Regis Corporation - 10-Q quarterly report FY

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended         Decmber 31, 2002   

OR

For the transition period from  ________________________   to _____________________

________________

Commission file number       011230

Regis Corporation

(952)947-7777

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  o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of February 7, 2003:

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REGIS CORPORATION

INDEX

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
as of December 31, 2002 and June 30, 2002
(Dollars in thousands, except par value)

The accompanying notes are an integral part of the unaudited Consolidated Financial Statements.

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the three months ended December 31, 2002 and 2001
(Dollars in thousands, except per share amounts)

The accompanying notes are an integral part of the unaudited Consolidated Financial Statements.

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the six months ended December 31, 2002 and 2001
(Dollars in thousands, except per share amounts)

The accompanying notes are an integral part of the unaudited Consolidated Financial Statements.

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the six months ended December 31, 2002 and 2001
(Dollars in thousands)

The accompanying notes are an integral part of the unaudited Consolidated Financial Statements.

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REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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REVIEW REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Directors of Regis Corporation:

We have reviewed the accompanying consolidated balance sheet of Regis Corporation as of December 31, 2002 and the related consolidated statements of operations for the three and six month periods ended December 31, 2002 and 2001 and of cash flows for the six months ended December 31, 2002 and 2001. 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, 2002, 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 27, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the accompanying consolidated balance sheet information as of June 30, 2002, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
January 21, 2003

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Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Summary

Regis Corporation (the Company), based in Minneapolis, Minnesota, is the world’s largest owner, operator, franchisor and acquirer of hair and retail product salons. The Company’s worldwide operations include 9,313 salons at December 31, 2002 operating in two reportable operating segments: domestic and international. Each of the Company’s concepts have generally similar products and services. The Company is organized to manage its operations based on geographical location. The Company’s domestic segment includes 7,166 salons, including 2,196 franchised salons, operating in North America primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. The Company’s international operations include 2,147 salons, including 1,744 franchised salons, located throughout Europe, primarily in the United Kingdom, France, Italy and Spain. The Company has over 43,000 employees worldwide.

Second quarter fiscal 2003 revenues grew to a record $414.8 million, including franchise revenues of $26.1 million, a 15.7 percent increase over the second quarter of fiscal 2002. Revenues for the first half of fiscal 2003 grew to a record $814.0 million, including franchise revenues of $52.0 million, a 14.9 percent increase over the first half of fiscal 2002.

Operating income in second quarter of fiscal 2003 increased to $43.2 million, a 32.7 percent increase over the corresponding period of fiscal 2002. Operating income in the first six months of fiscal 2003 increased to $79.6 million, a 26.9 percent increase over the corresponding period of fiscal 2002.

Net income in the second quarter of fiscal 2003 increased to $23.6 million, or $.52 per diluted share, a net income and earnings per share increase of 38.9 and 33.3 percent, respectively, from second quarter fiscal 2002. During the first half of fiscal 2003, net income increased 33.9 percent to $43.3 million and earnings per diluted share increased 28.0 percent to $.96 as compared to the corresponding period of fiscal 2002.

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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 percent of revenues. The percentages are computed as a percent of total Company revenues, except as noted.

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CRITICAL ACCOUNTING POLICIES

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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. Management bases these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. However, actual results could differ from these estimates.

Management believes the Company’s critical accounting policies and areas that require more significant judgments and estimates used in the preparation of its Consolidated Financial Statements to be:

Depreciation and amortization are recognized using the straight-line method over the long-lived assets’ estimated useful lives. The Company estimates useful lives based on historical data and industry trends. The Company periodically reassesses the estimated useful lives of its long-lived and intangible assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings and potentially the need to record an impairment charge.

The Company reviews long-lived and intangible assets, including goodwill, for impairment annually, or at any time events or circumstances indicate that the carrying value of such assets may not be fully recoverable. For long-lived assets and amortizable intangible assets, an impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to its carrying value. For goodwill, if an impairment were to be recognized, the carrying value of the impaired asset would be reduced to its fair value based on discounted estimated future cash flows. The Company generally considers its brands to be reporting units when it tests for goodwill impairment because that is where the Company believes goodwill naturally resides. Goodwill is evaluated for impairment based on the fair value of the brand concept to which the goodwill relates. The Company performs its annual goodwill impairment testing during its fiscal third quarter.

