modification success of third party suppliers of products and services. The Company will continue to assess and evaluate cost estimates and target dates for completion of each phase of the year 2000 project on a periodic basis. OTHER During fiscal 1997, the Company resolved the litigation brought by David E. Lipson and DEL Holding Corporation (DEL), a corporation controlled by Mr. Lipson, against Supercuts. The Company paid Mr. Lipson and DEL $6.7 million in complete settlement of all claims of Mr. Lipson, DEL or any other entity controlled by Mr. Lipson. See Note 10 to the Consolidated Financial Statements. This was funded through the issuance of the Company's common stock. RETURN ON BEGINNING EQUITY INCREASED 450 BASIS POINTS IN 1998
NET INCOME BEFORE NONRECURRING ITEMS AS A PERCENT OF BEGINNING EQUITY 1996 16.1% 1997 16.7% 1998 21.2%
RETURN ON BEGINNING EQUITY REGIS CORPORATION 1998 23 CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30 ASSETS 1998 1997 Current assets: Cash $ 4,774 $ 8,935 Accounts receivable, net 10,556 12,388 Inventories 53,826 42,596 Deferred income taxes 6,069 6,335 Other current assets 6,688 6,819 -------------------- Total current assets 81,913 77,073 Property and equipment, net 175,831 139,573 Goodwill 114,217 99,818 Other assets 10,389 15,071 -------------------- Total assets $382,350 $331,535 -------------------- -------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 19,741 $ 30,722 Accounts payable 22,374 24,111 Accrued expenses 41,650 37,291 -------------------- Total current liabilities 83,765 92,124 Long-term debt 100,995 82,740 Other noncurrent liabilities 8,329 7,557 Commitments (Note 5) Shareholders' equity: Common stock, $.05 par value; issued and outstanding, 23,820,362 and 23,317,924 common shares at June 30, 1998 and 1997, respectively 1,191 1,166 Additional paid-in capital 132,560 120,483 Retained earnings 55,510 27,465 -------------------- Total shareholders' equity 189,261 149,114 -------------------- Total liabilities and shareholders' equity $382,350 $331,535 -------------------- --------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 24 REGIS CORPORATION 1998 CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30 1998 1997 1996 Revenues: Company-owned salons: Service $550,448 $498,559 $442,366 Product 221,559 187,620 149,523 ------------------------------- 772,007 686,179 591,889 Franchise income 26,137 27,040 25,418 ------------------------------- 798,144 713,219 617,307 ------------------------------- Operating expenses: Company-owned: Cost of service 313,931 289,621 259,765 Cost of product 120,914 103,181 81,165 Direct salon 70,094 64,962 59,915 Rent 107,912 95,726 81,634 Depreciation 25,463 23,430 21,042 ------------------------------- 638,314 576,920 503,521 Selling, general and administrative 86,452 78,666 65,133 Depreciation and amortization 9,941 8,325 6,315 Nonrecurring items 1,979 18,731 12,823 Other 1,529 2,130 3,348 ------------------------------- Total operating expenses 738,215 684,772 591,140 ------------------------------- Operating income 59,929 28,447 26,167 Other income (expense): Interest (10,056) (10,264) (9,880) Other, net 1,104 1,519 1,090 ------------------------------- Income before income taxes 50,977 19,702 17,377 Income taxes (20,489) (13,128) (7,926) ------------------------------- Net income $ 30,488 $ 6,574 $ 9,451 ------------------------------- ------------------------------- Net income per share: Basic $ 1.30 $ .29 $ .43 ------------------------------- ------------------------------- Diluted $ 1.27 $ .28 $ .42 ------------------------------- ------------------------------- Weighted average common and common equivalent shares outstanding 24,086 23,231 22,720 ------------------------------- -------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. REGIS CORPORATION 1998 25 CONSOLIDATED STATEMENTS OF CHANGES ON SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS) COMMON STOCK ADDITIONAL PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL Balance, June 30, 1995 14,263,395 $ 714 $ 90,689 $ 14,016 $ 105,419 Shares issued in connection with subordinated debt conversion 375,000 19 2,794 2,813 Stock split effected in the form of a stock dividend 7,438,190 372 (372) Proceeds from sale of common stock 370,000 18 10,013 10,031 Shares issued in connection with employee benefit plans 12,842 1 101 102 Proceeds from exercise of stock options 77,734 3 819 822 Tax benefit realized upon exercise of stock options 590 590 Dividends (1,235) (1,235) Foreign currency translation adjustments (358) (358) Net income 9,451 9,451 ----------------------------------------------------------------------- Balance, June 30, 1996 22,537,161 1,127 104,634 21,874 127,635 Proceeds from sale of common stock 500,000 25 11,100 11,125 Shares issued in connection with employee benefit plans 13,056 1 240 241 Proceeds from exercise of stock options 267,707 13 3,656 3,669 Tax benefit realized upon exercise of stock options 853 853 Dividends (1,722) (1,722) Foreign currency translation adjustments 739 739 Net income 6,574 6,574 ----------------------------------------------------------------------- Balance, June 30, 1997 23,317,924 1,166 120,483 27,465 149,114 Proceeds from sale of common stock 400,000 20 10,390 10,410 Proceeds from exercise of stock options 102,438 5 1,290 1,295 Tax benefit realized upon exercise of stock options 397 397 Dividends (2,115) (2,115) Foreign currency translation adjustments (328) (328) Net income 30,488 30,488 ----------------------------------------------------------------------- Balance, June 30, 1998 23,820,362 $ 1,191 $ 132,560 $ 55,510 $ 189,261 ----------------------------------------------------------------------- -----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL SATEMENTS. 