================================================================================ 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 September 30, 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 of (I.R.S. Employer 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 October 31, 2001: Common Stock, $.05 par value 41,973,933 - ---------------------------- ----------------- Class Number of Shares ================================================================================
REGIS CORPORATION INDEX <TABLE> <CAPTION> Part I. Financial Information Page Nos. --------------------- --------- <S> <C> <C> <C> Item 1. Consolidated Financial Statements: Balance Sheet as of September 30, 2001 and June 30, 2001 3 Statement of Operations for the three months ended September 30, 2001 and 2000 4 Statement of Cash Flows for the three months ended September 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6-12 Review 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 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 </TABLE>
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REGIS CORPORATION CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2001 AND JUNE 30, 2001 (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS) <TABLE> <CAPTION> (UNAUDITED) SEPTEMBER 30, 2001 JUNE 30, 2001 ------------------ -------------- <S> <C> <C> ASSETS Current assets: Cash $ 34,257 $ 24,658 Receivables, net 20,888 18,861 Inventories 111,554 110,247 Deferred income taxes 9,419 10,087 Other current assets 4,491 8,794 --------- --------- Total current assets 180,609 172,647 Property and equipment, net 308,990 300,990 Goodwill 251,811 236,117 Other assets 32,256 26,751 --------- --------- Total assets $ 773,666 $ 736,505 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 6,047 $ 5,438 Accounts payable 43,126 37,689 Accrued expenses 67,614 68,788 --------- --------- Total current liabilities 116,787 111,915 Long-term debt 267,226 256,120 Other noncurrent liabilities 33,998 28,969 Shareholders' equity: Common stock, $.05 par value; issued and outstanding 41,927,458 and 41,726,787 common shares at September 30, 2001 and June 30, 2001, respectively 2,096 2,087 Additional paid-in capital 169,602 165,489 Accumulated other comprehensive loss (6,891) (4,815) Retained earnings 190,848 176,740 --------- --------- Total shareholders' equity 355,655 339,501 --------- --------- Total liabilities and shareholders' equity $ 773,666 $ 736,505 ========= ========= </TABLE> The accompanying notes are an integral part of the unaudited Consolidated Financial Statements. 3
REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 2001 2000 -------- -------- <S> <C> <C> Revenues: Company-owned salons: Service $233,619 $209,896 Product 100,572 87,408 -------- -------- 334,191 297,304 Franchise revenues: Royalties and fees 10,177 9,478 Product sales 5,300 3,972 -------- -------- 15,477 13,450 -------- -------- 349,668 310,754 Operating expenses: Company-owned salons: Cost of service 132,592 120,163 Cost of product 53,260 47,309 Direct salon 31,186 26,072 Rent 47,180 41,337 Depreciation 11,307 9,834 -------- -------- 275,525 244,715 Selling, general and administrative 37,641 32,280 Depreciation and amortization 2,429 5,063 Other 3,921 2,935 -------- -------- Total operating expenses 319,516 284,993 -------- -------- Operating income 30,152 25,761 Other income (expense): Interest (4,782) (5,095) Other, net 75 350 -------- -------- Income before income taxes 25,445 21,016 Income taxes (10,089) (8,301) -------- -------- Net income $ 15,356 $ 12,715 ======== ======== Net income per share: Basic $ .37 $ .31 ======== ======== Diluted $ .36 $ .31 ======== ======== </TABLE> Effective July 1, 2001, Regis changed its accounting for goodwill. For comparability purposes, see Note 2 for pro forma amounts. The accompanying notes are an integral part of the unaudited Consolidated Financial Statements. 4
REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income $ 15,356 $ 12,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 13,423 11,626 Amortization 496 3,350 Deferred income taxes 1,021 1,528 Other (200) 379 Changes in operating assets and liabilities: Receivables 1,486 (1,305) Inventories (423) (7,856) Other current assets 3,159 4,433 Other assets 594 (2,456) Accounts payable 2,046 3,456 Accrued expenses 481 254 Other noncurrent liabilities (1,196) 1,905 --------- --------- Net cash provided by operating activities 36,243 28,029 --------- --------- Cash flows from investing activities: Capital expenditures (19,634) (20,519) Proceeds from sale of assets 192 3 Purchases of salon net assets, net of cash