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FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For Quarter Ended December 31, 1996 Commission file number 011230
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Regis Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0749934
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7201 Metro Boulevard, Edina, Minnesota 55439
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(Address of principal executive offices) (Zip Code)
(612)947-7777
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 7, 1997:
Common Stock, $.05 par value 22,601,600
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Class Number of Shares
1
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REGIS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements:
Balance Sheet as of June 30, 1996
and December 31, 1996 3
Statement of Operations for the three
months ended December 31, 1995 and 1996 4
Statement of Operations for the six
months ended December 31, 1995 and 1996 5
Statement of Cash Flows for the six
months ended December 31, 1995 and 1996 6
Notes to Consolidated Financial Statements 7-12
Review Report of Independent Accountants 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29-31
Signature 32
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 1996 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, 1996 DECEMBER 31, 1996
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,558 $ 4,868
Accounts receivable 10,640 12,501
Inventories 32,507 36,674
Deferred income taxes 6,687 8,993
Other current assets 9,691 8,056
-------- --------
Total current assets 67,083 71,092
Property and equipment, net 126,821 130,306
Goodwill 93,352 95,779
Other assets 16,698 18,984
-------- --------
Total assets $303,954 $316,161
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital lease
obligations, current portion $ 40,477 $ 17,661
Accounts payable 20,369 23,893
Accrued expenses 40,768 41,837
Restructuring accruals 6,493 9,277
-------- --------
Total current liabilities 108,107 92,668
Long-term debt and capital lease obligations 61,904 93,502
Other noncurrent liabilities 6,308 6,204
Contingencies (Note 7)
Shareholders' equity:
Capital stock, $.05 par value; authorized,
50,000,000 shares; issued and outstanding,
22,537,161 common shares at June 30, 1996
and 22,601,300 common shares at December
31, 1996 1,127 1,130
Additional paid-in capital 104,634 105,368
Retained earnings 21,874 17,289
-------- --------
Total shareholders' equity 127,635 123,787
-------- --------
Total liabilities and
shareholders' equity $303,954 $316,161
-------- --------
-------- --------
See accompanying notes to unaudited consolidated financial statements.
3
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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996
---- ----
Revenues:
Company-owned operations:
Service $109,637 $120,955
Product 39,183 48,862
-------- --------
148,820 169,817
Franchise revenues 6,496 6,641
-------- --------
155,316 176,458
Operating expenses:
Cost of sales:
Service 65,388 70,813
Product 21,094 26,699
Rent 20,546 23,510
Selling, general and administrative 32,051 36,691
Depreciation and amortization 6,249 7,039
Merger and transaction costs 14,322
Provision for restructuring
activities 11,965 4,409
Other 1,263 941
-------- --------
158,556 184,424
Operating loss (3,240) (7,966)
Other income (expense):
Interest (2,484) (2,524)
Nonrecurring gains 140 222
Other, net 74 95
-------- --------
Loss before income taxes (benefit) (5,510) (10,173)
Income taxes (benefit) (1,695) (1,293)
-------- --------
Net loss $ (3,815) $ (8,880)
-------- --------
-------- --------
Net loss per share $ (0.17) $ (0.38)
-------- --------
-------- --------
Weighted average common and common
equivalent shares outstanding 22,649 23,284
-------- --------
-------- --------
See accompanying notes to unaudited consolidated financial statements.
4
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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996
---- ----
Revenues:
Company-owned operations:
Service $210,047 $242,495
Product 72,659 91,243
-------- --------
282,706 333,738
Franchise revenues 13,185 13,325
-------- --------
295,891 347,063
Operating expenses:
Cost of sales:
Service 123,815 140,824
Product 39,228 50,092
Rent 38,115 46,579
Selling, general and administrative 61,890 70,710
Depreciation and amortization 11,971 13,928
Merger and transaction costs 14,322
Provision for restructuring activities 11,965 4,409
Other 3,094 1,805
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290,078 342,669
Operating income 5,813 4,394
Other income (expense):
Interest (4,720) (4,974)
Nonrecurring gains 277 440
Other, net 109 305
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Income before income taxes 1,479 165
Income taxes 1,276 4,504
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Net income (loss) $ 203 $ (4,339)
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-------- --------
Net income (loss) per share $ 0.01 $ (0.19)
-------- --------
-------- --------
Weighted average common and common
equivalent shares outstanding 22,535 23,300
-------- --------
-------- --------
See accompanying notes to unaudited consolidated financial statements.
5
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REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 203 $ (4,339)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 12,186 14,091
Merger and transaction costs 14,322
Provision for restructuring 11,965 4,409
Deferred income taxes (5,010) (4,084)
Changes in assets and liabilities,
exclusive of investing and
financing activities 3,191 (11,997)
Other (961) 755
------- --------
Net cash provided by operating
activities 21,574 13,157
------- --------
Cash flows from investing activities:
Capital expenditures (17,168) (17,333)
Purchases of salon assets, net of
cash acquired and certain
obligations assumed (9,417) (6,049)
------- --------
Net cash used in investing
activities (26,585) (23,382)
------- --------
Cash flows from financing activities:
Borrowings on line of credit 88,862 94,514
Payments on line of credit (86,500) (117,600)
Proceeds from issuance of long-term
debt 5,985 37,000
Repayment of long-term debt and
capital lease obligations (471) (6,309)
Dividends paid (574) (813)
Proceeds from issuance of common stock 4,296 737
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Net cash provided by financing
activities 11,598 7,529
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Effect of exchange rate changes on cash (2) 6
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Increase (decrease) in cash and cash
equivalents 6,585 (2,690)
Cash and cash equivalents:
Beginning of period 3,182 7,558
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End of period $ 9,767 $ 4,868
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------- --------
Changes in assets and liabilities,
exclusive of investing and
financing activities:
Accounts receivable $ 1,467 $ (1,512)
Inventories 259 (3,170)
Other current assets (2,894) 704
Accounts payable 1,155 3,294
Accrued expenses 3,204 (9,688)
Restructuring accruals (1,625)
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$ 3,191 $(11,997)
------- --------
------- --------
See accompanying notes to unaudited consolidated financial statements.
6
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REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The unaudited consolidated statement of operations for the three and
six months ended December 31, 1995 and 1996, reflects, in the opinion
of management, all adjustments (which, with the exception of the matters
discussed in Note 3, 4 and 5 herein, include only normal recurring
adjustments) necessary to fairly present the results of operations for
the interim periods. The results of operations for any interim period
are not necessarily indicative of results for the full year.
The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The unaudited interim consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements which are incorporated by reference
in Regis Corporation's Annual Report on Form 10-K for the year ended
June 30, 1996 and Supercuts, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1995. Coopers & Lybrand L.L.P., the Company's
independent accountants, has performed a limited review of the
financial data included herein. Their report on such review
accompanies this filing.