The Company makes numerous acquisitions that are recorded using the purchase method of accounting. Accordingly, the purchase prices are allocated to assets acquired, including intangible assets, and liabilities assumed based on their estimated fair values at the dates of acquisition. Fair value is estimated based on the amount for which the asset or liability could be bought or sold in a current transaction between willing parties. The majority of the purchase price is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in customer base of the acquired salons and the limited value and customer preference associated with acquired hair salon brand identity. Residual goodwill further represents the Company’s opportunity to strategically combine the acquired business with the Company’s existing structure to serve a greater number of customers through our expansion strategies.

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In the normal course of business, the Company must make continuing estimates of potential future loss accruals related to legal, tax, self-insurance accruals and uncollectible accounts. These accruals require the use of management’s judgment on the outcome of various issues. Management’s estimates for these items are based on the best available evidence, but due to changes in facts and circumstances, the ultimate outcomes of these accruals could be different than management estimates.

On an interim basis, product costs are determined by applying an estimated gross profit margin to product and service revenues. The estimated gross profit margins are based primarily on historical factors. Management also incorporates into the margin its best estimate of the current product mix impact. On a semi-annual basis, the Company performs physical inventories and adjusts product costs to actual as determined under the lower of cost or market determined on a weighted average basis, and updates its gross profit margins accordingly.

RESULTS OF OPERATIONS

Revenues
Revenues for the second quarter of fiscal 2003 grew to a record $414.8 million, an increase of $56.2 million, or 15.7 percent, over the same period in fiscal 2002. Approximately 60 percent of this increase was attributable to domestic salon acquisitions and 29 percent to domestic new salon construction, with the remaining increase primarily due to revenue growth from International operations related to acquisitions and favorable fluctuations in the exchange rate between periods. Mall and strip center based domestic salons, all associated with operations in the United States and Canada (domestic salons), accounted for $41.9 million of the increase in total revenues, while franchise revenues increased $7.8 million, primarily due to International operations, and revenue from company-owned International operations increased $6.5 million.

Revenues for the first half of fiscal 2003 grew to a record $814.0 million, an increase of $105.8 million, or 14.9 percent, over the corresponding period in fiscal 2002. Approximately 59 percent of this increase was attributable to domestic salon acquisitions and 31 percent to domestic new salon construction, with the remaining increase primarily due to revenue growth from International operations related to acquisitions and favorable fluctuations in the exchange rate between periods, as well as same-store sales increases. Mall and strip center based domestic salons accounted for $77.8 million of the increase in total revenues, while franchise revenues increased $18.2 million, primarily due to International operations, and revenue from company-owned International operations increased $9.8 million.

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Revenues by brand concept for the three and six months ended December 31, 2002 and 2001 were as follows:

Included in the table above, primarily as part of Strip Center Salons and International, are franchise revenues of $26.1 and $18.3 million for the three months ended December 31, 2002 and 2001, respectively and $52.0 and $33.8 million for the six months ended December 31, 2002 and 2001, respectively.

During the second quarter and first half of fiscal 2003, consolidated same-store sales from all company-owned salons open more than 12 months increased 1.1 and 1.3 percent, respectively, compared to increases of 2.9 percent in the corresponding periods of fiscal 2002. Same-store sales increases achieved during the second quarter of fiscal 2003 were driven primarily by a shift in the mix of service sales toward salon services such as hair color and waxing services, as well as increased product sales. Same-store sales increases during fiscal 2003 were lower than the corresponding periods of the prior fiscal year primarily due to an overall decline in the state of the economy in fiscal 2003 as compared to fiscal 2002.

System-wide sales, inclusive of non-consolidated sales generated from franchisee salons, increased to $679.9 million during the second quarter of fiscal 2003 and $1.4 billion during the six months ended December 31, 2002, representing increases of 27.7 and 31.4 percent, respectively, over the same periods last year. The increases in system-wide sales during fiscal 2003 were primarily the result of salons added to the system through acquisitions, as well as net salon openings. Consolidated system-wide same-store sales increased 1.3 and 1.5 percent in the second quarter of and first half of fiscal 2003, respectively, compared to 3.5 percent in both of the corresponding periods of the prior year. A total of 34.6 and 31.1 million customers were served system-wide in the second quarter of fiscal 2003 and 2002, respectively. During the first half of fiscal 2003 and 2002, a total of 69.0 and 61.2 million customers were served system-wide, respectively. The increase in total customers was primarily the result of additional salons added to the system.