acquired (16,891) (19,799) --------- --------- Net cash used in investing activities (36,333) (40,315) --------- --------- Cash flows from financing activities: Borrowings on revolving credit facilities 82,200 78,300 Payments on revolving credit facilities (70,500) (60,500) Repayment of long-term debt (730) (833) (Decrease) increase in negative book cash balances (323) 4,820 Dividends paid (1,249) (1,224) Proceeds from issuance of common stock 433 411 --------- --------- Net cash provided by financing activities 9,831 20,974 --------- --------- Effect of exchange rate changes on cash (142) (457) --------- --------- Increase in cash 9,599 8,231 Cash: Beginning of period 24,658 14,888 --------- --------- End of period $ 34,257 $ 23,119 ========= ========= </TABLE> The accompanying notes are an integral part of the unaudited Consolidated Financial Statements. 5
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 September 30, 2001 and for the three months ended September 30, 2001 and 2000, reflect, in the opinion of management, all adjustments necessary to fairly present the consolidated financial position of the Company as of September 30, 2001 and the consolidated results of its operations and its 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, 2001. With respect to the unaudited financial information of the Company for the three-month periods ended September 30, 2001 and 2000, included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 22, 2001 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. COST OF PRODUCT SALES: On an interim basis, product costs are determined by applying an estimated gross profit margin to product revenues. GOODWILL: Prior to July 1, 2001, goodwill recorded in connection with the fiscal 1989 purchase of the publicly held minority interest in the Company, and acquisitions of business operations in which the Company had not previously been involved, was amortized on a straight-line basis over 40 years. Goodwill recorded in connection with acquisitions which expand the Company's existing business activities (acquisitions of salon sites) was amortized on a straight-line basis, generally over 20 years. Effective July 1, 2001, the Company ceased all amortization of goodwill balances (see Note 2). Goodwill is tested annually or at the time of a triggering event for impairment. 6
2. NEW ACCOUNTING PRONOUNCEMENTS: Effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible Assets." This statement discontinued the amortization of goodwill and indefinite-lived intangible assets, subject to periodic impairment testing. The effect of the change in accounting during the three-month period ended September 30, 2001 was to increase net income by approximately $2.3 million, or $0.05 per share. The pro forma amounts shown below reflect the effect of retroactive application of the non-amortization of goodwill as if the new method of accounting had been in effect in the prior period. <TABLE> <CAPTION> FOR THE QUARTER ENDED SEPTEMBER 30, 2001 2000 ---------- --------- (Pro Forma Amounts) <S> <C> <C> NET INCOME (Dollars in thousands) Reported net income $ 15,356 $ 12,715 Goodwill amortization (net of tax effect) 2,053 ---------- --------- Adjusted net income $ 15,356 $ 14,768 ========== ========= BASIC EARNINGS PER SHARE Reported basic earnings per share $ .37 $ .31 Goodwill amortization (net of tax effect) .05 ---------- --------- Pro forma basic earnings per share $ .37 $ .36 ========== ========== DILUTED EARNINGS PER SHARE Reported diluted earnings per share $ .36 $ .31 Goodwill amortization (net of tax effect) .05 ---------- --------- Pro forma diluted earnings per share $ .36 $ .36 ========== ========= </TABLE> On July 1, 2001, goodwill was tested for impairment in accordance with the provisions of the new standard. No amounts were impaired at that time. In addition, the remaining useful lives of intangible assets being amortized were reviewed and deemed to be appropriate. The following provides additional information concerning the Company's intangible assets, which are included in other assets in the Consolidated Balance Sheet, as of September 30, 2001 (Dollars in thousands): <TABLE> <S> <C> Amortized intangible assets: Franchise agreements $ 8,293 Non-compete agreements 5,496 Trade names 6,753 Other 2,278 ----------- 22,820 Accumulated amortization (6,573) ----------- $ 16,247 =========== </TABLE> 7