Financial data for all periods presented reflect the retroactive
effects of the October 1996 merger with SUPERCUTS, INC. (SUPERCUTS)
which has been accounted for as a pooling-of-interests (see Note 3).
The financial statements have been prepared by combining the current
and historical financial statements of Regis Corporation with those of
SUPERCUTS for each of the periods presented.
COST OF PRODUCT SALES. On an interim basis, product costs are
determined by applying an estimated gross profit margin.
ASSET IMPAIRMENT ASSESSMENTS. On a quarterly basis, the Company
measures and evaluates the recoverability of its tangible and
intangible noncurrent assets using undiscounted cash flow analyses.
USE OF ESTIMATES. The significant areas which require the use of
management's estimates relate to accruals for restructuring activity,
principally the portion associated with litigation and store
closures.
2. NONRECURRING GAINS:
During the second quarters of fiscal 1997 and 1996, the Company
received $222,000 and $140,000, respectively, of principal payments
from Premier Salons. For the six month periods ended December 31,
1996 and 1995, the payments received totaled $440,000 and $277,000,
respectively. The Company had previously written off the related
receivable, and accordingly, is recording all subsequent principal
payments as nonrecurring gains.
7
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3. MERGERS AND ACQUISITIONS:
SUPERCUTS, INC.
Effective October 25, 1996, the Company received shareholder approval
for the merger agreement with SUPERCUTS in a stock-for-stock merger
transaction. SUPERCUTS is a national operator of approximately 420
company-owned, and franchisor of approximately 740 affordable hair
care salons at December 31, 1996. Each SUPERCUTS shareholder received
0.40 shares of the Company's common stock in exchange for each
SUPERCUTS common share, or approximately 4,550,000 shares of the
Company's common stock on a fully diluted basis. The transaction has
been accounted for as a pooling-of-interests.
As a result of the merger, the Company recorded a merger and
transaction charge of $14,322,000, on a pre-tax basis, during the
quarter ended December 31, 1996. This charge included $7,717,000 for
professional fees including investment banking, legal, accounting and
miscellaneous transaction costs, $3,465,000 for severance, and a
non-cash charge of $3,140,000 for the write-off of duplicative operating
assets.
The severance accrual of $3,465,000 covers the termination of
approximately 105 SUPERCUTS employees who had duplicate positions in
corporate office functions. These corporate overhead departments
included finance and accounting, human resources, legal, management
information systems, purchasing, real estate and marketing. No
severance related payments have been made as of December 31, 1996.
As of December 31, 1996, $4,598,000 (which includes the severance accrual
of $3,465,000 and the professional fees accrual of $1,133,000) has been
included in accrued expenses in the balance sheet, and $2,968,000 has
been netted against the related property and equipment in the balance
sheet.
The SUPERCUTS transaction was accounted for as a pooling-of-interests;
therefore, prior financial statements have been restated to reflect
this merger. To effect the restatement, significant accounting
adjustments were necessary to conform the accounting practices of
SUPERCUTS to those of Regis. A detailed description of the nature of
these conforming accounting adjustments, as well as unaudited pro forma
information for periods ended June 30, 1996, have been included in the
registration statement filed by the Company on Form S-4 dated
September 24, 1996 with the Securities and Exchange Commission. The
conforming accounting adjustments included adjustments to previously
reported SUPERCUTS net income (loss) and shareholders' equity due to
consolidation of previously unconsolidated investor/franchisee stores,
change in goodwill amortization periods and reversal of the
capitalization of certain development costs.
Prior to the merger, SUPERCUTS' fiscal year for financial reporting
purposes ended on December 31. No material adjustment to retained
earnings was necessary to conform with Regis' year end. In addition,
for periods preceding the merger, there were no intercompany
transactions which required elimination from the combined consolidated
results.
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Revenues and net income for the combining entities for the three and
six month periods ended December 31, 1995 were as follows (dollars in
thousands):
Supercuts,
Three months ended: Regis as conformed Combined
------------------- ----- ------------ --------
Revenues $126,604 $28,712 $155,316
Net income (loss) 5,175 (8,990) (3,815)
Six months ended:
-----------------
Revenues $238,324 $57,567 $295,891
Net income (loss) 9,352 (9,149) 203
OTHER ACQUISITIONS
The following represents the unaudited pro forma results of operations
of the Company (restated for the inclusion of SUPERCUTS results) as if
purchase acquisitions occurring in fiscal 1996, primarily the U.K. and
the WAL-MART acquisitions, as more fully described under Management's
Discussion and Analysis of Financial Condition and Results of Operations,
and the related common stock activity had occurred at the beginning of
fiscal 1996.
(Dollars in thousands, except per share amounts)
------------------------------------------------
Three months ended Six months ended
December 31, 1995 December 31, 1995
------------------- ------------------
Revenues $170,918 $333,090
Income (loss) before income taxes (5,979) 1,510
Net income (loss) (4,135) 213
Net income (loss) per share $ (0.18) $ 0.01
These pro forma results may not be indicative of results that actually
would have occurred had the acquisitions taken place at the beginning
of the periods presented or of results which may occur in the future.
4. RESTRUCTURING:
During the three months ended December 31, 1995, a majority of the
Board of Directors of SUPERCUTS concluded that it was appropriate to
modify SUPERCUTS' strategic growth plans. It was decided that future
expansion efforts would focus primarily on expanding with existing
franchisees in existing franchise markets. Additionally, because of
the significant operating losses and negative cash flow from certain
salons, it was decided that salons in certain markets would be closed or
sold to franchisees or other third parties. The anticipated date of
completion of the restructuring is December 1997.
9
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The 1996 restructuring charge related to the activities described
above totalled approximately $11,965,000 (as adjusted from the
$18,925,000 originally reported due to conforming accounting
adjustments described previously). This charge was recorded in the
quarter ended December 31, 1995. Of the total charge of $11,965,000,
$4,384,000 was related to non-cash activity (i.e. primarily the write-off
of assets that were purchased before the merger and do not require a cash
outlay for disposal).
In order to revise estimates included in the restructuring charge for
legal and professional fees, an additional $858,000 was charged against
earnings in the quarter ended June 30, 1996. In the quarter ended
December 31, 1996, an additional $2,909,000 was charged against earnings
to revise restructuring charge estimates made in fiscal 1996 and
$1,500,000 was charged against earnings associated with identified Regis
salon closures. The changes in the estimated 1996 restructuring charge
represent changes in accounting estimates associated with litigation
matters, legal and professional fees and lease obligations.
5. INCOME TAXES:
The Company's effective tax rate for the three and six month periods
ended December 31, 1996 was negatively affected by certain
nondeductible merger and transaction costs associated with the
SUPERCUTS merger.
Additionally, as reflected in the Statement of Operations for
SUPERCUTS for the quarter ended September 30, 1996, SUPERCUTS recorded
as part of its September 30, 1996 income tax provision, a $1,500,000
change in estimate associated with income tax matters related to years
prior to 1996. This change in estimate includes tax changes resulting
from the completion of an Internal Revenue Service examination in the
quarter ended September 30, 1996. Accordingly, this change in estimate
is included in the financial results for the combined companies of Regis
and SUPERCUTS for the six months ended December 31, 1996.