Service Revenues. Service revenues in the second quarter of fiscal 2003 grew to $270.7 million, an increase of $36.1 million, or 15.4 percent, over the same period in fiscal 2002. During the first six months of fiscal 2003, service revenues increased $65.5 million, or 14.0 percent, to $533.8 million. The increase in service revenues for the quarter and year-to-date was primarily a result of acquisitions and new salon construction.

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Product Revenues. Product revenues in the second quarter of fiscal 2003 grew to $117.9 million, an increase of $12.3 million, or 11.7 percent, over the same period in fiscal 2002. During the first half of fiscal 2003, product revenues grew to $228.2 million, an increase of $22.1 million, or 10.7 percent, over the corresponding period of fiscal 2002. These increases demonstrate the Company’s continuous focus on product awareness, training and acceptance of national label merchandise. As a percent of company-owned revenues, product sales fell 70 and 60 basis points as compared to the second quarter and first half of fiscal 2002, respectively, primarily due to the large number of strip center salons which were acquired over the past year. Strip center salons have a lower product sales mix than the corporate average.

Franchise Revenues. Franchise revenues, including royalties and initial franchise fees from franchisees, and product and equipment sales made by the Company to franchisees, increased to $26.1 and $52.0 million in the quarter and six months ended December 31, 2002, respectively, compared to $18.3 and $33.8 million for the corresponding periods of fiscal 2002. Of the total year-to-date increase of $18.2 million, 55.8 percent is related to royalties, 38.6 percent due to increased sales of product to franchisee salons and 5.6 percent to initial franchise fees. The increases in franchise revenues for the quarter and six months ended December 31, 2002 were primarily the result of the European franchise companies, Groupe Gerard Glemain (GGG) and Jean Louis David (JLD).

Cost of Revenue
The aggregate cost of service and product revenues for company-owned salons in the second quarter of fiscal 2003 was $209.3 million compared to $189.4 million in the same period in fiscal 2002. For the first half of fiscal 2003 and 2002, the aggregate cost of service and product revenues was $413.6 and $375.2 million, respectively. The resulting combined gross margin percentage improved 180 basis points to 46.1 percent of company-owned revenues for the second quarter of fiscal 2003 and 130 basis points to 45.7 percent of company-owned revenues for the first half of fiscal 2003 as compared to the corresponding periods of the prior year.

Service margins improved 70 and 60 basis points in the second quarter and first six months of fiscal 2003 to 43.6 and 43.7 percent of company-owned revenues, respectively. These improvements were primarily due to initiatives that resulted in lower payroll and payroll related costs as compared to the corresponding periods of fiscal 2002. Additionally, improvements were realized in relation to a change in the salon mix; currently, the salon concepts with the highest service margins are growing at a quicker pace than other concepts.

Product margins improved 450 basis points to 52.0 percent of company-owned revenues in the second quarter of fiscal 2003. During the first half of fiscal 2003, product margins improved 310 basis points to 50.4 percent of company-owned revenues. These improvements were primarily the result of a favorable physical inventory count finalized in October 2002 and improving margins in the Company’s product sales. The estimated gross profit margin used to determine product costs on an interim basis was revised for future periods based on the results of the physical inventory and the continued trend of overall product margin improvement. The product margin improvement is being driven by improved purchasing power, as well as improved inventory management. Excluding the positive physical inventory results, product margins improved 130 basis points to 48.8 percent of company-owned revenues for the quarter.

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Direct Salon
This expense category includes direct costs associated with salon operations such as salon advertising, insurance, workers’ compensation, utilities and janitorial costs. For the second quarter of fiscal 2003, direct salon expense of $34.4 million decreased to 8.8 percent of company-owned revenues from 8.9 percent in the same period a year ago. For the first six months of fiscal 2003, direct salon expense of $69.8 million increased to 9.2 percent of company-owned revenues from 9.1 percent in the same period a year ago. The ten basis point improvement as a percent of company-owned revenues for the quarter was primarily related to the timing of certain advertising expenses. The ten basis point increase as a percent of company-owned revenues for the six months ended December 31, 2002 was primarily the result of higher workers’ compensation costs.