The intangible assets subject to amortization are amortized on a straight-line basis over the number of years that approximate their respective useful lives (ranging from four to 30 years). Total amortization expense during the three month period ended September 30, 2001 and 2000 was approximately $290,000 and $207,000, respectively. As of September 30, 2001, future estimated amortization expense related to intangible assets being amortized will be (Dollars in thousands): <TABLE> <CAPTION> FISCAL YEAR ----------- <S> <C> Remainder 2002 $1,142 2003 1,449 2004 1,152 2005 948 2006 885 2007 870 </TABLE> Effective July 1, 2001, the Company also adopted the provisions of FAS No. 141, "Business Combinations." The initial adoption of this statement did not have a material impact on the Consolidated Statement of Operations. The Financial Accounting Standards Board ("FASB") recently issued FAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company is currently in the process of evaluating the impact of this Statement on its financial condition and results of operations. The FASB recently issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 retains and expands upon the fundamental provisions of existing guidance related to the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. Generally, the provisions of FAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Earlier application is encouraged. The Company believes the adoption of this Statement will not have a material impact on its financial condition or results of operations. 8
3. DERIVATIVE INSTRUMENTS: In the normal course of business, the Company is exposed to changes in interest rates and foreign currency rates. In addition, the Company has investments in foreign subsidiaries, and the net assets of these subsidiaries are exposed to currency exchange-rate volatility. 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. At September 30, 2001, Regis had interest rate swap contracts to pay fixed rates of interest (ranging from 5.06 percent to 7.2 percent) and receive variable rates of interest based on the three-month LIBOR rate (ranging from 2.6 percent to 3.8 percent during the first quarter of fiscal 2002) on $25 million, $30 million and $11.8 million notional amount of indebtedness through April 2003, June 2003 and June 2005, respectively. During the current quarter, no hedge ineffectiveness occurred. The net loss recorded in other comprehensive income, net of tax, was $958,000 and $298,000 at September 30, 2001 and 2000, respectively. During the quarter, the Company entered into a cross-currency swap, with a notional amount of $21.8 million, to hedge its net investments in its foreign operations. The purpose of this hedge is to protect against adverse movements in exchange rates. The cross-currency swap hedges approximately 18 percent of the Company's net investments in foreign operations. For the quarter ended September 30, 2001, $297,000, net of tax, of net losses related to this derivative was included in the cumulative translation adjustment. 4. 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 exposure that is charged or credited to the cumulative translation account within shareholders' equity. Comprehensive income for the three months ended September 30, 2001 and 2000 were as follows: <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------- (Dollars in thousands) 2001 2000 -------- -------- <S> <C> <C> Net income $ 15,356 $ 12,715 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 (958) (298) Change in cumulative foreign currency translation (1,118) (778) -------- -------- Total comprehensive income $ 13,280 $ 11,479 ======== ======== </TABLE> 9
5. NET INCOME PER SHARE: 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 quarter ended September 30, 2001 and 2000 as they are considered to be anti-dilutive. The number of excluded stock options were approximately 832,650 and 3,204,309, respectively, in the first quarter of fiscal 2002 and 2001. 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 THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 ----------- ---------- <S> <C> <C> Weighted average shares for basic earnings per share 41,740,812 40,720,731 Effect of dilutive securities: Dilutive effect of stock options 1,142,955 605,560 Contingent shares issuable under contingent stock agreements 22,722 139,028 ----------- ---------- Weighted average shares for diluted earnings per share 42,906,489 41,465,319 =========== ========== </TABLE> 6. TRANSACTION AND RESTRUCTURING LIABILITIES: As of June 30, 2001, the Company's transaction and restructuring liabilities related to acquisitions totaled approximately $1,056,000. During the first quarter of fiscal 2002, such liabilities were reduced by cash payments of $186,000 and increased by $39,000 related to translation rates, resulting in balance of $909,000 at September 30, 2001. This remaining amount will be satisfied through periodic contractual payments by the end of fiscal 2002. 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: domestic salons and international salons. The Company operates or franchises 6,398 domestic salons in the United States and Canada 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 represents 886 salons, including 517 franchised salons, operating in malls, leading department stores, mass merchants and high-street locations. 10