The Company's effective income tax rate, exclusive of the impact of
nondeductible merger and transaction costs and the $1,500,000 change
in estimate, for fiscal 1997 is estimated to be approximately 42
percent, consistent with that incurred during fiscal 1996.
10
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6. FINANCING ARRANGEMENTS:
As previously discussed, on October 25, 1996, the Company completed
the merger with SUPERCUTS, Inc. which has been accounted for as a
pooling-of-interests. In order to fund transaction costs and other
merger related costs, Regis has borrowed $10,000,000 under a note
bearing interest at a fixed rate of 7.54 percent per annum, with
mandatory repayments of $3,000,000 on July 1, 1998 and 1999 and
$4,000,000 on July 1, 2000. For the purpose of repaying and replacing
SUPERCUTS' existing revolving credit arrangements under terms and
conditions consistent with that of the Company's long-term borrowings
from financial institutions, the Company has borrowed $22,000,000
note bearing interest at a fixed rate of 7.8 percent per annum with
mandatory repayments of $10,000,000 on July 1, 2004 and $12,000,000 on
July 1, 2006.
In addition, in December 1996, the Company has borrowed $5,000,000 under
a note bearing interest at a fixed rate of 7.16 percent per annum with
annual mandatory repayments of $1,000,000 until 2002, to have funds
available to help finance franchisee expansion in the SUPERCUTS division.
The senior term notes contain covenants, including limitations on
incurrence of debt, granting of liens, investments, merger or
consolidation, and transactions with affiliates. In addition, the
Company must maintain specified interest coverage and debt-to-equity
ratios.
7. CONTINGENCIES:
On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation
("DEL"), a Nevada corporation, which the Company believes is wholly
owned by Mr. Lipson, brought legal action against SUPERCUTS, INC.,
("SUPERCUTS") a wholly owned subsidiary of the Company, and certain
SUPERCUTS directors and officers. The initial lawsuit, prior to
subsequent amendments, sought payment of $3,000,000, allegedly due to
DEL pursuant to a Consulting Agreement dated as of August 22, 1995,
between SUPERCUTS and DEL. The initial lawsuit also sought
unspecified damages allegedly sustained by Mr. Lipson as a result of a
delay in his ability to sell 1,508,220 shares of SUPERCUTS' common
stock, which were sold by him between February 20 and February 28,
1996, because of SUPERCUTS' refusal to remove restrictive legends from
certificates representing such stock. According to his lawsuit, Mr.
Lipson sold the number of shares noted for an aggregate of $7,800,000,
or a reported average price of $5.20 per share. SUPERCUTS' common
stock price range for the month of February 1996, was a high of
7-3/8, a low of 5-1/8 and a close of 5-1/8. All matters that were heard
in the United States District Court for the Northern District of
Illinois, Eastern Division, Case No. 96C-0822, are currently on appeal
in the United States Court of Appeals for the Seventh Circuit.
In August 1996, Mr. Lipson has also brought legal action against
SUPERCUTS in the Circuit Court of Cook County, Illinois alleging that
SUPERCUTS has defamed him. Mr. Lipson requests a judgment "in excess
of $200,000,000." The court has set a hearing date of June 18, 1997
with respect to this matter.
Mr. Lipson has also filed suit against SUPERCUTS in the Court of
Chancery of the State of Delaware seeking advancement of expenses
incurred by him in certain litigation and other proceedings. On
December 10, 1996, the Delaware Court ruled that Mr. Lipson is
entitled to an advancement of certain expenses incurred by him, but
did not establish the amount of the advancement.
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While additional future charges, if any, related to this litigation could
have a material adverse impact on the Company's net income in the
quarterly period in which they would be recorded, management of the
Company believes, based on the advice of counsel, that such additional
charges, if any, will not have a material adverse effect on the
consolidated financial position or annual results of operations of the
Company.
8. SHAREHOLDER RIGHTS PLAN:
In December 1996, the Board of Directors adopted a shareholders rights
plan and declared a dividend of one preferred share purchase right on
each outstanding share of common stock.
The rights become exercisable only following the acquisition by a
person or group, without the prior consent of the Board of Directors,
of 20 percent or more of the Company's voting stock, or following the
announcement of a tender offer or exchange offer to acquire any
interest of 20 percent or more. If the rights become exercisable,
they entitle all holders, except the take-over bidder, to purchase
stock in the Company at a bargain price.
12
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REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Regis Corporation:
We have reviewed the accompanying consolidated balance sheets of Regis
Corporation as of June 30, 1996 and December 31, 1996, and the related
consolidated statements of operations for the three and six months ended
December 31, 1995 and 1996, and the consolidated statements of cash flows for
six months ended December 31, 1995 and 1996. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 14, 1997
13
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Regis Corporation, based in Minneapolis, is the largest owner,
operator and franchisor of hair and retail product salons in the world. The
Regis worldwide operations include 3,218 hairstyling salons at December 31, 1996
operating in six divisions: REGIS HAIRSTYLISTS, SUPERCUTS, MASTERCUTS, TRADE
SECRET, WAL-MART and INTERNATIONAL. Worldwide operations include 737 franchised
SUPERCUTS salons and 62 other franchised salons operating primarily in the TRADE
SECRET division. The Company has more than 25,000 employees worldwide.
During the second quarter of fiscal 1997, the Company's consolidated
revenues increased 13.6 percent to a record $176,458,000. Operating income grew
23.4 percent to $10,765,000 before merger and transaction costs and provision
for restructuring activities (special charges) of $18,731,000 related to the
SUPERCUTS merger described later, as well as continuing restructuring activities
of that division and restructuring charges related to Regis. Exclusive of
nonrecurring gains and the special charges described above, earnings per share
increased 31.3 percent in the second quarter of fiscal 1997 to $.21 per share,
compared to $.16 per share in the same period the prior year.
During the first six months of fiscal 1997, the Company's consolidated
revenues increased 17.3 percent to a record $347,063,000. Operating income grew
30.1 percent to $23,125,000 before special charges of $18,731,000 related to the
SUPERCUTS' merger, as well as continuing restructuring activities of that
division and restructuring charges related to Regis. Exclusive of nonrecurring
gains and special charges, earnings per share increased 39.4 percent in the
first half of fiscal 1997 to $.46 per share, compared to $.33 per share in the
same period the prior year.
Financial data for all periods presented reflect the retroactive
effects of the October 1996 merger with SUPERCUTS which has been accounted
for as a pooling-of-interests. The financial statements have been prepared
by combining the current and historical financial statements of Regis
Corporation with those of SUPERCUTS for each of the periods presented.
14
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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 percentage of sales. The percentages are computed as a
percentage of total Company revenues, except as noted.
