<PAGE>
FORM 10-Q
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, 1998
-----------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------
--------------------
For Quarter Ended December 31, 1998 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)
(612)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 February 3, 1999:
Common Stock, $.05 par value 23,977,809
---------------------------- ---------------
Class Number of Shares
<PAGE>
REGIS CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
--------------------- --------
<S> <C>
Item 1. Consolidated Financial Statements:
Balance Sheet as of December 31, 1998
and June 30, 1998 3
Statement of Operations for the three
months ended December 31, 1998 and 1997 4
Statement of Operations for the six
months ended December 31, 1998 and 1997 5
Statement of Cash Flows for the six
months ended December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-9
Review Report of Independent Accountants 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
<CAPTION>
PART II. Other Information
-----------------
<S> <C>
Item 6. Exhibits and Reports on Form 8-K 20-21
Signature 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, 1998 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 9,162 $ 4,774
Accounts receivable, net 12,028 10,556
Inventories 58,465 53,826
Deferred income taxes 5,398 6,069
Other current assets 8,633 6,688
-------- --------
Total current assets 93,686 81,913
Property and equipment, net 191,552 175,831
Goodwill 123,808 114,217
Other assets 12,570 10,389
-------- --------
Total assets $421,616 $382,350
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 22,015 $ 19,741
Accounts payable 19,095 22,374
Accrued expenses 45,557 41,650
-------- --------
Total current liabilities 86,667 83,765
Long-term debt 115,523 100,995
Other noncurrent liabilities 10,811 8,329
Shareholders' equity:
Common stock, $.05 par value;
issued and outstanding, 23,935,080 and 23,820,362
shares at December 31, 1998 and
June 30, 1998, respectively 1,197 1,191
Additional paid-in capital 135,406 132,560
Accumulated other comprehensive income (625) (1,677)
Retained earnings 72,637 57,187
-------- --------
Total shareholders' equity 208,615 189,261
-------- --------
-------- --------
Total liabilities and shareholders' equity $421,616 $382,350
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements.
3
<PAGE>
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Company-owned salons:
Service $154,329 $134,032
Product 66,077 58,288
-------- --------
220,406 192,320
Franchise income 6,442 6,632
-------- --------
226,848 198,952
Operating expenses:
Company-owned:
Cost of service 88,575 76,657
Cost of product 35,298 31,828
Direct salon 18,827 17,862
Rent 30,043 26,273
Depreciation 6,944 6,099
-------- --------
179,687 158,719
Selling, general and administrative 24,719 21,812
Depreciation and amortization 3,092 2,198
Nonrecurring items 1,532
Other 386 402
-------- --------
Total operating expenses 209,416 183,131
-------- --------
Operating income 17,432 15,821
Other income (expense):
Interest (2,777) (2,470)
Other, net 424 171
-------- --------
Income before income taxes 15,079 13,522
Income taxes (5,981) (5,565)
-------- --------
Net income $ 9,098 $ 7,957
-------- --------
-------- --------
Net income per share:
Basic $ .38 $ .34
-------- --------
-------- --------
Diluted $ .37 $ .33
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements.
4
<PAGE>
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Revenues:
Company-owned salons:
Service $303,339 $264,110
Product 125,064 110,152
---------- --------
428,403 374,262
Franchise income 12,964 13,371
---------- --------
441,367 387,633
Operating expenses:
Company-owned:
Cost of service 172,560 151,177
Cost of product 66,934 60,422
Direct salon 37,287 35,137
Rent 58,772 51,743
Depreciation 14,105 12,136
---------- --------
349,658 310,615
Selling, general and administrative 49,090 42,045
Depreciation and amortization 6,288 4,268
Nonrecurring items 2,891 1,979
Other 755 790
---------- --------
Total operating expenses 408,682 359,697
---------- --------
Operating income 32,685 27,936
Other income:
Interest (5,483) (4,887)
Other, net 790 464
---------- --------
Income before income taxes 27,992 23,513
Income taxes (11,110) (9,760)
---------- --------
Net income $ 16,882 $ 13,753
---------- --------
---------- --------
Net income per share:
Basic $ .71 $ .59
---------- --------
---------- --------
Diluted $ .69 $ .57
---------- --------
---------- --------
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements.
