1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- 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 011230 ------ 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) (952)947-7777 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 4, 2001: Common Stock, $.05 par value 41,391,917 - ---------------------------- --------------------------------- Class Number of Shares ================================================================================
2 REGIS CORPORATION INDEX <TABLE> <CAPTION> Part I. Financial Information Page Nos. --------------------- --------- <S> <C> <C> Item 1. Consolidated Financial Statements: Balance Sheet as of March 31, 2001 and June 30, 2000 3 Statement of Operations for the three months ended March 31, 2001 and 2000 4 Statement of Operations for the nine months ended March 31, 2001 and 2000 5 Statement of Cash Flows for the nine months ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7-12 Report of Independent Accountants 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-21 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 </TABLE>
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REGIS CORPORATION CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2001 AND JUNE 30, 2000 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS) <TABLE> <CAPTION> (UNAUDITED) MARCH 31, 2001 JUNE 30, 2000 -------------- -------------- <S> <C> <C> ASSETS Current assets: Cash $ 24,598 $ 14,888 Receivables, net 17,594 16,220 Inventories 103,704 91,823 Deferred income taxes 9,169 10,160 Other current assets 7,829 10,713 --------- --------- Total current assets 162,894 143,804 Property and equipment, net 293,708 260,532 Goodwill, net 246,468 208,724 Other assets 17,363 15,295 --------- --------- Total assets $ 720,433 $ 628,355 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 5,701 $ 9,983 Accounts payable 32,447 34,216 Accrued expenses 70,229 58,845 --------- --------- Total current liabilities 108,377 103,044 Long-term debt 263,756 224,618 Other noncurrent liabilities 27,409 21,552 Shareholders' equity: Common stock, $.05 par value; issued and outstanding 41,322,142 and 40,702,707 common shares at March 31, 2001 and June 30, 2000, respectively 2,066 2,035 Additional paid-in capital 162,288 150,793 Accumulated other comprehensive loss (5,695) (2,274) Retained earnings 162,232 128,587 --------- --------- Total shareholders' equity 320,891 279,141 --------- --------- Total liabilities and shareholders' equity $ 720,433 $ 628,355 ========= ========= </TABLE> The accompanying notes are an integral part of the unaudited consolidated financial statements. 3
4 REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> Revenues: Company-owned salons: Service $ 226,309 $ 196,156 Product 90,338 79,111 --------- --------- 316,647 275,267 Franchise revenues: Royalties and fees 9,536 9,069 Product sales 4,727 3,726 --------- --------- 14,263 12,795 --------- --------- Total revenues 330,910 288,062 Operating expenses: Company-owned salons: Cost of service 129,510 112,256 Cost of product 48,405 42,913 Direct salon 28,725 24,146 Rent 44,478 38,639 Depreciation 10,756 9,346 --------- --------- 261,874 227,300 Selling, general and administrative 33,400 30,843 Depreciation and amortization 5,788 4,310 Other 3,473 2,827 --------- --------- Total operating expenses 304,535 265,280 --------- --------- Operating income 26,375 22,782 Other income (expense): Interest (5,492) (4,187) Other, net 165 608 --------- --------- Income before income taxes 21,048 19,203 Income taxes (8,515) (7,586) --------- --------- Net income $ 12,533 $ 11,617 ========= ========= Net income per share: Basic $ .30 $ .29 ========= ========= Diluted $ .30 $ .28 ========= ========= </TABLE> The accompanying notes are an integral part of the unaudited consolidated financial statements. 4
5 REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> Revenues: Company-owned salons: Service $ 654,491 $ 570,468 Product 269,999 232,111 --------- --------- 924,490 802,579 Franchise revenues: Royalties and fees 28,159 26,809 Product sales 13,064 10,637 --------- --------- 41,223 37,446 --------- --------- Total revenues 965,713 840,025 Operating expenses: Company-owned salons: Cost of service 375,501 324,943 Cost of product 144,874 124,888 Direct salon 82,182 69,533 Rent 129,024 111,419 Depreciation 31,268 26,909 --------- --------- 762,849 657,692 Selling, general and administrative 99,678 89,491 Depreciation and amortization 16,022 12,184 Nonrecurring items 3,145 Other 9,593 8,113 --------- --------- Total operating expenses 888,142 770,625 --------- --------- Operating income 77,571 69,400 Other income (expense): Interest (16,328) (11,542) Other, net 1,026 1,454 --------- --------- Income before income taxes 62,269 59,312 Income taxes (24,934) (24,250) --------- --------- Net income $ 37,335 $ 35,062 ========= ========= Net income per share: Basic $ .91 $ .86 ========= ========= Diluted $ .89 $ .84 ========= ========= </TABLE> The accompanying notes are an integral part of the unaudited consolidated financial statements. 5