WORLDWIDE OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31,
------------------------------------
THREE MONTHS SIX MONTHS
----------------- -----------------
1995 1996 1995 1996
-------- ------- --------- ------
Company-owned service revenues (1) 73.7% 71.2% 74.3% 72.7%
Company-owned product revenues (1) 26.3 28.8 25.7 27.3
Franchise revenues 4.2 3.8 4.5 3.8
Company-owned operations:
Profit margins on service (2) 40.4 41.5 41.1 41.9
Profit margins on product (3) 46.2 45.4 46.0 45.1
Rent (1) 13.8 13.8 13.5 14.0
Depreciation and amortization (1) 4.2 4.1 4.2 4.2
Selling, general and administrative 20.6 20.8 20.9 20.4
Operating income (loss) (2.1) (4.5) 2.0 1.3
Income (loss) before taxes (3.5) (5.8) 0.5 0.0
Net income (loss) (2.5) (5.0) 0.1 (1.3)
Operating income, excluding special
charges 5.6 6.1 6.0 6.7
Earnings, excluding special charges and
nonrecurring gains 2.3 2.7 2.5 3.1
(1) Computed as a percentage of company-owned revenue.
(2) Computed as a percentage of service revenue.
(3) Computed as a percentage of product revenue.
THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995:
REVENUES. Revenues for the second quarter of fiscal 1997 grew to a record
$176,458,000, representing an increase of $21,142,000, or 13.6 percent, over the
same period in fiscal 1996. Approximately 75 percent of the increase is
attributable to salon acquisitions occurring subsequent to the second quarter of
fiscal 1996, with the remaining increase due to net salon openings, and
increases in customers served and product sales. REGIS HAIRSTYLISTS, SUPERCUTS,
MASTERCUTS, TRADE SECRET and WAL-MART salons in the United States and Canada
(Domestic salons) accounted for $18,281,000 of the total revenue increase. The
remainder of the revenue increase of $2,861,000 was related to the Company's
salon operations in the United
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Kingdom, South Africa, Switzerland, Mexico, Ireland and France (International
salons) and was largely influenced by the Company's salon acquisitions
subsequent to the second quarter of fiscal 1996 in the United Kingdom.
For the second quarter of fiscal 1997, revenues from REGIS HAIRSTYLISTS
were $69,153,000, an increase of 2.9 percent, and revenues from SUPERCUTS
were $28,349,000, a slight decrease of 1.3 percent, which reflects same-store
sales growth offset by restructuring activities that decreased the number of
company-owned salons by selling some to franchisees and closing others.
Revenues from MASTERCUTS were $23,800,000, an increase of 11.9 percent, TRADE
SECRET company-owned revenues were $23,638,000, an increase of 41.5 percent,
revenues from WAL-MART salons, a division acquired in June 1996, were
$7,547,000, and International salon revenues were $23,000,000, an increase of
14.2 percent, principally due to acquisitions subsequent to the second
quarter of fiscal 1996.
During the second quarter of fiscal 1997, same-store sales from Domestic
company-owned salons open more than twelve months increased 2.2 percent,
compared to a 3.0 percent same-store sales increase during the same period the
previous year. Same-store sales for the United Kingdom salons (U.K. salons),
the primary component of International salons, increased 1.2 percent during the
quarter. Same-store sales increases achieved during the second quarter of
fiscal 1997 are primarily due to an increase in the number of customers served.
The Company utilizes an audiovisual-based training system in its salons.
Management believes this training system provides its employees with improved
customer service and technical skills, and positively contributes to the
increase in customers served.
System-wide sales, inclusive of sales generated from franchisee salons,
increased 11.1 percent from $212,321,000 to $235,778,000 for the three months
ended December 31, 1995, and 1996, respectively. This increase in system-wide
sales is the result of the total number of stores in the system increasing over
the past twelve months as well as same-store sales increases. System-wide
comparable store sales for the second quarter of 1997 increased 2.2 percent.
SERVICE REVENUES. Service revenues in the second quarter of fiscal 1997
were $120,955,000, an increase of $11,318,000 or 10.3 percent, over the same
period in fiscal 1996. This increase was primarily due to acquisitions, net
salon openings and same-store sales growth.
PRODUCT REVENUES. Product revenues in the second quarter of fiscal 1997
were $48,862,000, an increase of $9,679,000, or 24.7 percent, over the same
period in fiscal 1996. The TRADE SECRET retail product salon operations
contributed $5,824,000 of this overall increase, reflecting salon acquisitions
occurring subsequent to the second quarter of fiscal 1996 and net salon
openings. Product revenues for the Company's REGIS HAIRSTYLISTS, SUPERCUTS,
MASTERCUTS and WAL-MART salons increased $2,763,000 and represented 19.7 percent
of their second quarter fiscal 1997 revenue mix, compared to 19.2 percent in the
same period of fiscal 1996. This increase in product revenue mix reflects the
impact of the WAL-MART salons acquisition, which have a higher percentage of
product revenue, increased customer awareness, further acceptance of national
brand salon merchandise, and sales training of Company employees. The balance of
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the product revenues increase relates to International salons, largely caused by
salon acquisitions subsequent to the second quarter of fiscal 1996.
SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995:
REVENUES. Revenues for the first six months of fiscal 1997 grew to a
record $347,063,000, representing an increase of $51,172,000, or 17.3 percent,
over the same period in fiscal 1996. Approximately 75 percent of the increase
is attributable to salon acquisitions occurring subsequent to the second quarter
of fiscal 1996, with the remaining increase due to net salon openings, and
increases in customers served and product sales. REGIS HAIRSTYLISTS, SUPERCUTS,
MASTERCUTS, TRADE SECRET and WAL-MART salons in the United States and Canada
(Domestic salons) accounted for $36,641,000 of the total revenue increase. The
remainder of the revenue increase of $14,531,000 was related to the Company's
salon operations in the United Kingdom, South Africa, Switzerland, Mexico and
France (International salons) and was largely influenced by the Company's salon
acquisitions in fiscal 1996 in the United Kingdom.
For the first six months of fiscal 1997, revenues from REGIS HAIRSTYLISTS
were $136,325,000, an increase of 2.5 percent, revenues from SUPERCUTS were
$59,096,000, an increase of 2.7 percent which reflects same-store sales
growth offset by restructuring activities that decreased the number of
company-owned salons by selling some to franchisees and closing others,
revenues from MASTERCUTS were $46,583,000, an increase of 13.9 percent, TRADE
SECRET company-owned revenues were $42,818,000, an increase of 33.1 percent,
revenues from WAL-MART salons were $14,974,000, and International salon
revenues were $45,335,000, an increase of 47.2 percent, principally due to
acquisitions in fiscal 1996.