Summarized financial information of the Company's reportable segments for the three months ended September 30, 2001 and 2000, respectively, is shown in the following table. <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------------- (Dollars in thousands) 2001 2000 --------- -------- <S> <C> <C> Total revenues: Domestic $ 326,062 $287,202 International 23,606 23,552 --------- -------- Total $ 349,668 $310,754 ========= ======== Salon contribution (including franchise product costs): Domestic $ 66,664 $ 60,378 International 3,558 2,726 --------- -------- Total $ 70,222 $ 63,104 ========= ========= </TABLE> 8. ACQUISITIONS: During the three month period ended September 30, 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 dates of acquisition. These acquisitions 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. 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> THREE MONTHS ENDED SEPTEMBER 30, ---------------------- (Dollars in thousands) 2001 2000 ------- ------- <S> <C> <C> Costs in excess of net tangible and identifiable intangible assets acquired $16,254 $17,125 ======= ======= Components of aggregate purchase price Cash $16,891 $19,799 Stock 3,554 Current and noncurrent payables assumed 5,158 494 ------- ------- $25,603 $20,293 ======= ======= </TABLE> 11
With respect to a September 2001 purchase of 523 salons in the International division, the Company is currently in the process of allocating the purchase price to the identifiable intangible assets, and goodwill. Identifiable intangible assets acquired primarily consist of acquired trade names and franchise rights. Based upon the preliminary purchase price allocation, the change in the carrying amount of the goodwill for the three months ended September 30, 2001 is as follows (Dollars in thousands): <TABLE> <CAPTION> Domestic International -------- ------------- <S> <C> <C> Balance as of June 30, 2001 $230,716 $ 5,401 Goodwill acquired 3,756 12,498 Translation rate adjustments and other (783) 223 -------- ------- Balance as of September 30, 2001 $233,689 $18,122 ======== ======= </TABLE> Generally, the goodwill recognized in the domestic transactions is expected to be fully deductible for tax purposes and the goodwill recognized in the international transactions is non-deductible for tax purposes. 12
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 September 30, 2001, and the related consolidated statements of operations and of cash flows for the three month periods ended September 30, 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, 2001, 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 28, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the accompanying consolidated balance sheet information as of June 30, 2001, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived. PRICEWATERHOUSECOOPERS LLP Minneapolis, Minnesota October 22, 2001 13
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 Regis worldwide operations include 7,284 salons at September 30, 2001 operating in two segments: domestic and international. 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 domestic segment includes 6,398 salons operating primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. The Company's international operations include 886 salons located primarily in the United Kingdom and France. The Company has 41,000 employees worldwide. First quarter fiscal 2002 revenues grew to a record $349.7 million, including franchise revenues of $15.5 million, a 12.5 percent increase over fiscal 2001 first quarter total revenues of $310.8 million. Operating income in first quarter of fiscal 2002 increased to $30.2 million, a 17.0 percent increase over operating income of $25.8 million in the comparable fiscal 2001 period. Net income in the first quarter of fiscal 2002 increased to a record $15.4 million, or $.36 per diluted share, a net income and earnings per share increase of 20.8 and 16.1 percent, respectively, from first quarter fiscal 2001 net income of $12.7 million, or $.31 per diluted share. The Company completed the implementation of the new accounting standard associated with the discontinuance of amortization of goodwill, effective July 1, 2001, as discussed in Note 2 to the Consolidated Financial Statements. 14