26 REGIS CORPORATION 1998 CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEARS ENDED JUNE 30 1998 1997 1996 Cash flows from operating activities: Net income $ 30,488 $ 6,574 $ 9,451 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 29,265 26,381 23,357 Amortization 6,396 5,703 4,432 Deferred income taxes 7,264 1,114 (3,059) Nonrecurring items 1,979 18,731 12,823 Other 255 259 503 Changes in operating assets and liabilities: Accounts receivable 1,673 (1,222) (1,190) Inventories (10,777) (8,376) (3,682) Other current assets 20 2,339 (3,299) Other assets (1,713) 13 (1,996) Accounts payable (1,358) 6,487 1,948 Accrued expenses 3,072 (22,396) (80) Other noncurrent liabilities 1,110 (750) (402) ------------------------------ Net cash provided by operating activities 67,674 34,857 38,806 ------------------------------ Cash flows from investing activities: Capital expenditures (55,631) (39,425) (32,605) Purchases of salon assets, net of cash acquired and certain obligations assumed (24,775) (10,370) (29,343) ------------------------------ Net cash used in investing activities (80,406) (49,795) (61,948) ------------------------------ Cash flows from financing activities: Borrowings on revolving credit facilities 163,254 187,328 150,758 Payments on revolving credit facilities (148,952) (203,425) (147,158) Proceeds from issuance of long-term debt 9,000 45,000 29,435 Repayment of long-term debt (24,620) (21,067) (17,164) Increase (decrease) in negative book cash balances 376 (4,842) 1,957 Dividends paid (2,115) (1,722) (1,235) Proceeds from issuance of common stock 11,705 15,035 10,955 ------------------------------ Net cash provided by financing activities 8,648 16,307 27,548 ------------------------------ Effect of exchange rate changes on cash (77) 8 (30) ------------------------------ (Decrease) increase in cash (4,161) 1,377 4,376 Cash: Beginning of year 8,935 7,558 3,182 ------------------------------ End of year $ 4,774 $ 8,935 $ 7,558 ------------------------------ ------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. REGIS CORPORATION 1998 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS DESCRIPTION: Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States and in a number of other countries, principally the United Kingdom (U.K.). Substantially all of the hairstyling and hair care salons owned and operated by the Company in the United States are located in leased space in enclosed mall shopping centers or strip shopping centers. Franchised salons are primarily located in strip shopping centers throughout the United States. At June 30, 1998, approximately 20 percent of the Company's outstanding common stock is owned by Curtis Squire, Inc. (CSI), which is a holding company controlled by the Chairman of the Board of Directors of the Company, and approximately 6 percent is owned by management and the Company's benefit plans. BASIS OF PRESENTATION: Financial and share data for 1996 reflect the retroactive effects of the October 1996 merger with Supercuts, Inc. (Supercuts) which was accounted for as a pooling-of-interests (Note 3). CONSOLIDATION: The financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. In consolidation, all material intercompany accounts and transactions are eliminated. FOREIGN CURRENCY TRANSLATION: Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Income statement accounts are translated at the average rates of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in the cumulative translation account grouped within shareholders' equity. INVENTORIES: Inventories consist principally of hair care products held either for use in salon services or for sale. Inventories are stated at the lower of cost or market with cost determined on the first-in, first-out method. PROPERTY AND EQUIPMENT: Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are computed on the straight-line method over estimated useful asset lives (shorter of asset life or lease term for leasehold improvements). Expenditures for maintenance and repairs and minor renewals and betterments which do not improve or extend the life of the respective assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operations. Fully depreciated assets remain in the accounts until retired from service. GOODWILL: Goodwill recorded in connection with the fiscal 1989 purchase of the publicly held minority interest in the Company, and 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 19 years depending upon the lease terms of the salon sites acquired. ASSET IMPAIRMENT ASSESSMENTS: The Company periodically measures and evaluates the recoverability of its tangible and intangible noncurrent assets using undiscounted cash flow analyses. FRANCHISE INCOME AND EXPENSES: Franchise income includes royalties and initial franchise fees from franchisees. Royalties are recognized as income in the month in which franchisee services are rendered or products are sold by franchisees. The Company recognizes income from initial franchise fees at the time franchisee salons are opened. All expenses associated with franchise operations are included in selling, general and administrative expenses in the Consolidated Statement of Operations. 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 basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. NET INCOME PER SHARE: In fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", and has disclosed basic and diluted earnings per share for all periods presented in accordance with the standard. Basic earnings per share is calculated as net income divided by weighted average common shares outstanding. The Company's only dilutive securities are issuable under the Company's stock option plan. Diluted earnings per share is calculated as net income divided by weighted average common shares outstanding, increased to include assumed exercise of dilutive stock options. Prior periods have been restated to reflect the new standard. 28 REGIS CORPORATION 1998 The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:
1998 1997 1996 Weighted average shares for basic earnings per share 23,481,064 22,624,037 21,936,209 Diluted effect of stock options 604,704 607,075 783,983 --------------------------------------- Weighted average shares for diluted earnings per share 24,085,768 23,231,112 22,720,192 --------------------------------------- ---------------------------------------
USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS: Effective with the Company's first quarter reporting of fiscal 1999, the Company will adopt SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and presenting comprehensive income and its components. Components of comprehensive income for the Company include net income and foreign currency translation adjustments. The effects of foreign currency translation adjustments are disclosed in the Consolidated Statements of Changes in Shareholders' Equity. Effective with the Company's fiscal 1999 year end reporting, the Company will adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for defining operating segments and reporting certain information regarding operating segments. The Company is reviewing the requirements of this statement and believes that it may change, to some degree, the nature and extent of its current business segment disclosures. This statement does not impact the basic consolidated financial statements; it affects the disclosure of segment information in the Notes to Consolidated Financial Statements. 2. OTHER FINANCIAL STATEMENT DATA The following provides additional information concerning selected balance sheet accounts:
(DOLLARS IN THOUSANDS) 1998 1997 Property and equipment: Land $ 2,190 $ 700 Buildings and improvements 19,468 6,172 Equipment, furniture and leasehold improvements 275,826 237,845 Equipment, furniture and leasehold improvements under capital leases 13,718 9,983 ---------------------- 311,202 254,700 Less accumulated depreciation and amortization (131,496) (113,228) Less amortization of equipment, furniture and leasehold improvements under capital leases (3,875) (1,899) ---------------------- $ 175,831 $ 139,573 ---------------------- ---------------------- Goodwill $ 140,703 $ 120,429 Less accumulated amortization (26,486) (20,611) ---------------------- $ 114,217 $ 99,818 ---------------------- ---------------------- Accrued expenses: Payroll and payroll related costs $ 23,455 $ 19,923 Insurance 6,989 5,653 Other 11,206 11,715 ---------------------- $ 41,650 $ 37,291 ---------------------- ----------------------
The following provides supplemental disclosures of cash flow activity:
(DOLLARS IN THOUSANDS) 1998 1997 1996 Cash paid during the year for: Interest $ 9,918 $10,862 $ 9,052 Income taxes 13,239 13,016 15,227
Non-cash investing and financing activities include the following: Years ended June 30, 1998 and 1997: - - In connection with various acquisitions, the Company entered into seller-financed notes payable (Note 3). - - In 1998, the Company financed capital expenditures totaling $5.9 million through the issuance of capital leases. REGIS CORPORATION 1998 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended June 30, 1996: - - In connection with the conversion of the Company's $2.8 million of convertible debt, 562,500 shares of common stock were issued. - - In connection with various acquisitions, the Company entered into seller-financed notes payable of approximately $4.2 million. 3. MERGERS AND ACQUISITIONS: SUPERCUTS, INC. MERGER: Effective October 25, 1996, the Company received shareholder approval for the merger agreement with Supercuts in a stock-for-stock merger transaction. Supercuts was the national operator of approximately 430 company-owned, and franchisor of approximately 740 affordable hair care salons at the acquisition date. As a result of the merger, the Company recorded a nonrecurring charge of $14.3 million during the quarter ended December 31, 1996. This charge included $7.7 million for professional fees including investment banking, legal, accounting and miscellaneous transaction costs, $3.5 million for severance, and a non-cash charge of $3.1 million for the write-off of duplicative operating assets, principally associated with the closure of the Supercuts headquarters. The Supercuts transaction has been accounted for as a pooling-of-interests, therefore prior period financial statements were restated to reflect this merger as if the merged companies had always been combined. To effect the restatement, significant accounting adjustments were necessary to conform the accounting practices of Supercuts to those of Regis. Revenues and net income (loss) for the combining entities were as follows (dollars in thousands):
SUPERCUTS, YEAR ENDED JUNE 30 REGIS AS CONFORMED COMBINED 1997 Revenues $594,714 $118,505 $713,219 Net income (loss) 13,206 (6,632) 6,574 1996 Revenues 499,442 117,865 617,307 Net income (loss) 19,124 (9,673) 9,451
OTHER ACQUISITIONS: During 1998 and 1997, the Company made numerous acquisitions in addition to Supercuts. Costs in excess of net tangible and identifiable assets and components of the aggregate purchase price of the acquisitions were as follows:
(DOLLARS IN THOUSANDS) 1998 1997 Costs in excess of net tangible and identifiable assets $ 21,743 $ 9,700 ------------------------------ ------------------------------ Components of aggregate purchase price: Cash $ 24,837 $ 11,300 Notes payable 2,130 2,600 ------------------------------ $ 26,967 $ 13,900 ------------------------------ ------------------------------
The aforementioned acquisitions, except Supercuts, have been recorded using the purchase method of accounting. Accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The acquisitions recorded using the purchase method, individually and in the aggregate, are not material to the Company's operations. 4. FINANCING ARRANGEMENTS: The Company's long-term debt consists of the following:
(DOLLARS IN THOUSANDS) INTEREST MATURITY RATE % DATE 1998 1997 Senior term notes 6.94 -8.18 1998-2006 $ 68,000 $ 74,000 Revolving credit facilities 6.99 -7.67 1998-2001 28,750 14,448 Equipment and leasehold notes payable 8.00-11.90 2000-2002 12,113 9,664 U.K. term notes 4.00-8.42 2001-2003 5,827 8,083 Other subordinated notes payable 5.00-12.00 2000-2004 6,046 7,267 ------------------------- 120,736 113,462 Less current portion (19,741) (30,722) ------------------------- Long-term portion $ 100,995 $ 82,740 ------------------------- -------------------------
In July 1998, the Company paid down its revolving credit facilities by $14.0 million with the proceeds of a 7.14 percent senior term note with interest due quarterly, and principal payments of $9.0 million and $5.0 million due in July 2007 and 2008, respectively. 30 REGIS CORPORATION 1998 In March 1997, the Company entered into a treasury lock agreement for the purpose of establishing the effective interest rate on the refinancing of a $14.0 million senior term note which matured in June 1998. The contract was entered into to reduce the risk to the Company of future interest rate fluctuations. The contract had a notional amount of $14.0 million and was tied to the U.S. government ten-year treasury note rate. Upon settlement of the agreement in June 1998, the Company incurred a loss of $1.6 million on the contract. This loss will be amortized as interest expense through 2008. The Company does not enter into financial instruments for trading or speculative purposes. The Company renewed its working capital revolving credit facility in June 1998. Under the terms of the renewal, the revolving credit facility allows for borrowings up to $25.0 million through December 1998, $35.0 million through December 1999, $45.0 million through December 2000 and $50.0 million through October 2001, and bears interest at the prime rate. The prime rate at June 30, 1998 and 1997 was 8.50 percent. The facility also allows for borrowings bearing interest at LIBOR rates plus 1.00 to 1.25 percent based on the Company's debt to capitalization ratio. The revolving credit facility requires a quarterly commitment fee at the rate of 1/4 percent per year on the unused portion of the facility. Letters of credit totaling $0.9 million were outstanding at June 30, 1998, which reduce the amount available under the revolving credit facility. The Company also has an additional revolving credit facility which, at the discretion of the lender, allows for borrowings up to $20.0 million and bears interest at the prime rate or LIBOR plus 1.0 percent. There are no borrowings under this facility as of June 30, 1998. The equipment and leasehold notes payable are primarily comprised of capital lease obligations totaling $8.9 million and $5.1 million at June 30, 1998 and 1997, respectively. These capital lease obligations are payable in monthly installments over five years. The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, and transactions with affiliates. In addition, the Company must maintain specified interest coverage and debt-to-equity ratios. The fair value of the senior term, equipment and leasehold and subordinated notes payable, based upon discounted cash flow analyses using the Company's current incremental borrowing rate, approximate their carrying values at June 30, 1998. Aggregate maturities of long-term debt at June 30, 1998 are as follows:
FISCAL YEAR (DOLLARS IN THOUSANDS) 1999 $ 19,741 2000 14,967 2001 11,680 2002 21,910 2003 1,960 Thereafter 50,478 ---------- $ 120,736 ---------- ----------
5. COMMITMENTS: OPERATING LEASES: The Company is committed under long-term operating leases for the rental of most of its company-owned salon locations. The terms of the leases range from one to 20 years, with many leases renewable for an additional five to ten year term at the option of the Company, and certain leases include escalation provisions. For certain leases, the Company is required to pay additional rent based on a percent of sales and, in most cases, real estate taxes and other expenses. Rent expense for the Company's international department store salons is based primarily on a percent of sales. The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. Future minimum lease payments for the next five years, which are reimbursable from the franchisees, are approximately $17.0 million annually. All additional lease costs are passed through to the franchisees. Total rent expense, excluding sublease rental obligations which are passed through to the franchisees, includes the following:
(DOLLARS IN THOUSANDS) 1998 1997 1996 Minimum rent $ 70,372 $ 62,125 $ 49,667 Percentage rent based on sales 16,912 16,799 16,078 Real estate taxes and other expenses 20,628 16,802 15,889 ---------------------------------------- $107,912 $ 95,726 $ 81,634 ---------------------------------------- ----------------------------------------