5
<PAGE>
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,882 $ 13,753
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 16,647 13,608
Amortization 3,776 2,964
Deferred income taxes (176) 8,267
Nonrecurring items 1,979
Other 1,506 365
Changes in assets and liabilities:
Accounts receivable (1,326) (352)
Inventories (3,272) 263
Other current assets (1,941) (3,678)
Other assets (1,619) (1,040)
Accounts payable (4,119) (6,808)
Accrued expenses 5,034 2,246
Other noncurrent liabilities 2,532 646
-------- ---------
Net cash provided by operating activities 33,924 32,213
-------- ---------
Cash flows from investing activities:
Capital expenditures (29,049) (27,729)
Purchases of salon assets, net of cash
acquired and certain obligations assumed (17,038) (4,251)
-------- ---------
Net cash used in investing activities (46,087) (31,980)
-------- ---------
Cash flows from financing activities:
Borrowings on revolving credit facilities 118,787 62,194
Payments on revolving credit facilities (107,629) (69,896)
Proceeds from issuance of long-term debt 21,500 13,700
Repayment of long-term debt (16,418) (3,689)
Dividends paid (1,431) (934)
Proceeds from issuance of common stock 1,821 359
-------- ---------
Net cash provided by financing activities 16,630 1,734
-------- ---------
Effect of exchange rate changes on cash (79) (57)
-------- ---------
Increase in cash 4,388 1,910
Cash:
Beginning of year 4,774 8,935
-------- ---------
End of period $ 9,162 $ 10,845
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to unaudited Consolidated Financial Statements.
6
<PAGE>
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The unaudited interim consolidated financial statements as of December
31, 1998 and for the three and six months ended December 31, 1998 and 1997,
reflect, in the opinion of management, all adjustments (which, with the
exception of the matters discussed in Note 5 herein, include only normal
recurring adjustments) necessary to fairly present the consolidated financial
position of the Company as of December 31, 1998 and the consolidated
results of operations and cash flows for the interim periods. The results of
operations and cash flows for any interim period are not necessarily
indicative of results of operations and cash flows for the full year.
The year-end balance sheet data was derived from audited consolidated
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
Regis Corporation's (the Company) consolidated financial statements
which are incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended June 30, 1998. PricewaterhouseCoopers LLP,
the Company's independent accountants, have performed limited reviews of
the interim consolidated financial data included herein. Their report
on such reviews accompanies this filing.
COST OF PRODUCT REVENUES. On an interim basis, product costs are
determined by applying an estimated gross profit margin to product
revenues.
2. COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The standard requires the display and reporting of
comprehensive income, which includes all changes in shareholders' equity
with the exception of additional investments by shareholders or
distributions to shareholders. The adoption of this standard had no
impact on the Company's current or previously reported net income or
shareholders' equity. Comprehensive income for the Company includes net
income and foreign currency translation charged or credited to the
cumulative translation account within shareholders' equity.
Comprehensive income for the three and six months ended December 31,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31,
THREE MONTHS SIX MONTHS
--------------------- --------------------
(DOLLARS IN THOUSANDS)
Comprehensive income: 1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net income $9,098 $7,957 $16,882 $13,753
Change in cumulative foreign currency translation 44 154 1,052 26
Less: reclassification adjustment for translation
losses realized in net income (964)
------- -------- ------- --------
Total comprehensive income $9,142 $8,111 $16,970 $13,779
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
7
<PAGE>
3. NET INCOME PER SHARE:
Basic earnings per share (EPS) is calculated as net income divided by
weighted average common shares outstanding. The Company's only dilutive
securities are issuable under the Company's Stock Option Plan, as
amended. Diluted EPS is calculated as net income divided by weighted
average common shares outstanding, increased to include assumed
conversion of dilutive securities.
The following provides information related to the weighted average
common shares used in the calculation of the Company's basic and diluted
EPS:
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31,
THREE MONTHS SIX MONTHS
------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares for basic earnings per share 23,874,985 23,344,913 23,854,405 23,339,060
Dilutive effect of stock options 721,118 592,004 667,749 616,652
---------- ---------- ---------- ----------
Weighted average for diluted earnings per share 24,596,103 23,936,917 24,522,154 23,955,712
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4. FINANCING ARRANGEMENTS:
In September 1998, the Company borrowed $7.5 million under a 6.55
percent senior term note due September 2003 to refinance the Company's
distribution center revolving line of credit established in fiscal 1998.
5. NONRECURRING ITEMS:
Nonrecurring items included in operating income consist of gains(losses)
on assets and business dispositions and other items of a nonrecurring
nature. The more significant items included in the second quarter and
first six months of fiscal 1999 and 1998 are as follows:
- For the second quarter and first six months of fiscal
1999, the Company recorded $1.5 million and $2.9 million,
respectively, of expense associated with year 2000
remediation.
- In the first quarter of fiscal 1998, the Company recorded
a special charge of approximately $2.0 million associated
with the divestiture of the business and assets of
Anasazi Exclusive Salon Products, LLC (Anasazi).
8
<PAGE>
6. SUBSEQUENT EVENT
On January 25, 1999, the Company announced that it had entered into an
agreement and plan of merger with The Barbers Hairstyling for Men and
Women, Inc. (The Barbers), a provider of hairstyling and hair care
products through franchised and company-owned salons based in
Minneapolis, Minnesota. Under the terms of the agreement and plan of
merger, each shareholder of The Barbers will receive .33 shares of Regis
common stock, resulting in the issuance by the Company of approximately
1.5 million shares of common stock. It is expected that the transaction
will be accounted for as a pooling of interests. Consummation of the
merger is subject to approval by the shareholders of The Barbers. The
transaction is expected to close during the Company's fiscal 1999 fourth
quarter.