Rent
Rent expense during the second quarter and first half of fiscal 2003 was $56.9 and $110.7 million, respectively, compared to $48.3 and $95.4 million in the same periods of fiscal 2002. Rent expense increased 40 and 30 basis points as a percentage of company-owned revenues for the second quarter and first six months of fiscal 2003, respectively, primarily due to lower same-store sales increases as compared to the prior year causing certain increasing fixed cost categories, such as rent, to increase as a percent of sales. Additionally, common area costs continued to increase due to landlords in regional malls passing on increased insurance, utility and maintenance costs to their tenants. Also, higher minimum rents related to acquired JLD salons in the New York City area contributed to the increase.

Depreciation – Salon Level
Depreciation expense at the salon level remained relatively consistent as a percent of company-owned revenues at 3.3 percent during the quarter and 3.4 percent during the six months ended December 31, 2002, respectively, compared to 3.4 percent in the corresponding periods of fiscal 2002.

Direct Salon Contribution
For reasons previously discussed, direct salon contribution, representing company-owned salon revenues less associated operating expenses, increased $14.3 million in the second quarter of fiscal 2003 to $75.0 million and $22.8 million in the first half of fiscal 2003 to $142.2 million. As a percent of sales, direct salon contribution improved 150 and 100 basis points to 19.3 and 18.7 percent of company-owned revenues during the quarter and six months ended December 31, 2002, respectively.

Franchise Direct Costs, Including Product and Equipment
Franchise direct costs include all direct costs related to franchise salons, such as the cost of products and equipment sold to franchisees and direct costs incurred at the corporate office and in Europe to support franchising activities. Franchise direct costs increased to $15.4 million, or 59.0 percent of franchise revenues, during the quarter ended December 31, 2002. For the first six months of fiscal 2003, franchise direct costs increased to $29.2 million, or 56.2 percent of franchise revenues. The increases were primarily related to additional support costs associated with the European franchise company JLD, which was acquired in the fourth quarter of fiscal 2002. Additionally, growth in the sale of retail product to franchisees contributed to the overall dollar increase.

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Corporate and Franchise Support Costs
Expenses in this category include field supervision (payroll, related taxes and travel) and corporate office administration costs (such as warehousing, salaries, occupancy costs and professional fees). Corporate and franchise support costs (CFSC) were $39.3 million in the second quarter of fiscal 2003, compared to $34.6 million in the same period in fiscal 2002. CFSC were $79.2 million in the first six months of fiscal 2003, compared to $69.9 million during the corresponding period of fiscal 2002. As a percent of total revenues, CFSC decreased 20 basis points for the three and six months ended December 31, 2002 to 9.5 and 9.7 percent, respectively. These improvements were primarily due to duplicative costs incurred during the first half of the 2002 fiscal year associated with operating three distribution centers, prior to closing the Company’s Minneapolis distribution center in December 2001.

Depreciation and Amortization – Corporate
Corporate depreciation and amortization remained consistent at 0.8 percent of total revenues in the second quarter and increased ten basis points to 0.8 percent in the first half of fiscal 2003 and 2002, respectively.

Operating Income
Operating income in the second quarter of fiscal 2003 improved to $43.2 million, or 10.4 percent of total revenues, an increase of 32.7 percent, or 130 basis points as a percent of revenues, over the same period in fiscal 2002. Operating income in the first half of fiscal 2003 improved to $79.6 million, or 9.8 percent of total revenues, an increase of 26.9 percent, or 90 basis points, over the first half of fiscal 2002. The improvement in operating income during fiscal 2003 is related to improvements in the product and service margins and other operational improvements previously discussed.

Interest
Interest expense in the second quarter of fiscal 2003 increased $.7 million to $5.4 million. During the six months ended December 31, 2002, interest expense increased $1.0 million to $10.5 million. As a percent of total revenues, interest expense remained consistent for both the quarter and year-to-date of fiscal 2003 at 1.3 percent.