FUTURE MINIMUM LEASE PAYMENTS: As of June 30, 1998, future minimum lease payments (excluding percentage rents based on sales and sublease rental obligations which are passed through to the franchisees) due under existing REGIS CORPORATION 1998 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS noncancellable operating leases with remaining terms of greater than one year are as follows:
FISCAL YEAR (DOLLARS IN THOUSANDS) 1999 $ 78,800 2000 68,301 2001 53,975 2002 43,880 2003 36,420 Thereafter 109,094 ---------- Total minimum lease payments $ 390,470 ---------- ----------
SALON DEVELOPMENT PROGRAM: As a part of its salon development program, the Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations. 6. INCOME TAXES: The provision for income taxes consists of:
(DOLLARS IN THOUSANDS) 1998 1997 1996 Current: Federal $ 11,210 $ 10,133 $ 9,142 State 1,849 1,589 1,828 International 166 292 15 Deferred: United States 7160 1,138 (2,596) International 104 (24) (463) -------------------------------------------- $ 20,489 $ 13,128 $ 7,926 -------------------------------------------- --------------------------------------------
The components of the net deferred tax asset are as follows:
(DOLLARS IN THOUSANDS) 1998 1997 Net current deferred tax asset: Insurance $ 2,234 $ 1,756 Payroll and payroll related costs 2,097 1,313 Nonrecurring items 2,065 3,266 Other, net (327) ------------------------ $ 6,069 $ 6,335 ------------------------ ------------------------ Net noncurrent deferred tax asset: Depreciation and amortization $ (1,380) $ 3,898 Deferred rent 1,985 1,785 Payroll and payroll related costs 1,167 1,115 Other, net (248) 1,724 ------------------------ $ 1,524 $ 8,522 ------------------------ ------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 Income (loss) before income taxes: United States $ 50,986 $ 20,336 $ 16,709 International (9) (634) 668 --------------------------------------- $ 50,977 $ 19,702 $ 17,377 --------------------------------------- ---------------------------------------
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) 1998 1997 1996 Computed income tax expense at federal statutory rate $ 17,842 $ 6,945 $ 6,082 Increase in income taxes resulting from: State income taxes, net of federal income tax benefit 1,836 1,033 953 Nondeductible merger and transaction costs 2,228 Change in estimate 1,500 Other, principally nondeductible goodwill 811 1,422 891 ------------------------------------ Income tax expense $ 20,489 $ 13,128 $ 7,926 ------------------------------------ ------------------------------------
During 1997, the Company recorded a $1.5 million change in estimate associated with income tax matters related to years prior to 1996 resulting from the completion of an Internal Revenue Service examination. 7. EMPLOYEE BENEFIT PLANS: EMPLOYEE STOCK OWNERSHIP PLAN: The Company has a qualified employee stock ownership plan (ESOP) covering substantially all field supervisors, warehouse and corporate office employees. Contributions to the ESOP are at the discretion of the Company. 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. 32 REGIS CORPORATION 1998 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 on the open market, not to exceed an aggregate contribution of $2.2 million. Company contributions to the aforementioned plans, which are charged to earnings in the period contributed, included the following:
(DOLLARS IN THOUSANDS) 1998 1997 1996 ESOP $ 1,146 $ 662 $ 616 ESAP 301 257 231 SPP 274 223 172
STOCK OPTIONS: The Company's Stock Option Plan (the Plan), as amended, provides for granting both incentive stock options and nonqualified stock options. A total of 2,200,000 shares of common stock may be granted under the Plan to employees of the Company for a term not to exceed 10 years from the date of grant. Options granted to employees generally vest over a five year period. Options may also be granted under this Plan to the Company's outside directors for a term not to exceed five years from the vesting date. Options granted to outside directors vest over a four year period, although the previous Supercuts Board members were fully vested at the time of the merger. The Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Incentive stock options are granted at not less than fair market value on the date of grant. The Board of Directors determines the Plan participants and establishes the terms and conditions of each option. Separate from the Stock Option Plan described above, in an action approved by shareholders in October 1996 in connection with the merger (Note 3) and effective termination of the Supercuts stock option plans, outstanding Supercuts stock options were converted to options to purchase approximately 400,000 shares of Regis common stock on the basis of the exchange ratio established to effect the merger. Common shares available for grant as of June 30 were 467,550, 53,850 and 405,356 for 1998, 1997 and 1996, respectively. Stock options outstanding and weighted average exercise prices are as follows:
OPTIONS OUTSTANDING ------------------------------ WEIGHTED AVERAGE EXERCISE SHARES PRICE Balance, June 30, 1995 1,353,817 $12.24 Granted 473,400 16.25 Cancelled (79,262) 20.62 Exercised (114,150) 7.34 ----------------------------- Balance, June 30, 1996 1,633,805 13.32 Granted 307,500 20.44 Cancelled (102,117) 21.68 Exercised (271,357) 13.18 ----------------------------- Balance, June 30, 1997 1,567,831 14.20 Granted 328,500 26.00 Cancelled (236,570) 17.58 Exercised (105,664) 12.40 ----------------------------- Balance, June 30, 1998 1,554,097 $ 16.30 ----------------------------- -----------------------------