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. <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------ ------ <S> <C> <C> Company-owned service revenues (1) 69.9% 70.6% Company-owned product revenues (1) 30.1 29.4 Franchise revenues: Royalties and fees 2.9 3.0 Product sales 1.5 1.3 Company-owned operations: Profit margins on service (2) 43.2 42.8 Profit margins on product (3) 47.0 45.9 Direct salon (1) 9.3 8.8 Rent (1) 14.1 13.9 Depreciation (1) 3.4 3.3 Direct salon contribution (1) 17.6 17.7 Selling, general and administrative 10.8 10.4 Depreciation and amortization (4) 0.7 1.6 Operating income 8.6 8.3 Income before income taxes 7.3 6.8 Net income 4.4 4.1 </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 (4) See Note 2 to the financial statements regarding discontinuation of goodwill amortization, effective July 1, 2001, and comparative financial information. 15
RESULTS OF OPERATIONS REVENUES Revenues for the first quarter of fiscal 2002 grew to a record $349.7 million, an increase of $38.9 million or 12.5 percent, over the same period in fiscal 2001. Approximately 44 percent of this increase is attributable to salon acquisitions, with the remaining increase primarily due to net salon openings and same-store sales increases. For the first quarter of fiscal 2002 and 2001, respectively, revenues by division were as follows: <TABLE> <CAPTION> 2001 2000 -------- -------- (Dollars in thousands) <S> <C> <C> Domestic: Regis Salons $102,852 $ 96,327 Strip Center Salons (primarily Supercuts and Cost Cutters) 94,367 78,728 MasterCuts 40,895 38,398 Trade Secret 47,773 45,587 SmartStyle 40,175 28,162 International 23,606 23,552 -------- -------- $349,668 $310,754 ======== ======== </TABLE> Included in the table above are franchise revenues of $15,447 and $13,450 for the three months ended September 30, 2001 and 2000, respectively. During the first quarter of fiscal 2002, same-store sales from all domestic company-owned salons open more than 12 months increased 3.2 percent, compared to an increase of 5.0 percent in fiscal 2001. Same-store sales increases achieved during the first three months of fiscal 2002 and 2001 were driven primarily by a shift in the mix of service sales, increased customer transactions and market based price increases in certain salon divisions. A total of 30.1 million customers were served system-wide in the first three months of fiscal 2002 compared to 28.0 million customers served during the same period of fiscal 2001. System-wide sales, inclusive of non-consolidated sales generated from franchisee salons, increased to $513.2 million for the first quarter of fiscal 2002, representing an increase of 12.7 percent over the same period last year. System-wide same-store sales increased 3.8 percent and 5.2 percent in the first quarter of fiscal 2002 and 2001, respectively. SERVICE REVENUES. Service revenues in the first quarter of fiscal 2002 grew to $233.6 million, an increase of $23.7 million or 11.3 percent, over the same period in fiscal 2001. The increase in service revenues is primarily a result of salon acquisitions, accelerated new salon construction and same-store sales growth. 16
PRODUCT REVENUES. Product revenues in the first quarter of fiscal 2002 grew to $100.6 million, an increase of $13.2 million, or 15.1 percent, over the same period in fiscal 2001. This increase continues a trend of escalating product revenues due to strong product same-store sales growth of 6.7 percent in the first quarter of fiscal 2002, a reflection of the continuous focus on product awareness, training and acceptance of national label merchandise and opening additional Trade Secret salons through new construction or acquisitions. Product revenues as a percent of total company-owned revenues increased to 30.1 percent for the first quarter of fiscal 2002 compared to 29.4 percent for the same period a year ago. 