Income Taxes
The Company’s effective income tax rate for the second quarter of fiscal 2002 was 38.3 percent, compared to 39.4 percent in the second quarter of fiscal 2002. During the six months ended December 31, 2002 and 2001, the Company’s effective tax rate was 37.9 and 39.5 percent, respectively. The improvement in the fiscal 2003 effective rate is primarily due to a larger percentage of the Company’s revenues being earned in lower international tax jurisdictions, as well as tax savings resulting from certain tax strategies adopted late in fiscal 2002. Additionally, the year-to-date rate was favorably impacted by the successful resolution of certain tax matters related to previous periods, which were discussed during the first quarter. Management expects the underlying effective tax rate for all of fiscal 2003 to be approximately 38.1 percent.

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Net Income
Net income in the second quarter of fiscal 2003 grew to $23.6 million, or $.52 per diluted share, compared to $17.0 million, or $.39 per diluted share, in the same period in fiscal 2002. During the six months ended December 31, 2002, net income increased to $43.3 million, or $.96 per diluted share, representing a net income and earning per share increase of $11.0 million and $.21, respectively, over the corresponding period of fiscal 2002.

Effects of Inflation
The Company primarily compensates its Regis Salon and International salon employees with percentage commissions based on the 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 remainder of its mall-based and strip center salons.

Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 2 to the Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES
Customers 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 three months of fiscal 2003 was $69.1 million compared to $70.3 million during the same period in fiscal 2002. Although operating performance improved, the slight decline in net cash provided by operations was primarily due to increased inventory, which was offset in part by lower accrued expenses. Inventory levels increased in order to support the Company’s increasing base of new and acquired salons, as well as the growing number of franchisee salons. Accrued expenses also increased primarily due to the timing of estimated income tax payments.

Capital Expenditures and Acquisitions
During the first six months of fiscal 2003, the Company had worldwide capital expenditures of $36.1 million, of which $3.2 million related to acquisitions. The Company constructed 205 new corporate salons in the first half of fiscal 2003, including 86 new SmartStyle salons, 34 new Regis Salons, 30 new Strip Center Salons, 24 new MasterCuts salons, 22 new Trade Secret salons and 9 new International salons, and completed 88 major remodeling projects. All capital expenditures during the first six months of fiscal 2003 were funded by the Company’s operations and borrowings under its revolving credit facility.

The Company anticipates its worldwide salon development program for fiscal 2003 will include approximately 435 new company-owned salons, 300 to 350 new franchised salons, 175 major remodeling and conversion projects and 400 to 500 acquired salons. It is expected that expenditures for these development activities will be approximately $160 to $165 million, of which $75 million is allocated to new salon construction, maintenance, remodeling and conversions.

Contractual Obligations and Commercial Commitments
There have been no significant changes in the Company’s commercial commitments such as commitments under lines of credit or standby letters of credit since June 30, 2002. The Company is guarantor on a limited number of lease agreements between its franchisees and leasing companies. If the Company should be held liable under such agreements, the Company retains the right to possess the related salon operations. Management has not experienced and does not expect any material loss to result from these arrangements.

The Company is in compliance with all covenants and other requirements of its credit agreements and indentures. Additionally, the credit agreements do not include rating triggers or subjective clauses that would accelerate maturity dates.

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, and continues to enter into transactions to acquire established hair care salons and businesses.

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Off-Balance-Sheet Arrangements
The Company’s off-balance-sheet arrangements consist primarily of operating leases for the rental of salon premises, including leases for company-owned salons as well as franchisee accommodation leases, which are funded by franchisees. Regarding the franchisee accommodation leases, the Company generally retains the right to the related salon assets net of any outstanding obligations in the event of a default by a franchise owner. There have been no material changes in these off-balance-sheet arrangements since June 30, 2002, the Company’s fiscal year end. Management has not experienced and does not expect any material loss to result from these arrangements.

Additionally, a residual value guarantee exists related to a five-year operating lease agreement for the Company’s distribution center and various equipment in Salt Lake City, Utah for a maximum of $10.2 million. The lease agreement terminates during fiscal 2005. Under the agreement, the Company is obligated to pay the deficiency between the residual value guarantee and the fair market value at the termination of the agreement. The Company expects the fair market value of the distribution center and related equipment, subject to the purchase or remarket options, to substantially reduce or eliminate the Company’s potential $10.2 million liability under the residual value guarantee.

Financing
There were no significant financing activities during the first half of fiscal 2003, other than the extension of the Company’s revolving credit facility through November of fiscal 2006. No other significant changes were made to the facility’s terms. Derivative instruments are discussed in Note 3 to the Consolidated Financial Statements.