At June 30, 1998, the weighted average exercise price and remaining contractual life of stock options are as follows:
RANGE OF $ 4.00- $ 12.38- $ 26.25- EXERCISE PRICES $ 8.67 $ 26.00 $ 34.38 TOTAL - ------------------------------------------------------------------------------- Total options outstanding 622,547 834,950 96,600 1,554,097 Weighted average exercise price $ 7.76 $ 21.09 $ 29.89 $ 16.30 Weighted average remaining contractual life in years 5.4 8.5 4.7 7.0 Options exercisable 361,247 195,150 96,600 652,997 Weighted average price of exercisable options $ 7.60 $ 16.38 $ 29.89 $ 13.52
In 1997, the Company adopted SFAS No. 123, a standard of accounting and reporting for stock-based compensation plans. The Company has continued to measure compensation cost for its incentive stock plans using the intrinsic value-based method of accounting it has historically used and, therefore, the standard has no effect on the Company's operating results. REGIS CORPORATION 1998 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Had the Company used the fair-value-based method of accounting for its stock option and incentive plans beginning in 1996 and charged compensation cost against income, over the vesting period, based on the fair value of options at the date of grant, net income and net income per share would have been as follows:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 Net income: As reported $ 30,488 $ 6,574 $ 9,451 Pro forma 29,989 6,000 8,528 Net income per share: As reported $ 1.27 $ .28 $ .42 Pro forma 1.25 .26 .38
The pro forma information above only includes stock options granted in 1998, 1997 and 1996. Compensation expense under the fair-value-based method of accounting will increase over the next few years as additional stock option grants are considered. The weighted average fair value per option granted during 1998, 1997 and 1996 was $10.92, $9.47 and $11.00, respectively. The weighted average fair value was calculated by using the fair value of each option grant on the date of grant. The fair value of options was calculated utilizing the Black-Scholes option-pricing model and the following key assumptions:
1998 1997 1996 Risk-free interest rate 5.56 % 6.41 % 5.91 % Expected life in years 6.0 6.5 7.0 Expected volatility 34.16 % 35.50 % 41.43 % Expected dividend yield .38 % .39 % .25 %
OTHER: The Company has established unfunded deferred compensation plans which cover certain management and executive personnel. The Company maintains life insurance policies on the plans' participants. The amounts charged to earnings for these plans were $0.6 million, $0.4 million and $0.4 million in 1998, 1997 and 1996, respectively. The Company has a survivor benefit plan for the Chairman of the Board's spouse, payable upon his death, at a rate of $0.3 million annually, adjusted for inflation, for the remaining life of his spouse. The Company has funded its future obligations under this plan through life insurance policies on the Chairman of the Board (the Chairman). The Company has entered into an agreement with the Chairman providing that the Chairman will continue to render services to the Company until at least May 2007, and for such further period as may be agreed upon mutually. The Company has agreed to pay the Chairman an annual amount of $0.6 million, adjusted for inflation, for the remainder of his life. The Chairman has agreed that during the period in which payments to him are made, as provided in the agreement, he will not engage in any business competitive with the business conducted by the Company. Compensation associated with this agreement is charged to expense as services are provided. Effective July 1, 1998, the Company established a survivor benefit plan for the Chief Executive Officer's spouse, payable upon his death, at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. The Company has funded its future obligations under this plan through life insurance policies on the Chief Executive Officer. 8. SHAREHOLDERS' EQUITY: In addition to the shareholder equity activity described in Note 7, the following activity has taken place: INCREASE IN AUTHORIZED SHARES AND DESIGNATION OF PREFERRED CLASS: The Company has 50 million shares of capital stock authorized, par value $.05, of which all outstanding shares and shares available under the Stock Option Plan have been designated as common. In addition, 250,000 shares of authorized capital stock have been designated as Series A Junior Participating Preferred Stock (preferred stock). None of the preferred stock has been issued. SHAREHOLDERS' RIGHTS PLAN: The Company has a shareholders' rights plan pursuant to which one preferred share purchase right is held by shareholders for each outstanding share of common stock. The rights become exercisable only following the acquisition by a person or group, without the prior consent of the Board of Directors, of 20 percent or more of the Company's voting stock, or following the announcement of a tender offer or exchange offer to acquire an interest of 20 percent or more. If the rights become exercisable, they entitle all holders, except the take-over bidder, to purchase one one-hundredth of a share of preferred stock at an exercise price of $120, subject to adjustment, or in lieu of purchasing the preferred stock, to purchase for the same exercise price common stock of the Company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right. 34 REGIS CORPORATION 1998 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 for the United States and International is presented below. All intercompany revenues and expenses have been eliminated.