6 REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> 2001 2000 ---- ---- <S> <C> <C> Cash flows from operating activities: Net income $ 37,335 $ 35,062 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 36,754 31,140 Amortization 10,885 8,167 Deferred income taxes 1,881 374 Other 1,072 (641) Changes in assets and liabilities: Accounts receivable (3,577) 242 Inventories (10,510) (10,101) Other current assets 2,938 (801) Other assets (2,596) (2,742) Accounts payable (5,322) (5,141) Accrued expenses 8,863 3,764 Other noncurrent liabilities 1,480 4,078 --------- --------- Net cash provided by operating activities 79,203 63,401 --------- --------- Cash flows from investing activities: Capital expenditures (59,865) (55,998) Proceeds from sale of assets 544 147 Purchases of salon assets, net of cash acquired (43,843) (60,867) ---------- --------- Net cash used in investing activities (103,164) (116,718) ---------- ---------- Cash flows from financing activities: Borrowings on revolving credit facilities 238,400 277,585 Payments on revolving credit facilities (224,100) (191,485) Proceeds from issuance of long-term debt 25,000 Repayment of long-term debt (4,809) (28,995) Increase in negative book cash 1,347 Dividends paid (3,693) (3,968) Proceeds from issuance of common stock 1,039 1,143 --------- --------- Net cash provided by financing activities 33,184 54,280 --------- --------- Effect of exchange rate changes on cash 487 20 --------- --------- Increase in cash 9,710 983 Cash: Beginning of period 14,888 10,353 --------- --------- End of period $ 24,598 $ 11,336 ========= ========= </TABLE> The accompanying notes are an integral part of the unaudited consolidated financial statements. 6
7 REGIS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation of Unaudited Interim Consolidated Financial Statements: The unaudited interim consolidated financial statements of Regis Corporation (the Company) as of March 31, 2001 and for the three and nine months ended March 31, 2001 and 2000, reflect, in the opinion of management, all adjustments necessary to fairly present the consolidated financial position of the Company as of March 31, 2001 and its consolidated results of operations and cash flows for the interim periods. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year. The year-end consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended June 30, 2000. PricewaterhouseCoopers LLP, the Company's independent accountants, have performed limited reviews of the interim consolidated financial data included herein. Their report on such reviews accompanies this filing. COST OF PRODUCT SALES. On an interim basis, product costs are determined by applying an estimated gross profit margin to product revenues. 2. New Accounting Pronouncement: Effective July 1, 2000, Regis adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted (FAS 133). FAS 133 requires that all derivative instruments, such as interest rate swap contracts, be recognized in the financial statements and measured at their fair market value. Changes in the fair market value of derivative instruments are recognized each period in current earnings or shareholders' equity (as a component of other comprehensive income), depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The adoption of FAS 133 did not have a material impact on the Company's primary financial statements, but did result in the recording of an unrealized loss of approximately $160,000, net of tax, in other comprehensive income. In the normal course of business, the Company is exposed to changes in interest rates. The Company has established policies and procedures that govern the management of these exposures through the use of financial instruments. By policy, the Company does not enter into such contracts for the purpose of speculation. The Company's objective in managing its exposure to interest rates is to decrease the volatility that changes in interest rates might have on earnings and cash flows. To achieve this objective, the Company uses interest rate swaps, as determined by management, to adjust a portion of total debt that is subject to variable interest rates. The Company designates these instruments as cash flow hedges. Under an interest rate swap contract, the Company agrees to pay fixed rates of interest and receive variable rates of interest based upon a notional amount of indebtedness. These contracts are considered to be a hedge against changes in the amount of future cash flows associated with the Company's interest payments related to its variable-rate debt obligations. Accordingly, the interest rate swap contracts are reflected at fair value in the Company's consolidated balance sheet and the related gains or losses on these contracts are deferred in 7