During the first six months of fiscal 1997, same-store sales from Domestic
company-owned salons open more than twelve months increased 2.4 percent,
compared to a 3.6 percent same-store sales increase during the same period the
previous year. Same-store sales for the United Kingdom salons (U.K. salons),
the primary component of International salons, increased 2.8 percent during the
six months ended December 31, 1996. Same-store sales increases achieved during
the first six months of fiscal 1997 are primarily due to an increase in the
number of customers served.
System-wide sales, inclusive of sales from franchisee salons, increased
13.7 percent from $408,901,000 to $464,968,000 for the six months ended December
31, 1995, and 1996, respectively. This increase in system-wide sales is the
result of the total number of stores in the system increasing over the past
twelve months as well as same-store sales increases. System-wide comparable
store sales for the first six months of 1997 increased 2.1 percent.
SERVICE REVENUES. Service revenues in the first six months of fiscal 1997
were $242,495,000, an increase of $32,448,000 or 15.4 percent, over the same
period in fiscal 1996. This increase was primarily due to acquisitions, net
salon openings and same-store sales growth.
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PRODUCT REVENUES. Product revenues in the first six months of fiscal
1997 were $91,243,000, an increase of $18,584,000, or 25.6 percent, over the
same period in fiscal 1996. The TRADE SECRET retail product salon operations
represented $9,678,000 of this overall increase, reflecting salon
acquisitions occurring subsequent to the second quarter of fiscal 1996 and
net salon openings. Product revenues for the Company's REGIS HAIRSTYLISTS,
SUPERCUTS, MASTERCUTS and WAL-MART salons increased $6,216,000 and
represented 19.0 percent of their first six month fiscal 1997 revenue mix,
compared to 18.4 percent in the same period of fiscal 1996. This increase in
product revenues mix reflects the impact of the WAL-MART salons acquisition,
which have a higher percentage of product revenues, increased customer
awareness, further acceptance of national brand salon merchandise, and sales
training of Company employees. The balance of the product revenue increase
relates to International salons, largely caused by salon acquisitions
subsequent to the second quarter of fiscal 1996.
COST OF SALES
THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995:
Cost of service and product sales in the second quarter of fiscal 1997 was
$97,512,000, compared to $86,482,000, in the same period the previous year. The
resulting combined gross margin percentage for the second quarter of fiscal 1997
improved to 42.6 percent of sales compared to 41.9 percent of sales in the same
period the previous year. As further discussed below, this improvement in gross
margin was primarily due to SUPERCUTS, partially offset by slight declines in
REGIS HAIRSTYLISTS, MASTERCUTS and TRADE SECRET gross margins.
Service margins improved to 41.5 percent in the second quarter of fiscal
1997, compared to 40.4 percent in the same period the previous year. The
improvement was due to the continued sales maturation of SUPERCUTS and
benefits of restructuring activities which closed under-performing stores.
This was partially offset by slight declines at REGIS and MASTERCUTS due to
slower same-store sales growth and wage increases at MASTERCUTS, due to the
ripple-effect of the minimum wage increase.
Retail product margins declined to 45.4 percent in the second quarter of
fiscal 1997, compared to 46.2 percent in the same period the previous year. The
decline in product margins was primarily due to the lack of sales leverage on
TRADE SECRET fixed cost payrolls.
SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995:
Cost of service and product sales in the first six months of fiscal 1997
was $190,916,000, compared to $163,043,000, in the same period the previous
year. The resulting combined gross margin percentage for the second quarter of
fiscal 1997 improved to 42.8 percent of sales compared to 42.3 percent of sales
in the same period the previous year. As further discussed below, this
improvement in gross margin was primarily due to SUPERCUTS partially offset by
slight declines in REGIS HAIRSTYLISTS, MASTERCUTS and TRADE SECRET gross
margins.
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Service margins improved to 41.9 percent in the first six months of
fiscal 1997, compared to 41.1 percent in the same period the previous year.
This increase in margin was primarily due to the continued sales maturation
of SUPERCUTS and the benefits of restructuring activities which closed
under-performing stores. This was partially offset by slight declines at
REGIS and MASTERCUTS due to slower same-store sales growth and wage increases
at MASTERCUTS, due to the ripple-effect of the minimum wage increase.
Retail product margins declined slightly to 45.1 percent in the second
quarter of fiscal 1997, compared to 46.0 percent in the same period the previous
year. The decline in product margins was primarily due to the lack of sales
leverage on TRADE SECRET fixed cost payrolls.
RENT EXPENSE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
Rent expense in the second quarter of fiscal 1997 was $23,510,000, or 13.8
percent of revenues, compared to $20,546,000, or 13.8 percent of revenues, in
the same period the previous year.
Rent expense for the first six months of fiscal 1997 was $46,579,000, or
14.0 percent of sales compared to $38,115,000, or 13.5 percent of sales for
1996. The primary reason for the increase as a percentage of sales in the six
month period is due to fiscal 1996 department store salon acquisitions in the
U.K. When compared to Domestic salon operations, the U.K. salon operations have
higher rent expenses, offset by lower selling and administrative expenses,
because certain costs are absorbed by department stores and passed on as rent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995:
Selling, general and administrative (SG&A) expense in the second quarter of
fiscal 1997 was $36,691,000, or 20.8 percent of revenues, compared to
$32,051,000, or 20.6 percent of revenues, in the same period the previous year.
Such expenses include costs directly related to salon operations (such as
advertising, promotion, insurance, telephone and utilities), field supervision
costs (payroll, related taxes and travel) and home office administration costs
(such as warehousing, salaries, occupancy costs and professional fees). The
slight increase was due to certain fixed expenses increasing, such as warehouse
costs and expenses to combine the UK administrative functions coupled with
slower same-store sales growth, especially in TRADE SECRET.
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SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995:
SG&A expense in the first six months of fiscal 1997 was $70,710,000, or
20.4 percent of revenues, compared to $61,890,000, or 20.9 percent of revenues,
in the same period the previous year. As previously discussed, the fiscal 1996
U.K. department store salon acquisitions had a favorable effect on SG&A expense
as a percent of revenues for the six month period. The balance of the
improvement was due to continued sales leveraging of fixed and semi-fixed costs.
DEPRECIATION AND AMORTIZATION
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
Depreciation and amortization expense in the second quarter of fiscal 1997
decreased to 4.1 percent from 4.2 percent of revenues last year. For the first
six months of fiscal 1997 versus fiscal 1996, depreciation and amortization
expense remained constant at 4.2 percent of revenues. Depreciation expense, the
major component within this category, has remained relatively consistent as a
percentage of revenues.
RESTRUCTURING CHARGES
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
During the three months ended December 31, 1995, a majority of the Board
of Directors of SUPERCUTS concluded that it was appropriate to modify
SUPERCUTS' strategic growth plans. It was decided that future expansion
efforts would focus primarily on expanding with existing franchisees in
existing franchise markets. Additionally, because of the significant
operating losses and negative cash flow from certain salons, it was decided
that salons in certain markets would be closed or sold to franchisees or
other third parties. The anticipated date of completion of the restructuring
is December 1997.