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 $15.5 million in the first quarter of fiscal 2002, compared to $13.5 million for the same period of fiscal 2001. The increase in franchise revenues is primarily the result of increased sales of product to franchisee salons. COST OF REVENUE The aggregate cost of service and product revenues for company-owned salons in the first quarter of fiscal 2002 was $185.9 million compared to $167.5 million in the same period in fiscal 2001. The resulting combined gross margin percentages for the first quarter of fiscal 2002 improved 70 basis points to 44.4 percent of company-owned revenues compared to 43.7 percent in the same period in fiscal 2001. This overall improvement was due to improvement in service and retail product margins. Service margins improved to 43.2 percent in the first quarter of fiscal 2002, representing a 40 basis point improvement over service margins of 42.8 percent in the same period of fiscal 2001. The improvement is primarily a result of increased efforts to control payroll and payroll related costs in the Company's International and fixed cost payroll divisions (MasterCuts and Strip Center Salons, including Supercuts). Product margins improved 110 basis points to 47.0 percent in the first quarter of fiscal 2002 from 45.9 percent in the same period of fiscal 2001. This improvement is the result of a shift in the Company's mix of products sold. Beginning in the latter portion of fiscal 2001, the product mix changed to consist more heavily of products with a higher profit margin. Further, product margins in the first quarter of fiscal 2001 were adversely impacted by retail discounting associated with the introduction of new packaging for several different product lines. 17
DIRECT SALON This expense category includes direct costs associated with salon operations such as advertising, promotion, insurance, telephone and utilities. For the first quarter of fiscal 2002, direct salon expense of $31.2 million increased to 9.3 percent of company-owned revenues from 8.8 percent when compared to the same period a year ago. The current year increase of 50 basis points is primarily a result of higher utility and workers' compensation costs. RENT Rent expense for the first quarter of fiscal 2002 was $47.2 million or 14.1 percent of company-owned revenues, compared to $41.3 million or 13.9 percent of company-owned revenues in the same period in fiscal 2001. The increase in rent expense as a percentage of company-owned revenues in the first three months of fiscal 2002 is primarily a result of higher common area maintenance costs relative to same-store sales increases. DEPRECIATION - SALON LEVEL Depreciation expense at the salon level remained relatively consistent in the first quarter of fiscal 2002 at 3.4 percent of revenues, compared to 3.3. percent in the same period of fiscal 2001. DIRECT SALON CONTRIBUTION For reasons previously discussed, direct salon contribution, representing company-owned salon revenues less associated operating expenses, increased in the first quarter of fiscal 2002 to $58.7 million compared to $52.6 million. As a percent of sales, direct salon contribution decreased ten basis points to 17.6 percent of company-owned revenues. 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 $37.6 million, or 10.8 percent of total revenues in the first quarter of fiscal 2002, compared to $32.3 million, or 10.4 percent of total revenues in the same period in fiscal 2001. This 40 basis point increase is primarily due to costs associated with closing the Company's Minneapolis distribution center, as well as the timing of promotional spending for the holiday season. Further, same-store sales increases were lower in the first quarter of fiscal 2002 as compared to the corresponding period of the prior year which contributed to the increase in this fixed cost category as a percent of revenues. DEPRECIATION AND AMORTIZATION - CORPORATE Corporate depreciation and amortization decreased to 0.7 percent of total revenues in the first quarter of fiscal 2002, compared to 1.6 percent in the same period in fiscal 2001. This decrease is related to implementation of FAS No. 142 in July 2001, which discontinues the amortization of acquired goodwill, as discussed in Note 2 to the Consolidated Financial Statements. 18
OPERATING INCOME Operating income in the first quarter of fiscal 2002 improved to $30.2 million, or 8.6 percent of total revenue, an increase of $4.4 million or 17.0 percent over the same period in fiscal 2001. INTEREST Interest expense in the first quarter of fiscal 2002 declined to $4.8 million, representing 1.4 percent of total revenues, compared to $5.1 million, or 1.6 percent of total revenues in the same period in fiscal 2001. Interest expense as a percent of total revenues has decreased due to lower interest rates in fiscal 2002 when compared to the same period a year ago. INCOME TAXES The Company's annual effective income tax rate for the first three months of fiscal 2002 was 39.7 percent compared to 39.5 percent in the same period a year ago. Management expects the underlying effective tax rate for all of fiscal 2002 to fall between 39 and 40 percent. NET INCOME Net income in the first quarter of fiscal 2002 