8 shareholders' equity as a component of comprehensive income. However, to the extent that any of these contracts are not effective in offsetting the change in interest cash flows being hedged, their ineffective portion is immediately recognized in earnings. The net effect of this accounting on the Company's operating results is that interest expense on the portion of variable-rate debt being hedged is recorded based on the fixed interest rate stated within the swap agreement. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current rates of interest, of the remaining obligations to exchange payments under the terms of the contract. Any gains or losses upon the early termination of the interest rate swap contracts are deferred in other comprehensive income and recognized in income over the remaining life of the contract. At March 31, 2001, Regis had interest rate swap contracts to pay fixed rates of interest (ranging from 7.07 to 7.20 percent) and receive variable rates of interest based on the three-month LIBOR rate (ranging from 4.86 to 6.81 percent during the first nine months of fiscal 2001) on $30 and $25 million notional amounts of indebtedness through June 2003 and April 2003, respectively. 3. Comprehensive Income: Comprehensive income for the Company includes net income, transition adjustment for the adoption of FAS 133, changes in fair market value of financial instruments designated as hedges of interest rate exposure and foreign currency translation charged or credited to the cumulative translation account within shareholders' equity. Comprehensive income for the three and nine months ended March 31, 2001 and 2000 were as follows: <TABLE> <CAPTION> FOR THE PERIODS ENDED MARCH 31, ---------------------------------------- THREE MONTHS NINE MONTHS --------------- ---------------- (Dollars in thousands) 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $12,533 $ 11,617 $ 37,335 $ 35,062 Other comprehensive income: Transition adjustment relating to the adoption of FAS 133, net of taxes (160) Changes in fair market value of financial instruments designated as hedges of interest rate exposure, net of taxes (653) (1,525) Change in cumulative foreign currency translation (1,888) (441) (1,736) (419) ------- -------- -------- -------- Total comprehensive income $ 9,992 $ 11,176 $ 33,914 $ 34,643 ======= ======== ======== ======== </TABLE> 8
9 4. Net Income per Share: Basic earnings per share (EPS) is calculated as net income divided by weighted average common shares outstanding. The Company's primary dilutive securities are issuable under the Company's Stock Option Plans, as amended. Diluted EPS is calculated as net income divided by weighted average common shares outstanding, increased to include assumed conversion of dilutive securities. Stock options with exercise prices greater than the average market value of the Company's common stock were excluded from the computation of diluted earnings per share for the third quarter and first nine months ended March 31, 2001 as they are considered to be anti-dilutive. The number of excluded stock options were approximately 5,449,000 and 4,428,000, respectively, in the third quarter and first nine months of fiscal 2001, and 2,798,000 and 594,000, respectively, in the third quarter and first nine months of fiscal 2000. The following provides information related to the weighted average common shares used in the calculation of the Company's basic and diluted EPS: <TABLE> <CAPTION> FOR THE PERIODS ENDED MARCH 31, ----------------------------------------------------- THREE MONTHS NINE MONTHS ------------------------ ------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Weighted average shares for basic earnings per share 41,124,611 40,717,771 40,879,686 40,563,429 Effect of dilutive securities 1,141,173 1,131,691 998,371 1,130,111 ---------- ----------- ---------- ---------- Weighted average shares for diluted earnings per share 42,265,784 41,849,462 41,878,057 41,693,540 ========== ========== ========== ========== </TABLE> 5. Financing: In September 2000, the Company amended its senior revolving credit agreement to increase the amount available from $180 million to $250 million, extending the expiration date to August 2003, and modifying certain debt covenant restrictions. In October 2000, the Company borrowed $25 million under an 8.39 percent senior term note due October 2010 to finance acquisitions by the Company. The note contains certain debt covenant restrictions which are similar to the Company's existing debt covenants. 9
10 6. Transaction and Restructuring Liabilities: The following provides additional information concerning the Company's transaction and restructuring liabilities (dollars in thousands): <TABLE> <CAPTION> Restructuring - International Restructuring-Mergers ------------------------------- ------------------------------------------- Salon Salon Transaction Closures & Closures & Charges Dispositions Other Subtotal Severance Dispositions Other Subtotal Mergers Total ------------ ----- -------- --------- ------------ ----- -------- ------------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> June 30, 2000 $ 583 $ 67 $ 650 $2,824 $ 23 $ 145 $2,992 $ 35 $3,677 Change in estimate (31) 31 Cash utilization 270 5 275 1,086 27 39 1,152 35 1,462 Non-cash utilization 64 64 35 2 37 101 ----- ---- ----- ------ ---- ----- ------ ---- ------ March 31, 2001 $ 249 $ 62 $ 311 $1,703 $ 27 $ 73 $1,803 $ 0 $2,114 ===== ==== ===== ====== ==== ===== ====== ==== ====== </TABLE> 7. Segment Information: Each of the Company's operating segments have generally similar products and services. The Company is organized to manage its operations based on geographical location. The Company's operating segments have been aggregated into two reportable segments generally based on the way that management has organized the segments within the enterprise for making operating decisions and assessing performance: domestic salons and international salons. The Company operates or franchises 6,236 domestic salons located within high-profile regional malls and strip shopping centers under several different concepts including Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters brand names. The Company's International segment includes 368 salons operating in leading department stores, strip shopping centers, mass merchants and high street locations. 10