Management believes that cash generated from operations and amounts available under its existing debt facilities will be sufficient to fund its anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future.

The Company operates in international markets and 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.

Dividends
During the first half of fiscal 2003, the Company paid dividends totaling $2.6 million, or $.06 per share. On January 29, 2003, the Board of Directors of the Company declared a $.03 per share quarterly dividend payable on February 26, 2003 to shareholders of record on February 12, 2003.

Outlook
Regis Corporation is the world’s largest owner, operator, franchisor and acquirer of hair and retail product salons in the $135 billion hair care industry. The 9,313 company-owned and franchised salons, which generated $1.4 billion of system-wide sales in the first half of fiscal year 2003, are located in the United States, Canada, France, Italy, the United Kingdom, Spain, Belgium, Switzerland, Poland, Brazil and Puerto Rico.

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Over the last ten years, the Company has been able to average double-digit revenue and earnings growth through its strategy of building, acquiring and franchising salons in high traffic locations throughout North America, Canada and Europe. Eight times larger than its nearest competitor, the Company maintains just a two percent worldwide market share, signaling substantial opportunities for long-term future growth.

Impact of Inflation
The impact of inflation on results of operations has not been significant. The Company does not expect inflation to have a significant impact on its abilities to achieve its long-term growth targets.

Impact of Seasonality
The Company’s business is not subject to substantial seasonal variations in demand. Historically, the Company’s revenue and net earnings have generally been realized evenly throughout the fiscal year. The service and retail product revenue associated with its corporate salons, as well as the Company’s franchise revenue, is of a replenishment nature. The Company estimates that customer visitation patterns are generally consistent throughout the year.

Impact of the Economic Environment
Changes to the U.S., Canadian, European and the U.K. economies may have an impact on the Company’s business. However, the replenishment nature of the Company’s business, as well as the fact that its various concepts span across all levels of consumer objectives regarding price and style, mitigates the impact that changes in economic conditions may have on the Company’s business.

Impact of changes to Interest Rates and Foreign Currency Exchange RatesChanges in interest rates may have an impact on the Company’s expected results from operations. Currently, the Company manages the risk related to fluctuations in interest rates through the use of floating rate debt instruments and other financial instruments. See Note 3 to the Consolidated Financial Statements for additional information.

Changes in foreign currency exchange rates may have an impact on the Company’s expected results from operations. The majority of the revenue and costs associated with the performance of its foreign operations are denominated in local currencies such as the Canadian dollar, Euro and British Pound. For the three and six months ended December 31, 2002, operations denominated in currencies other than the U.S. dollar equaled 11.7 and 14.2 percent of consolidated net income, respectively.

Near-term Expectations
For fiscal year 2003, the Company expects mid-teens revenue and earnings growth. The Company plans to achieve this revenue growth through the combination of salon acquisitions (10.0 to 11.5 percent), new salon construction (4.0 to 5.0 percent) and same-store sales increases (1.0 to 1.5 percent). Earnings for fiscal year 2003 are also expected to benefit from the continued improvement in both service and product margins.

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Long-term Expectations
The Company’s growth strategy will continue to focus on building and acquiring company-owned and operated salons in convenient locations with good visibility, strong customer traffic and appropriate trade demographics. In addition, it will continue to focus on the middle to moderately upscale market with its broad-based salon concepts.

The Company believes that the availability of real estate and quality stylists will not constrain its ability to achieve its long-term growth objectives of 10 to 14 percent revenue growth and low-to-mid teens earnings growth.

Franchising will also be a key component of the Company’s future growth. Through the combination of company-owned and franchise salon growth, the Company expects to be able to strengthen its presence in existing markets as well as successfully enter new markets.

The variety of salon services offered continues to grow as the various concepts expand their services from primarily hair cutting and styling to include hair coloring, as well as additional services such as waxing. The Company plans to continue to expand the number of services offered by its various salon concepts. Recently, the Company began to increase the number of Regis Signature Salons, which are full-blown spas. The Regis Signature Salons offer a wide variety of services spanning from hair cut, coloring and styling services to waxings, facials and massages. Based on years of industry experience, the Company has the knowledge and resources to provide many additional benefits beyond traditional hair care to its customers.