The 1996 restructuring charge related to the activities described above
totalled approximately $11,965,000 (as adjusted from the $18,925,000 originally
reported due to conforming accounting adjustments described previously). This
charge was recorded in the quarter ended December 31, 1995. Of the total charge
of $11,965,000, $4,384,000 was related to non-cash activity (i.e. primarily the
write-off of assets that were purchased before the merger and do not require
a cash outlay for disposal).
In order to revise estimates included in the restructuring charge for
legal and professional fees, an additional $858,000 was charged against
earnings in the quarter ended June 30, 1996. In the quarter ended
December 31, 1996, an additional $2,909,000 was charged against earnings to
revise restructuring charge estimates made in fiscal 1996 and $1,500,000 was
charged against earnings associated with identified Regis salon closures. The
changes in the estimated 1996 restructuring charge represent changes in
accounting estimates associated with litigation matters, legal and
professional fees and lease obligations.
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MERGER AND TRANSACTION COSTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
Effective October 25, 1996, the Company received shareholder approval for
the merger agreement with SUPERCUTS in a stock-for-stock merger transaction.
SUPERCUTS is a national operator of approximately 420 company-owned, and
franchisor of approximately 740 affordable hair care salons at December 31,
1996. Each SUPERCUTS shareholder received 0.40 shares of the Company's common
stock in exchange for each SUPERCUTS common share, or approximately 4,550,000
shares of the Company's common stock on a fully diluted basis. The transaction
has been accounted for as a pooling-of-interests.
As a result of the merger, the Company recorded a merger and transaction
charge of $14,322,000, on a pre-tax basis, during the quarter ended December 31,
1996. This charge included $7,717,000 for professional fees including
investment banking, legal, accounting and miscellaneous transaction costs,
$3,465,000 for severance, and a non-cash charge of $3,140,000 for the write-off
of duplicative operating assets.
The severance accrual of $3,465,000 covers the termination of approximately
105 SUPERCUTS employees who had duplicate positions in corporate office
functions. These corporate overhead departments included finance and
accounting, human resources, legal, management information systems, purchasing,
real estate and marketing. No severance related payments have been made as of
December 31, 1996.
As of December 31, 1996, $4,598,000 (which includes the severance accrual
of $3,465,000 and the professional fees accrual of $1,133,000) has been
included in accrued expenses in the balance sheet, and $2,968,000 has been
netted against the related property and equipment in the balance sheet.
The SUPERCUTS transaction was accounted for as a pooling-of-interests;
therefore, prior financial statements have been restated to reflect this merger.
To effect the restatement, significant accounting adjustments were necessary to
conform the accounting practices of SUPERCUTS to those of Regis. A detailed
description of the nature of these conforming accounting adjustments, as well as
unaudited pro forma information for periods ended June 30, 1996, have been
included in the registration statement filed by the Company on Form S-4 dated
September 24, 1996 with the Securities and Exchange Commission. The conforming
accounting adjustments included adjustments to previously reported SUPERCUTS net
income (loss) and shareholders' equity due to consolidation of previously
unconsolidated investor/franchisee stores, change in goodwill amortization
periods and reversal of the capitalization of certain development costs.
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Prior to the merger, SUPERCUTS' fiscal year for financial reporting
purposes ended on December 31. No material adjustment to retained earnings was
necessary to conform with Regis' year end. In addition, for periods preceding
the merger, there were no intercompany transactions which required elimination
from the combined consolidated results.
OPERATING INCOME/LOSS
THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995:
Operating income in the second quarter of fiscal 1997 improved to
$10,765,000, before special charges of $18,731,000 related to the SUPERCUTS
merger described previously as well as continuing restructuring activities of
that division and restructuring charges related to Regis. This was an increase
of $2,040,000, or 23.4 percent, over the same period the previous year. After
these charges, the Company recorded an operating loss of $7,966,000, an
increased loss of $4,726,000 from the same quarter last year. Operating income
before special charges, as a percent of revenues, was 6.1 percent in the second
quarter of fiscal 1997 compared to 5.6 percent in the same period the previous
year. As a percent of revenues, the improvement is attributable primarily to
SUPERCUTS as its salon maturation and restructuring activities improve operating
income.
SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995:
Operating income in the first six months of fiscal 1997 improved to
$23,125,000 before special charges of $18,731,000 related to the SUPERCUTS
merger described previously, as well as continuing restructuring activities
of that division and restructuring charges related to Regis. This was an
increase of $5,347,000, or 30.1 percent, over the same period the previous
year. After these charges, the Company recorded operating income of
$4,394,000, a decrease of $1,419,000 from the same quarter last year.
Operating income before special charges, as a percent of revenues, was 6.7
percent in the second quarter of fiscal 1997 compared to 6.0 percent in the
same period the previous year. As a percent of revenues, the improvement is
attributable primarily to SUPERCUTS as its salon maturation and restructuring
activities improve operating income.
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INTEREST EXPENSE
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
Interest expense for the second quarter of fiscal 1997 was $2,524,000, or
1.4 percent of revenues, compared to $2,484,000, or 1.6 percent of revenues in
the same period the previous year. For the first six months of fiscal 1997
interest expense was $4,974,000, or 1.4 percent of revenues, compared to
$4,720,000, or 1.6 percent of revenues, in the same period the previous year.
The improvement as a percent of revenues is due to sales leveraging as the
expense amount remains relatively consistent.
NONRECURRING GAINS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
During the second quarters of fiscal 1997 and 1996, the Company received
$222,000 and $140,000, respectively, of principal payments from Premier Salons.
For the respective six month periods ended December 31, 1996 and 1995, the
payments received totaled $440,000 and $277,000. The Company had previously
written off the related receivable, and accordingly, is recording all subsequent
principal payments as nonrecurring gains.
INCOME TAXES
THREE AND SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE AND SIX MONTHS
ENDED DECEMBER 31, 1995:
The Company's effective tax rate for the three and six month periods ended
December 31, 1996 was negatively affected by certain nondeductible merger and
transaction costs associated with the SUPERCUTS merger.
Additionally, as reflected in the Statement of Operations for SUPERCUTS
for the quarter ended September 30, 1996, SUPERCUTS recorded as part of its
September 30, 1996 income tax provision, a $1,500,000 change in estimate
associated with income tax matters related to years prior to 1996. This
change in estimate includes tax changes resulting from the completion of an
Internal Revenue Service examination in the quarter ended September 30, 1996.
Accordingly, this change in estimate is included in the financial results
for the combined companies of Regis and SUPERCUTS for the six months ended
December 31, 1996.
The Company's effective income tax rate, exclusive of the impact of
nondeductible merger and transaction costs and the $1,500,000 change in
estimate, for fiscal 1997 is estimated to be approximately 42 percent,
consistent with that incurred during fiscal 1996.