11 7. Segment Information, continued: Summarized financial information of the Company's reportable segments for the three and nine months ended March 31, 2001 and 2000, respectively, is shown in the following table. <TABLE> <CAPTION> FOR THE PERIODS ENDED MARCH 31, -------------------------------------------------- THREE MONTHS NINE MONTHS ---------------------- ----------------------- (Dollars in thousands) 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Company-owned revenues: Domestic $ 293,413 $ 250,445 $ 854,391 $ 725,210 International 23,234 24,822 70,099 77,369 --------- --------- --------- --------- Total $ 316,647 $ 275,267 $ 924,490 $ 802,579 ========= ========= ========= ========= Salon contribution: Domestic $ 52,050 $ 44,867 $ 153,107 $ 133,266 International 2,723 3,100 8,534 11,621 --------- --------- --------- --------- Total $ 54,773 $ 47,967 $ 161,641 $ 144,887 ========= ========= ========= ========= </TABLE> In addition to the company-owned revenues detailed in the table above, the Company also recorded franchise revenue as part of consolidated revenues for the third quarter and first nine months of fiscal 2001 of $14.3 million and $41.2 million, respectively, as compared to $12.8 million and $37.4 million, respectively, for the third quarter and first nine months of fiscal 2000. The expenses associated with the Company's franchising activities are included in selling, general and administrative and other operating expenses. 8. Acquisitions: During the nine month period ended March 31, 2001 and 2000, the Company made numerous acquisitions. These acquisitions have been recorded using the purchase method of accounting. Accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The acquisitions recorded using the purchase method of accounting, individually and in the aggregate, are not material to the Company's operations. Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition. 11
12 8. Acquisitions, continued: Costs in excess of net tangible and identifiable intangible assets acquired and components of the aggregate purchase prices of the acquisitions were as follows: <TABLE> <CAPTION> NINE MONTHS ENDED MARCH 31, ---------------------------- (Dollars in thousands) 2001 2000 ---- ---- <S> <C> <C> Costs in excess of net tangible and identifiable intangible assets acquired $ 49,572 $ 59,814 ======== ======== Components of aggregate purchase price: Cash $ 43,843 $ 60,867 Stock 11,247 1,588 Current and noncurrent payables assumed 7,272 3,969 -------- -------- $ 62,362 $ 66,424 ======== ======== </TABLE> 9. Benefit Plans: On October 24, 2000, the shareholders of Regis Corporation adopted the Regis Corporation 2000 Stock Option Plan ("2000 Plan"), which allows the Company to grant both incentive and nonqualified stock options and replaces the Company's 1991 Stock Option Plan. A total of 3,500,000 shares of common stock may be granted under the 2000 Plan to employees of the Company for a term not to exceed ten years from the date of grant. The term may not exceed five years for incentive stock options granted to employees of the Company possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any subsidiary of the Company. Options may also be granted to the Company's outside directors for a term not to exceed ten years from the grant date. The 2000 Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Stock options are granted at not less than fair market value on the date of grant. The Board of Directors determines the 2000 Plan participants and establishes the terms and conditions of each option. In the second quarter of fiscal 2001, the Board of Directors approved a special grant of 2,263,000 options for shares of common stock from the 2000 Plan. These options begin vesting in year three at a rate of one-third per year for three years and expire ten years from the date of grant. 12
13 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Regis Corporation: We have reviewed the accompanying consolidated balance sheet of Regis Corporation as of March 31, 2001, and the related consolidated statements of operations for the three and nine month periods ended March 31, 2001 and 2000, and of cash flows for each of the nine month periods ended March 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of June 30, 2000, and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows for the year then ended (not presented herein), and in our report dated August 22, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the accompanying consolidated balance sheet information as of June 30, 2000, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota April 24, 2001 13