In addition to growth in salon services, the Company has been successful in growing the retail product business. During the first half of fiscal year 2003, retail product sales increased 11 percent to $228 million. Through the offering of the largest assortment of professional hair care products in the industry and superior merchandising, the Company believes it can continue to successfully grow its retail product business. Today, the Company estimates that it serves approximately 10 percent of the U.S. professional retail product market.

Maintaining financial flexibility is also a key element in continuing the Company’s successful growth. With strong operating cash flow and an investment grade rating, the Company is confident that it will be able to financially support its future growth.

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SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This quarterly report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “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 judgment 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. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include competition within the personal hair care industry, which remains strong, both domestically and internationally, and price sensitivity; changes in economic condition; changes in consumer tastes and fashion trends; labor and benefit costs; legal claims; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; the ability of the Company to successfully identify and acquire salons that support its growth objectives; or other factors not listed above. The ability of the Company to meet its expected revenue growth is dependent on salon acquisitions, new salon construction and same-store sales increases, all of which are affected by many of the aforementioned risks. Additional information concerning potential factors that could affect future financial results is set forth in the Company’s Form 10-K and included in Form S-3 Registration Statement filed with the Securities and Exchange Commission on January 31, 2003.

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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. To a lesser extent, the Company is also exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries.

As of December 31, 2002, the Company had $68.6 million of floating and $246.2 of fixed rate debt outstanding. The Company manages its interest rate risk by balancing the amount of fixed and floating rate debt. On occasion the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. Generally, the terms of the interest rate swap agreements contain quarterly settlement dates based on the notional amounts of the swap contracts. As of December 31, 2002, the Company has entered into interest rate swap agreements covering $55.0 million of its floating rate obligations and $88.5 million of its fixed rate obligations, as discussed in Note 3 of the Registrant’s December 31, 2002 quarterly report on Form 10-Q.

The Company has also entered into interest rate swap agreements with a notional amount of $11.8 million to hedge its variable rate operating lease obligations and a cross currency swap with a notional amount of $21.3 million to hedge its foreign currency exposure in certain of its net investments.

The table below presents information about the Company’s debt obligations, variable lease obligations and derivative financial instruments that are sensitive to changes in interest rates. For fixed rate debt obligations, the table presents principal amounts and related weighted-average interest rates by fiscal year of maturity. For variable rate obligations, the table presents principal amounts and the weighted-average interest rates as of December 31, 2002. For variable lease obligations, the table presents the maximum potential obligation under the residual value guarantee. For the Company’s derivative financial instruments, the table presents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract.

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Expected maturity date as of June 30,

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The cross currency swap derivative financial instrument expires in fiscal 2007 and at December 31, 2002, the Company’s net investment in this derivative financial instrument was in a $3.7 million loss position, based on its estimated fair value.

At December 31, 2002, the Company’s cash is concentrated at a limited number of financial institutions. This exposes the Company to credit risk due to the concentrations of cash at these institutions. However, the Company believes that the credit risk is mitigated due to the financial strength of the financial institutions.

Item 4. Controls and Procedures

With the participation of management, the Company’s chief executive officer and chief financial officer evaluated the Company’s disclosure controls and procedures within 90 days of the filing date of this quarterly report (the “Evaluation Date”). Based upon this evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

There were no significant changes in the Company’s internal controls or, to the knowledge of management of the Company, in other factors that could significantly affect internal controls subsequent to the date of the Company’s most recent evaluation of its disclosure controls and procedures utilized to compile information included in this filing.

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Part II — Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

(b) Reports on Form 8-K:

The following report on Form 8-K was filed during the three months ended December 31, 2002:

None.

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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.

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CERTIFICATIONS

CERTIFICATION PURSUANT TO RULE 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Paul D. Finkelstein, President and Chief Executive Officer of Regis Corporation, certify that:

February 13, 2003

/s/ Paul D. Finkelstein
Paul D. Finkelstein, President and Chief Executive Officer

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CERTIFICATION PURSUANT TO RULE 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Randy L. Pearce, Executive Vice President, Chief Financial and Administrative Officer of Regis Corporation, certify that:

February 13, 2003

/s/ Randy L. Pearce
Randy L. Pearce, Executive Vice President, Chief Financial and Administrative Officer

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