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NET INCOME/LOSS
THREE MONTHS ENDED DECEMBER 31, 1996, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995:
Earnings for the second quarter of fiscal 1997 increased to $4,790,000,
or $.21 per share, compared to earnings of $3,519,000, or $.16 per share, in
the same period the previous year, exclusive of the effect of special charges
and nonrecurring income items, net of taxes, in both periods. After these
charges, the net loss for the second quarter fiscal 1997 was $8,880,000 or
$.38 per share, compared to a net loss for the second quarter of fiscal 1996
of $3,815,000, or $.17 per share.
SIX MONTHS ENDED DECEMBER 31, 1996, COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995:
Earnings for the first six months of fiscal 1997 increased to $10,701,000,
or $.46 per share, compared to earnings of $7,455,000, or $.33 per share, in the
same period the previous year, exclusive of the effect of special charges and
nonrecurring income items, net of taxes, in both periods. After these charges,
the net loss for the second quarter fiscal 1997 was $4,339,000 or $.19 per
share, compared to net income for the first six months of fiscal 1996 of
$203,000, or $.01 per share.
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 (before capital expenditures and debt
principal repayments) in the first six months of fiscal 1997 was $13,157,000,
compared to $21,574,000 during the same period the previous year. The decrease
between the two periods is primarily due to the merger and transaction costs
associated with the SUPERCUTS merger.
During the first six months of fiscal 1997, the Company had worldwide
capital expenditures of $18,595,000, $1,262,000 of which relates to
acquisitions. The Company constructed 15 new REGIS HAIRSTYLISTS salons, 4 new
SUPERCUTS salons, 16 new MASTERCUTS salons, 35 new TRADE SECRET salons, 7 new
WAL-MART salons and 12 new International salons, and completed 20 major
remodeling projects. All capital expenditures during the first six months of
fiscal 1997 were funded by cash flow from the Company's operations and
borrowings under its revolving credit facilities.
The Company anticipates its worldwide salon development program for fiscal
1997 will include a minimum of 150 new salons, and 60 major remodeling and
conversion projects (including the 89 new salons opened and 20 remodeling
projects completed during the first six months of fiscal 1997). It is expected
that expenditures for these new salons and other projects will be approximately
$32,000,000 in fiscal 1997, excluding acquisition activity.
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The Company has a $20,000,000 revolving credit facility which bears
interest at the prime rate, and matures in October 1998. The facility also
allows for borrowings bearing interest at an adjusted LIBOR rate plus a LIBOR
margin up to 1.50 percent. The revolving credit facility requires a quarterly
commitment fee of 1/4 percent per annum on the unused portion of the facility.
As of December 31, 1996, borrowings of $5,300,000 were outstanding under this
credit facility.
At December 31, 1996, the Company had six outstanding senior term notes: a
$24,000,000 note bearing interest at a fixed rate of 11.52 percent which is
subject to annual mandatory repayments of $10,000,000 on June 30, 1997 and
$14,000,000 on June 30, 1998; a $10,000,000 note, bearing interest at a fixed
6.94 percent, which is due on July 1, 2005; a $5,000,000 note bearing interest
at a fixed 7.99 percent which is due on July 1, 2003; a $22,000,000 note bearing
interest at a fixed 7.8 percent with annual mandatory repayments of $10,000,000
on July 1, 2004 and $12,000,000 on July 1, 2006; a $10,000,000 note bearing
interest at a fixed 7.54 percent with annual mandatory repayments of $3,000,000
on July 1, 1998 and 1999 and $4,000,000 on July 1, 2000; and a $5,000,000 note
bearing interest at a fixed 7.16 percent with annual mandatory repayments of
$1,000,000 until 2002.
The senior term notes and the revolving credit facility agreements
contain covenants, including limitations on incurrence of debt, granting of
liens, investments, merger or consolidation, and transactions with
affiliates. In addition, the Company must maintain specified interest
coverage and debt-to-equity ratios.
As previously discussed, on October 25, 1996, the Company completed the
merger with SUPERCUTS, which has been accounted for as a
pooling-of-interests. In connection with the merger, Regis has borrowed under
a $10,000,000, 7.54 percent senior note, described above, to fund transaction
costs and other merger related costs, and a $22,000,000, 7.8 percent senior
note, also described above, to repay and replace SUPERCUTS' existing
revolving credit arrangements under terms and conditions consistent with that
of the Company's long-term borrowings from financial institutions.
In addition, the Company has borrowed under a $5,000,000, 7.16 percent note
described above to have funds available to help finance franchisee expansion in
the SUPERCUTS division.
Transactions by the Company's International salons are invoiced and paid in
local currency. Accordingly, the Company is subject to risks associated with
fluctuations in currency exchange rates.
Management believes that cash generated from operations and amounts
available from additional debt capacity will be sufficient to fund its
anticipated salon capital expenditures and required debt repayments for the
foreseeable future.
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In September and December 1996, the Company paid a quarterly dividend of
$361,000 and $452,000, respectively, or 2 cents per share. In February 1997,
the Board of Directors of the Company approved the payment of a 2 cents per
share dividend payable to shareholders of record on February 17, 1997.
On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"),
a Nevada corporation, which the Company believes is wholly owned by Mr. Lipson,
brought legal action against SUPERCUTS, INC., ("SUPERCUTS") a wholly owned
subsidiary of the Company, and certain SUPERCUTS directors and officers. The
initial lawsuit, prior to subsequent amendments, sought payment of $3,000,000,
allegedly due to DEL pursuant to a Consulting Agreement dated as of August 22,
1995, between SUPERCUTS and DEL. The initial lawsuit also sought unspecified
damages allegedly sustained by Mr. Lipson as a result of a delay in his ability
to sell 1,508,220 shares of SUPERCUTS' common stock, which were sold by him
between February 20 and February 28, 1996, because of SUPERCUTS' refusal to
remove restrictive legends from certificates representing such stock. According
to his lawsuit, Mr. Lipson sold the number of shares noted for an aggregate of
$7,800,000, or a reported average price of $5.20 per share. SUPERCUTS' common
stock price range for the month of February 1996, was a high of 7-3/8, a low of
5-1/8 and a close of 5-1/8. All matters that were heard in the United States
District Court for the Northern District of Illinois, Eastern Division, Case No.
96C-0822, are currently on appeal in the United States Court of Appeals for the
Seventh Circuit.
In August 1996, Mr. Lipson has also brought legal action against SUPERCUTS
in the Circuit Court of Cook County, Illinois alleging that SUPERCUTS has
defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000." The
court has set a hearing date of June 18, 1997 with respect to this matter.
Mr. Lipson has also filed suit against SUPERCUTS in the Court of Chancery
of the State of Delaware seeking advancement of expenses incurred by him in
certain litigation and other proceedings. On December 10, 1996, the Delaware
Court ruled that Mr. Lipson is entitled to an advancement of certain expenses
incurred by him, but did not establish the amount of the advancement.