14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Regis Corporation, based in Minneapolis, Minnesota, is the world's largest owner, operator, franchisor and acquirer of hair and retail product salons in all 50 states, Puerto Rico, Canada and the United Kingdom. The Regis worldwide operations include 6,604 salons at March 31, 2001 operating in two segments: domestic and international. The Company's domestic segment includes 6,236 salons operating primarily under the brand names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. The Company's international operations include 368 salons located in the United Kingdom. The Company has 40,000 employees worldwide. Third quarter fiscal 2001 revenues grew to $330.9 million, including franchise revenues of $14.3 million, a 14.9 percent increase over fiscal 2000 third quarter total revenues of $288.1 million. Revenues for the nine months ended March 31, 2001 grew to $965.7 million, including franchise revenues of $41.2 million, a 15.0 percent increase over total revenues of $840.0 million in the comparable fiscal 2000 period. Operating income in third quarter of fiscal 2001 increased to $26.4 million, a 15.8 percent increase over operating income of $22.8 million in the comparable fiscal 2000 period. Operating income for the first nine months of fiscal 2001 grew to $77.6 million, an 11.8 percent increase over operating income of $69.4 million in the first nine months of fiscal 2000. Net income in the third quarter of fiscal 2001 increased to $12.5 million, or $.30 per diluted share, an earnings per share increase of 7.1 percent from third quarter fiscal 2000 net income of $11.6 million, or $.28 per diluted share. For the nine months ended March 31, 2001, net income grew to $37.3 million, or $.89 per diluted share. This represents an earnings per share increase of 6.0 percent over net income of $35.1 million, or $.84 per diluted share, for the first nine months of fiscal 2000. Prior year fiscal 2000 results for the first nine months include merger and transaction costs associated with the October 1999 merger with Supercuts (Holdings) Limited (Supercuts UK) which were nonrecurring in nature. Exclusive of this nonrecurring item, operating income for the first nine months of fiscal 2001 increased 6.9 percent to $77.6 million compared to $72.5 million in the comparable fiscal 2000 period. Net income for the first nine months of fiscal 2001 decreased to $37.3 million, or $.89 per diluted share, an earnings per share decrease of 2.2 percent from the prior year, exclusive of nonrecurring items. 14
15 RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain information derived from the Company's Consolidated Statement of Operations expressed as a percentage of total revenues, except as noted. <TABLE> <CAPTION> FOR THE PERIODS ENDED MARCH 31, ------------------------------------------- THREE MONTHS NINE MONTHS ------------------- ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ <S> <C> <C> <C> <C> Company-owned service revenues (1) 71.5% 71.3% 70.8% 71.1% Company-owned product revenues (1) 28.5 28.7 29.2 28.9 Franchise revenues: Royalties and fees 2.9 3.1 2.9 3.2 Product sales 1.4 1.3 1.4 1.3 Company-owned operations: Profit margins on service (2) 42.8 42.8 42.6 43.0 Profit margins on product (3) 46.4 45.8 46.3 46.2 Direct salon (1) 9.1 8.8 8.9 8.7 Rent (1) 14.0 14.0 14.0 13.9 Depreciation (1) 3.4 3.4 3.4 3.4 Direct salon contribution (1) 17.3 17.4 17.5 18.1 Selling, general and administrative 10.1 10.7 10.3 10.7 Depreciation and amortization 1.7 1.5 1.7 1.5 Nonrecurring items 0.4 Other 1.0 1.0 1.0 1.0 Operating income 8.0 7.9 8.0 8.3 Income before income taxes 6.4 6.7 6.4 7.1 Net income 3.8 4.0 3.9 4.2 Operating income, excluding nonrecurring items 8.0 7.9 8.0 8.6 Net income, excluding nonrecurring items 3.8 4.0 3.9 4.5 </TABLE> - -------------- (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 15
16 RESULTS OF OPERATIONS: REVENUES REVENUES for the third quarter of fiscal 2001 grew to $330.9 million, an increase of $42.8 million or 14.9 percent, over the same period in fiscal 2000. Revenues for the first nine months of fiscal 2001 were $965.7 million, an increase of $125.7 million or 15.0 percent, over the same period in fiscal 2000. System-wide sales, inclusive of non-consolidated sales generated from franchise salons, increased to $480.4 million and $1.4 billion, respectively, for the third quarter and first nine months of fiscal 2001, representing increases of 15.5 percent and 14.6 percent over the same periods last year. These increases in company-owned and system-wide sales are primarily the result of the total number of salons added to the system through acquisitions and net salon openings. For the third quarter and first nine months of fiscal 2001 and 2000, respectively, revenues by division were as follows: <TABLE> <CAPTION> THREE MONTHS NINE MONTHS --------------------- --------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> Regis Salons $ 102,333 $ 94,246 $ 299,379 $ 281,350 Strip Center Salons (primarily Supercuts and Cost Cutters) 75,142 55,783 213,001 151,703 MasterCuts 39,640 36,084 116,874 106,419 Trade Secret 43,394 41,029 135,172 122,669 Wal-Mart/SmartStyle 32,904 23,303 89,965 63,069 International 23,234 24,822 70,099 77,369 Franchise revenue 14,263 12,795 41,223 37,446 --------- --------- --------- --------- $ 330,910 $ 288,062 $ 965,713 $ 840,025 ========= ========= ========= ========= </TABLE> Same-store sales for domestic company-owned salons increased 