(DOLLARS IN THOUSANDS) 1998 1997 1996 Revenues: United States $ 679,777 $ 603,170 $ 531,599 International 118,367 110,049 85,708 ------------------------------------------- $ 798,144 $ 713,219 $ 617,307 ------------------------------------------- ------------------------------------------- Operating income: United States $ 57,106 $ 26,584 $ 23,552 International 2,823 1,863 2,615 ------------------------------------------- $ 59,929 $ 28,447 $ 26,167 ------------------------------------------- ------------------------------------------- Total assets: United States $ 356,369 $ 300,814 $ 275,954 International 25,981 30,721 28,000 ------------------------------------------- $ 382,350 $ 331,535 $ 303,954 ------------------------------------------- -------------------------------------------
10. NONRECURRING ITEMS: The following table summarized nonrecurring items recorded by the Company:
(DOLLARS IN THOUSANDS) 1998 1997 1996 Salon closures and dispositions, primarily Supercuts $ 1,500 $ 7,000 Resolution of Supercuts officer litigation 2,909 5,823 Merger and transaction costs (Note 3) 14,322 Loss on divestiture of Anasazi business and assets $ 1,979 ---------------------------------------- $ 1,979 $ 18,731 $ 12,823 ---------------------------------------- ----------------------------------------
Anasazi Exclusive Salon Products, LLC., a salon products manufacturing company, was sold to Curtis Acquisition LLC, which is controlled by two members of the Company's Board of Directors, one of whom is the Chairman. Approximately $2.0 million, $.3 million and $4.4 million of the nonrecurring items in 1998, 1997 and 1996, respectively, are non-cash in nature. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Regis Corporation: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Regis Corporation at June 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota August 21, 1998 REGIS CORPORATION 1998 35 QUARTERLY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER ENDED ------------------------------------------------------------ YEAR SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ENDED 1998 Revenues $ 188,681 $ 198,952 $ 197,273 $ 213,238 $ 798,144 Operating income 12,115 15,821 13,889 18,104 59,929 Net income 5,796 7,957 6,769 9,966 30,488 Net income per diluted share (a) .24 .33 .28 .41 1.27(c) Dividends declared per share .02 .02 .02 .03 .09 1997 Revenues $ 170,605 $ 176,458 $ 175,488 $ 190,668 $ 713,219 Operating income 12,360 (7,966) 9,773 14,280 28,447 Net income (loss) 4,541 (8,880) 4,251 6,662 6,574 Net income (loss) per diluted share (b) .20 (.38) .18 .29 .28(c) Dividends declared per share .02 .02 .02 .02 .08
(a) For the quarter ended September 30, 1997 and for the full year 1998, exclusive of nonrecurring items (Notes 3 and 10), net income per diluted share would have been $.29 and $1.31, respectively. (b) For quarters ended September 30, 1996, December 31, 1996, March 31, 1997, June 30, 1997, and for the full year 1997, exclusive of nonrecurring items (Notes 3 and 10), net income per diluted share would have been $.25, $.21, $.18, $.28 and $.92, respectively. (c) The summation of quarterly net income per share amounts does not equate to the calculation for the full fiscal year, as quarterly calculations are performed on a discrete basis. STOCK DATA Regis common stock is listed and traded on the Nasdaq National Market under the symbol "RGIS". The accompanying table sets forth the high and low closing bid quotations as reported by Nasdaq for each quarter during the previous two fiscal years. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. As of June 30, 1998, Regis shares were owned by approximately 13,000 shareholders. The common stock price was $29.19 per share on August 14, 1998.