While additional future charges, if any, related to this litigation could
have a material adverse impact on the Company's net income in the quarterly
period in which they would be recorded, management of the Company believes,
based on the advice of counsel, that such additional charges, if any, will
not have a material adverse effect on the consolidated financial position or
annual results of operations of the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"),
a Nevada corporation, which the Company believes is wholly owned by Mr. Lipson,
brought legal action against SUPERCUTS, INC., ("SUPERCUTS") a wholly owned
subsidiary of the Company, and certain SUPERCUTS directors and officers. The
initial lawsuit, prior to subsequent amendments, sought payment of $3,000,000,
allegedly due to DEL pursuant to a Consulting Agreement dated as of August 22,
1995, between SUPERCUTS and DEL. The initial lawsuit also sought unspecified
damages allegedly sustained by Mr. Lipson as a result of a delay in his ability
to sell 1,508,220 shares of SUPERCUTS' common stock, which were sold by him
between February 20 and February 28, 1996, because of SUPERCUTS' refusal to
remove restrictive legends from certificates representing such stock. According
to his lawsuit, Mr. Lipson sold the number of shares noted for an aggregate of
$7,800,000, or a reported average price of $5.20 per share. SUPERCUTS'
common stock price range for the month of February 1996 was a high of 7-3/8, a
low of 5-1/8 and a close of 5-1/8. All matters that were heard in the United
States District Court for the Northern District of Illinois, Eastern Division,
Case No. 96C-0822, are currently on appeal in the United States Court of Appeals
for the Seventh Circuit.
In August 1996, Mr. Lipson has also brought legal action against SUPERCUTS
in the Circuit Court of Cook County, Illinois alleging that SUPERCUTS has
defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000." The
court has set a hearing date of June 18, 1997 with respect to this matter.
Mr. Lipson has also filed suit against SUPERCUTS in the Court of Chancery
of the State of Delaware seeking advancement of expenses incurred by him in
certain litigation and other proceedings. On December 10, 1996, the Delaware
Court ruled that Mr. Lipson is entitled to an advancement of certain expenses
incurred by him, but did not establish the amount of the advancement.
While additional future charges, if any, related to this litigation could
have a material adverse impact on the Company's net income in the quarterly
period in which they would be recorded, management of the Company believes,
based on the advice of counsel, that such additional charges, if any, will
not have a material adverse effect on the consolidated financial position or
annual results of operations of the Company.
27
<PAGE>
ITEM 2. CHANGES IN SECURITIES
a. On December 23, 1996, the Company's Board of Directors adopted a
Shareholder Rights Plan ("Rights Plan"). The Rights Plan provides for the
distribution of preferred stock purchase rights ("Rights") as a dividend at
the rate of one Right for each share of the Company's common stock held as
of the close of business on December 23, 1996. The Rights will expire on
December 23, 2006.
The Rights Plan is intended to protect the interests of the Company's
shareholders from abusive or unfair takeover tactics. It is not designed
to prevent the acquisition of the Company on terms beneficial to all
shareholders.
If any person other than Curtis Squire, Inc., becomes the beneficial owner
of 20 percent or more of the Company's common stock, then each Right not
owned by a 20 percent or more stockholder (other than Curtis Squire, Inc.)
will entitle its holder to purchase, at the Right's then current exercise
price, shares of common stock having a value of twice the Right's exercise
price. In addition, if, after any person (other than Curtis Squire, Inc.)
has become a 20 percent or more stockholder, the Company is involved in a
merger or other business combination with another person in which its
common stock is changed or converted, each Right will entitle its holder to
purchase shares of common stock of such other person having a value of
twice the Right's exercise price.
The Company will be entitled to redeem the Rights at $.001 per Right at any
time prior to the acquisition by a person of beneficial ownership of 20
percent or more of the Company's common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. On October 23, 1996, the Company held a special meeting of shareholders.
The purpose of the meeting was to approve the issuance by the Company of up
to 4,920,590 shares of the Company's common stock in connection with the
proposed merger of RGIS Merger Corp., a wholly-owned subsidiary of the
Company, into Supercuts, Inc., and the conversion of each outstanding share
of SUPERCUTS' common stock into the right to receive 0.40 shares of the
Company's common stock pursuant to an agreement and plan of merger dated as
of July 14, 1996. At the meeting, 14,441,339 shares of the Company stock
was voted in favor of the merger and 208,463 shares voted against the
merger.
b. On November 12, 1996, at the annual meeting of the shareholders of the
Company, the shareholders approved an increase in the authorized shares of
common stock of the Company from 25,000,000 to 50,000,000. 16,086,395
shares were voted in favor of the proposal and no shares were voted against
the proposal.
28
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 15 Letter Re: Unaudited Interim Financial Information.
29
<PAGE>
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the three months ended
December 31, 1996:
Form 8-K dated October 23, 1996 related to the merger between the Company
and SUPERCUTS, INC.
30
<PAGE>
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: February 14, 1997 By: /s/ Frank E. Evangelist
------------------------------
Frank E. Evangelist
Senior Vice President, Finance
Chief Financial Officer
Signing on behalf of the
registrant and as principal
accounting officer
31
<PAGE>
Exhibit 15
LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, North West
Washington, D.C. 20549
RE: Regis Corporation
Registrations on Form S-8
(File No. 33-44867, No. 33-89882)
Registration on Form S-4
(File No. 333-12099)
Registrations on Form S-3
(File No. 33-82094, No. 33-86276,
No. 33-89150, No. 33-92244,
No. 33-96224 and No. 33-80337)
We are aware that our report dated February 14, 1997, on our reviews of the
interim financial information of Regis Corporation as of December 31, 1996 and
for the periods ended December 31, 1996 and 1995, and included in the Company's
quarterly report on Form 10-Q for the quarter ended December 31, 1996, is
incorporated by reference in these registration statements. Pursuant to Rule
436(c) under the Securities Act of 1933, this report should not be considered a
part of the registration statement prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Minneapolis, MN
February 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER BALANCE SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,868
<SECURITIES> 0
<RECEIVABLES> 12,501
<ALLOWANCES> 0
<INVENTORY> 36,674
<CURRENT-ASSETS> 71,092
<PP&E> 243,449
<DEPRECIATION> 113,143
<TOTAL-ASSETS> 316,161
<CURRENT-LIABILITIES> 92,668
<BONDS> 0
0
0
<COMMON> 1,130
<OTHER-SE> 122,657
<TOTAL-LIABILITY-AND-EQUITY> 316,161
<SALES> 48,862
<TOTAL-REVENUES> 176,458
<CGS> 26,699
<TOTAL-COSTS> 184,424
<OTHER-EXPENSES> 50,221<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,524
<INCOME-PRETAX> (10,173)
<INCOME-TAX> 1,293
<INCOME-CONTINUING> (8,880)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,880)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> 0
<FN>
<F1>Includes merger and transaction charge of $14,322 and restructuring charge of
$4,409.
</FN>
</TABLE>