2.7 percent and 3.0 percent in the third quarter and first nine months of fiscal 2001, respectively, compared to 3.2 percent and 4.0 percent in the same periods in fiscal 2000. The increase in same-store sales was lower than in the prior year due to inclement weather and a slow down in the retail environment in November 2000 through March of 2001 compared to the prior year. System-wide same-store sales for the third quarter and first nine months of fiscal 2001 increased 3.2 percent and 3.4 percent, respectively, compared to 2.6 percent and 3.5 percent, respectively, in the same periods a year ago. Same-store sales increases achieved are due to an increase in the number of customers served and market-based price increases in certain salon divisions. A total of 29 million and 85 million customers were served system-wide during the third quarter and first nine months of fiscal 2001, respectively. The Company utilizes an audiovisual-based training system in its company-owned salons. Management believes this training system provides its employees with improved customer service and technical skills, and positively contributes to the increase in customers served. SERVICE REVENUES in the third quarter of fiscal 2001 grew to $226.3 million, an increase of $30.2 million or 15.4 percent, over the same period in fiscal 2000. In the first nine months of fiscal 2001, service revenues were $654.5 million, an increase of $84.0 million or 14.7 percent, over the same period a year ago. The increase in service revenues is primarily a result of salon acquisitions the Company has made during the past twelve months and new salon openings in the third quarter and first nine months of fiscal 2001. 16
17 PRODUCT REVENUES in the third quarter of fiscal 2001 grew to $90.3 million, an increase of $11.2 million, or 14.2 percent, over the same period in fiscal 2000. In the first nine months of fiscal 2001, product revenues were $270.0 million, an increase of $37.9 million, or 16.3 percent, over the same period of fiscal 2000. These increases continue a trend of escalating product revenues due to product same-store sales growth of 4.4 percent and 5.6 percent in the third quarter and first nine months of fiscal 2001, respectively, a reflection of the continuous focus on product awareness and promotions, training and acceptance of national label merchandise. Product revenues as a percent of total company-owned revenues remained fairly consistent at 28.5 percent for the third quarter of fiscal 2001 compared to 28.7 percent for the same period a year ago, while product revenues as a percent of company-owned revenues increased to 29.2 percent for the first nine months of fiscal 2001 compared to 28.9 percent in the comparable period of fiscal 2000. FRANCHISE REVENUES, including royalties, initial franchise fees and product and equipment sales made by the Company to franchisees, increased slightly to $14.3 million and $41.2 million in the third quarter and first nine months of fiscal 2001, respectively. The increase in franchise revenues is a result of an increase in royalties derived from same-store sales growth and new store openings of the Company's franchisees, which are not included in the Company's consolidated revenues, and additional franchise units added through acquisition, as well as an increase in product purchases by franchisees from the Company. These increases were offset to a lesser extent by a reduction in franchisee royalties and product sales due to acquisitions of franchise salons as company-owned units. COST OF REVENUES The aggregate cost of service and product revenues in the third quarter of fiscal 2001 were $177.9 million compared to $155.2 million in the same period in fiscal 2000. For the first nine months of fiscal 2001, the aggregate cost of service and product revenues were $520.4 million compared to $449.8 million in the same period a year ago. The resulting combined gross margin percentages for the third quarter and first nine months of fiscal 2001 improved 20 basis points to 43.8 percent of company-owned revenues in the third quarter of fiscal 2001 compared to 43.6 percent of company-owned revenues in the same periods in fiscal 2000 while declining 30 basis points to 43.7 percent in the first nine months of fiscal 2001 compared to the same period a year ago. SERVICE MARGINS remained consistent at 42.8 percent in the third quarter of fiscal 2001 while declining 40 basis points to 42.6 percent in the first nine months of fiscal 2001, compared to 43.0 percent in the same period in fiscal 2000. The 40 basis point decrease is primarily a result of higher payroll and related costs as a percent of service revenues in the Company's fixed cost payroll divisions (MasterCuts and Strip Center Salons, including Supercuts) in the first half of fiscal 2001. Inclement weather and a slow down in the retail environment which resulted in de-leveraging of fixed cost payrolls against lower same-store sales volumes adversely impacted these divisions during the first half of fiscal 2001. In addition, these divisions have been experiencing some wage pressure causing an increase in payroll costs. PRODUCT MARGINS improved 60 basis points to 46.4 percent in the third quarter of fiscal 2001 while improving 10 basis points to 46.3 percent in the first nine months of fiscal 2001 from 46.2 percent in the same period of fiscal 2000. These 60 basis point and 10 basis point improvements in product margins in the third quarter and first nine months of fiscal 2001 are a result of leveraging fixed cost payrolls in the Trade Secret and MasterCuts divisions against retail same-store sales growth. 17