1998 1997 HIGH LOW HIGH LOW 1st quarter $25.50 $22.94 $34.00 $21.75 2nd quarter 27.00 22.97 27.50 15.25 3rd quarter 30.00 25.00 18.50 15.75 4th quarter 30.00 26.00 24.00 17.63
36 REGIS CORPORATION 1998 CORPORATE INFORMATION BOARD OF DIRECTORS Myron Kunin CHAIRMAN OF THE BOARD Regis Corporation Paul D. Finkelstein PRESIDENT AND CHIEF EXECUTIVE OFFICER Regis Corporation Christopher A. Fox EXECUTIVE VICE PRESIDENT Regis Corporation Rolf Bjelland EXECUTIVE VICE PRESIDENT CHIEF INVESTMENT OFFICER Lutheran Brotherhood Thomas L. Gregory CONSULTANT TLG Associates Van Zandt Hawn DIRECTOR AND FOUNDER Goldner Hawn Johnson & Morrison Incorporated Susan S. Hoyt EXECUTIVE VICE PRESIDENT HUMAN RESOURCES Staples, Inc. David B. Kunin CHAIRMAN Anasazi Exclusive Salon Products, LLC CORPORATE OFFICERS Myron Kunin CHAIRMAN Paul D. Finkelstein PRESIDENT AND CHIEF EXECUTIVE OFFICER Christopher A. Fox EXECUTIVE VICE PRESIDENT Mary Anders SENIOR VICE PRESIDENT, MARKETING Kris Bergly CHIEF OPERATING OFFICER Wal-Mart/SmartStyle Family Hair Salons Bert M. Gross SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY William E. Halfacre SENIOR VICE PRESIDENT, RETAIL AND PURCHASING CHIEF OPERATING OFFICER Trade Secret Bruce D. Johnson SENIOR VICE PRESIDENT, DESIGN AND CONSTRUCTION Mark Kartarik SENIOR VICE PRESIDENT PRESIDENT AND CHIEF OPERATING OFFICER Supercuts, Inc. Sharon Kiker CHIEF OPERATING OFFICER Regis Hairstylists Gordon Nelson SENIOR VICE PRESIDENT, FASHION AND EDUCATION Randy L. Pearce SENIOR VICE PRESIDENT, FINANCE, AND CHIEF FINANCIAL OFFICER Anthony W. E. Rammelt SENIOR VICE PRESIDENT, INTERNATIONAL MANAGING DIRECTOR, EUROPE Rob Ribnick CHIEF OPERATING OFFICER MasterCuts ANNUAL MEETING The annual meeting of Regis shareholders will be held at The Minneapolis Institute of Arts, 2400 Third Avenue South, Minneapolis, Minnesota, on October 13, 1998, at 4:00 p.m. ANNUAL REPORT ON FORM 10-K A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 1998, may be obtained without charge by writing to: Bert M. Gross, Secretary Regis Corporation 7201 Metro Boulevard Minneapolis, Minnesota 55439 TRANSFER AGENT AND REGISTRAR Norwest Bank Minnesota, N.A. South St. Paul, Minnesota INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP Minneapolis, Minnesota CORPORATE HEADQUARTERS 7201 Metro Boulevard Minneapolis, Minnesota 55439 PHONE (612) 947-7777 FAX (612) 947-7700 WEBSITE http://www.regiscorp.com EX-23 8 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Regis Corporation on Form S-3 (File Nos. 333-28511, No. 33-82094, No. 33-86276, No. 33-89150, No. 33-92244, No. 33-96224, No. 33-80337, and No. 333-49165), Form S-4 (File No. 333-12099) and Form S-8 (File No. 33-44867 and No. 33-89882) of our reports dated August 21, 1998, on our audits of the consolidated financial statements and financial statement schedule of Regis Corporation as of June 30, 1998 and 1997, and for each of the three years in the period ended June 30, 1998, which reports are incorporated by reference or included in its Annual Report on Form 10-K for the year ended June 30, 1998. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota September 17, 1998 EX-27 9 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGIS CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 4,774 0 10,634 78 53,826 81,913 311,202 135,371 382,350 83,765 0 0 0 1,191 188,070 382,350 221,559 798,144 120,914 638,314 13,449 0 10,056 50,977 20,489 30,488 0 0 0 30,488 1.30 1.27 Includes a nonrecurring charge of $1,979. Reflects basic EPS according to FAS No. 128. Excluding nonrecurring items, fully diluted EPS would have been $1.31.
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