grew to $15.4 million, or $.36 per diluted share, compared to $12.7 million, or $.31 per diluted share in the same period in fiscal 2001. The increase in earnings per diluted share primarily resulted from sales increases, improved gross margins and the change in accounting for goodwill, partially offset by higher fixed costs. EFFECTS OF INFLATION The Company primarily compensates its Regis and International salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of revenues to remain relatively constant. Accordingly, this provides the Company certain protection against inflationary increases as payroll expense and related benefits (the Company's major expense components) are, with respect to these divisions, variable costs of sales. The Company does not believe inflation, due to its low rate, has had a significant impact on the results of operations associated with hourly paid hairstylists for the 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. 19
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 2002 increased to $36.2 million compared to $28.0 million during the same period in fiscal 2001. The increase between the two periods is primarily due to a change in working capital. CAPITAL EXPENDITURES AND ACQUISITIONS During the first three months of fiscal 2002, the Company had worldwide capital expenditures of $21.3 million, of which $1.7 million related to acquisitions. The Company constructed 90 new corporate salons in the first quarter of fiscal 2002, including 14 new Regis Salons, 12 new MasterCuts salons, 8 new Trade Secret salons, 39 new SmartStyle salons, 11 new Strip Center Salons and 6 new International salons, and completed 40 major remodeling projects. All capital expenditures during the first three months of fiscal 2002 were funded by the Company's operations and borrowings under its revolving credit facility. The Company anticipates its worldwide salon development program for fiscal 2002 will include approximately 410 new salons and 150 major remodeling and conversion projects. It is expected that expenditures for these new salons and other projects will be approximately $70 to $75 million in fiscal 2002, excluding capital expenditures associated with acquisitions. During the first quarter of fiscal 2002, the Company had worldwide expenditures of $16.9 million related to the acquisition of 553 salons, including 517 franchised salons. SALON DEVELOPMENT PROGRAM As a part of its salon development program, the Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continues to enter into transactions to acquire established hair care salons and businesses. FINANCING 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 three months of fiscal 2002, the Company paid dividends totaling $1.2 million, or $.03 per share. On October 24, 2001, the Board of Directors of the Company declared a $.03 per share quarterly dividend payable on November 21, 2001 to shareholders of record on November 7, 2001. 20
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. 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 October 25, 2001 21
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 September 30, 2001, the Company had $152 million of floating and $121 million of fixed 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 September 30, 2001, the Company has entered into interest rate swap agreements covering $66.8 million of the floating rate obligations, as discussed in Note 3 to the Consolidated Financial Statements. The Company has also entered into a cross currency swap with a notional amount of $21.8 million to hedge its foreign currency exposure in certain of its net investments. 22
Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders On October 23, 2001, at the annual meeting of the shareholders of the Company, a vote on the election of the Company's directors took place with the following results: <TABLE> <CAPTION> FOR WITHHOLD AUTHORITY ---------- ------------------ <S> <C> <C> Rolf F. Bjelland 35,066,366 1,391,069 Paul D. Finkelstein 30,596,823 5,860,612 Christopher A. Fox 30,596,951 5,860,484 Thomas L. Gregory 34,906,704 1,550,731 Van Zandt Hawn 35,066,066 1,391,369 Susan Hoyt 35,066,241 1,391,194 David B. Kunin 34,837,644 1,619,791 Myron Kunin 30,814,047 5,643,388 </TABLE> 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 September 30, 2001: None. 23
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: November 9, 2001 By: /s/ Randy L. Pearce ------------------------------------- Randy L. Pearce Executive Vice President Chief Financial and Administrative Officer Signing on behalf of the registrant and as principal accounting officer 24