18 DIRECT SALON This expense category includes direct costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. For the third quarter of fiscal 2001, direct salon expense of $28.7 million increased to 9.1 percent from 8.8 of company-owned revenues when compared to the prior period. For the first nine months of fiscal 2001, direct salon expense of $82.2 million increased as a percent of company-owned revenues to 8.9 percent from 8.7 percent in the same period in fiscal 2000. The deterioration of 30 basis points and 20 basis points in direct salon expense as a percentage of company-owned sales in the third quarter and first nine months of fiscal 2001, respectively, are a result of higher utility costs as well as higher freight costs due to increased diesel fuel prices compared to the same periods a year ago. RENT Rent expense for the third quarter of fiscal 2001 was $44.5 million or 14.0 percent of company-owned revenues, compared to $38.6 million or 14.0 percent of company-owned revenues in the same period in fiscal 2000. Rent expense in the first nine months of fiscal 2001 was $129.0 million or 14.0 percent of company-owned revenues, compared to $111.4 million or 13.9 percent of company-owned revenues in the same period in fiscal 2000. The slight increase in rent expense as a percentage of company-owned sales in the first nine months of fiscal 2001 is a result of lower same-store sales volumes during the second quarter of fiscal 2001 over which to spread this relatively fixed cost. DEPRECIATION -- SALON LEVEL For the third quarter and first nine months fiscal 2001, salon depreciation expense was 3.4 percent of company-owned revenues compared to 3.4 percent in the same periods a year ago. DIRECT SALON CONTRIBUTION For the reasons described above, direct salon contribution, representing company-owned salon revenues less associated operating expenses, increased in the third quarter of fiscal 2001 to $54.8 million, or 17.3 percent of company-owned revenues, compared to $48.0 million or 17.4 percent of company-owned revenues in the same period of fiscal 2000. For the first nine months of fiscal 2001, direct salon contribution was $161.6 million, or 17.5 percent of company-owned revenues, compared to $144.9 million or 18.1 percent of company-owned revenues in the same period a year ago. SELLING, GENERAL AND ADMINISTRATIVE Expenses in this category include field supervision (payroll, related taxes and travel) and home office administration costs (such as warehousing, salaries, occupancy costs and professional fees). Selling, general and administrative (SG&A) expenses were $33.4 million, or 10.1 percent of total revenues in the third quarter of fiscal 2001, compared to $30.8 million, or 10.7 percent of total revenues in the same period in fiscal 2000. For the first nine months of fiscal 2001, SG&A expenses were $99.7 million, or 10.3 percent of total revenues, compared to $89.5 million, or 10.7 percent of total revenues in the same period in fiscal 2000. These 60 basis point and 40 basis point improvements, respectively, are primarily related to cost synergies created by the Supercuts UK pooling 18
19 consummated in the second quarter of fiscal 2000. Further, the timing of certain marketing expenditures during the third quarter of fiscal 2001 as compared to the corresponding period of fiscal 2000 contributed to the improvement. DEPRECIATION AND AMORTIZATION -- CORPORATE Corporate depreciation and amortization increased to 1.7 percent of total revenues in both the third quarter and first nine months of fiscal 2001, compared to 1.5 percent in the same periods in fiscal 2000. This increase is primarily related to an increase in the level of intangible assets, primarily goodwill, associated with the Company's acquisition activity during the past twelve months and an increase in depreciation related to enhancements to the corporate infrastructure. OPERATING INCOME Operating income in the third quarter of fiscal 2001, excluding nonrecurring items, improved to $26.4 million, or 8.0 percent of total revenue, an increase of $3.6 million or 15.8 percent over the same period in fiscal 2000. Operating income in the first nine months of fiscal 2001 improved to $77.6 million, or 8.0 percent of total revenues, an increase of $5.0 million, or 6.9 percent over the prior year period operating income of $72.5 million, or 8.6 percent of total revenues, exclusive of nonrecurring items. INTEREST Interest expense in the third quarter and first nine months of fiscal 2001 was $5.5 million and $16.3 million, respectively, representing 1.7 percent of total revenues in the third quarter and first nine months of fiscal 2001, compared to $4.2 million and $11.5 million, or 1.5 percent and 1.4 percent of total revenues in the same periods in fiscal 2000. Interest expense as a percent of total revenues has increased slightly because of higher debt levels primarily resulting from the Company's acquisition program. In addition, the interest expense for the first nine months of fiscal 2001 was impacted by higher interest rates in the first and second quarters of fiscal 2001 when compared to the same periods a year ago. INCOME TAXES The Company's effective income tax rate for the first nine months of fiscal 2001 is 40.0 percent compared to 40.9 percent in the same period a year ago. Management expects the underlying effective tax rate for all of fiscal 2001 to be between 40 and 41 percent, influenced by discrete Canadian acquisitions occurring during the second and third quarters of fiscal 2001. NET INCOME Net income in the third quarter of fiscal 2001 grew to $12.5 million, or $.30 per diluted share, compared to $11.6 million, or $.28 per diluted share in the same period in fiscal 2000. For the first nine months of fiscal 2001, net income grew to $37.3 million, or $.89 per diluted share, compared to net income of $35.1 million, or $.84 per diluted share in the same period in fiscal 2000. Exclusive of nonrecurring items, a portion of which were not deductible for tax reporting purposes, net income in the first nine months of fiscal 2000 was $37.9 million, or $.91 per diluted share. 19
20 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 for the first nine months of fiscal 2001 was $79.2 million compared to $63.4 million during the same period in fiscal 2000. The increase between the two periods is primarily due to improved operating performance. During the first nine months of fiscal 2001, the Company had worldwide capital expenditures of $71.7 million, of which $11.8 million related to acquisitions of 744 salons. The Company constructed 31 new Regis Salons, 25 new MasterCuts salons, 29 new Trade Secret salons, 150 new Wal-Mart/SmartStyle salons, 189 new Strip Center salons and 33 new International salons, and completed 91 major remodeling projects. All capital expenditures during the first nine months of fiscal 2001 were funded by cash flows from the Company's operations and borrowings under its revolving credit facility. The Company anticipates its worldwide salon development program for fiscal 2001 will include the construction of approximately 430 to 450 new company-owned salons, and 150 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $85 to $90 million in fiscal 2001, excluding capital expenditures related to acquisitions. In light of the current economic environment, the Company plans to temporarily reduce its salon growth beginning in fiscal year 2002 with the objective of strengthening its balance sheet. Capital expenditures for fiscal 2002 are expected to be approximately $65 to $70 million, or 15 to 20 percent below the levels for this year's budget. Plans also call for the construction of 375 to 400 new salons and an acquisition budget of $25 to $30 million. This compares with approximately 450 constructed salons and an $80 million acquisition budget in fiscal 2001. By moderating its real estate strategy, the Company plans to reduce leverage and thereby increase its flexibility to maximize future growth opportunities. Financing 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. See discussion in footnote 5 to the Consolidated Financial Statements. Dividends During the first nine months of fiscal 2001, the Company paid regular quarterly dividends totaling $3.7 million, or $.09 per share. On May 9, 2001, the Board of Directors of the Company declared a $.03 per share quarterly dividend payable on June 7, 2001 to shareholders of record on May 23, 2001. 20
21 SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward looking statements in this document reflect management's best judgement at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Additional information concerning potential factors that could affect future financial results is included in the Company's Form S-3 Registration Statement filed with the Securities and Exchange Commission on March 15, 2001. 21
22 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, some of which bears interest at floating rates based on LIBOR plus an applicable borrowing margin. As of March 31, 2001, the Company had $147.5 million of total floating rate debt outstanding. The Company manages its interest rate risk by balancing the amount of fixed and variable debt. In addition, on occasion the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates. Generally, the terms of the interest rate swap agreements range from two to three years with settlement on a quarterly basis. As of March 31, 2001, the Company has entered into interest rate swap agreements covering $55 million of the floating rate debt, as discussed in Note 2 to the Consolidated Financial Statements. 22
23 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 15 Letter Re: Unaudited Interim Financial Information. (b) Reports on Form 8-K: The following report on Form 8-K was filed during the three months ended March 31, 2001: None. 23
24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGIS CORPORATION Date: May 11, 2001 By: /s/ Randy L. Pearce ----------------------------------------- Randy L. Pearce Executive Vice President Chief Administrative and Financial Officer Signing on behalf of the registrant and as principal accounting officer 24