In February 1999, the board of directors approved a three-for-two stock
split of its common stock in the form of a 50 percent stock dividend to be
distributed on March 1, 1999 to shareholders of record on February 15,
1999.
9
<PAGE>
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Regis Corporation:
We have reviewed the accompanying consolidated balance sheet of Regis
Corporation as of December 31, 1998, and the related consolidated statements
of operations for the three months and six months ended December 31, 1998 and
1997, and cash flows for the six months ended December 31, 1998 and 1997.
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.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of June 30, 1998, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended (not fully presented herein);
and in our report dated August 21, 1998, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the information
set forth in the accompanying consolidated balance sheet as of June 30, 1998,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
January 25, 1999
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Regis Corporation, based in Minneapolis, Minnesota, is the world's largest
owner, operator, franchisor and consolidator of hair and retail product
salons with 3,681 salons (830 franchised) in 50 states, Puerto Rico, Canada
and five other international countries at December 31, 1998. Regis operates
and franchises salons in six divisions: Regis Hairstylists, Strip Center
Salons (primarily Supercuts), MasterCuts, Trade Secret, Wal-Mart/SmartStyle
and International, and has more than 29,000 employees worldwide.
On January 25, 1999, the Company announced that it had entered into an
agreement and plan of merger with The Barbers Hairstyling for Men and Women,
Inc. (The Barbers), a national franchiser, owner and operator of affordable
hair care salons, based in Minneapolis, Minnesota. The Barbers has 979
franchised and company-owned salons, operating primarily under the names Cost
Cutters, City Looks Salons International and We Care Hair. Consummation of
the merger is subject to approval by the shareholders of The Barbers. The
transaction is expected to close during the Company's fiscal 1999 fourth
quarter.
Second quarter fiscal 1999 revenues, including franchise income of $6.4
million, grew to a record $226.8 million, a 14.0 percent increase over fiscal
1998 second quarter total revenues of $199.0 million. Revenues for the six
months ended December 31, 1998, including franchise income of $13.0 million,
grew to a record $441.4 million, a 13.9 percent increase over total revenues
of $387.6 million in the comparable fiscal 1998 period.
Fiscal 1999 results include costs associated with the Company's Year 2000
remediation program which are nonrecurring in nature. Fiscal 1998 results
reflect the previously reported nonrecurring charge associated with
disposition of Anasazi. Exclusive of these nonrecurring items, operating
income for the second quarter of fiscal 1999 grew 8.4 percent to $19.0
million. Operating income for the six months ended December 31, 1998 grew
8.1 percent to $35.6 million.
Exclusive of nonrecurring items, net income in the second quarter of fiscal
1999 increased to $10.0 million, or $.41 per diluted share, an earnings per
share increase of 24.2 percent from second quarter fiscal 1998 net income of
$8.0 million, or $.33 per diluted share. For the first six months of fiscal
1999, the Company reported net income of $18.6 million, or $.76 per diluted
share, compared to $14.9 million, or $.62 per diluted share, exclusive of the
nonrecurring items.
Including nonrecurring items, net income in the second quarter of fiscal 1999
increased to a record $9.1 million, or $.37 per diluted share, an earnings
per share increase of 12.1 percent from second quarter fiscal 1998 net income
of $8.0 million, or $.33 per diluted share. For the first six months of
fiscal 1999, the Company reported net income of $16.9 million, or $.69 per
diluted share, compared to a net income of $13.8 million, or $.57 per diluted
share, in the first six months of fiscal 1998.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain information
derived from the Company's Consolidated Statement of Operations expressed as
a percentage of total revenues, except as noted.
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED DECEMBER 31,
----------------------------------
THREE MONTHS SIX MONTHS
------------- -------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Company-owned service revenues (1) 70.0% 69.7% 70.8% 70.6%
Company-owned product revenues (1) 30.0 30.3 29.2 29.4
Franchise income 2.8 3.3 2.9 3.4
Company-owned operations:
Profit margins on service (2) 42.6 42.8 43.1 42.8
Profit margins on product (3) 46.6 45.4 46.5 45.1
Direct salon (1) 8.5 9.3 8.7 9.4
Rent (1) 13.6 13.7 13.7 13.8
Depreciation (1) 3.2 3.2 3.3 3.2
Direct salon contribution (1) 18.5 17.5 18.4 17.0
Selling, general and administrative 10.9 11.0 11.1 10.8
Depreciation and amortization 1.4 1.1 1.4 1.1
Nonrecurring items 0.7 0.0 0.7 0.5
Operating income 7.7 8.0 7.4 7.2
Income before income taxes 6.6 6.8 6.3 6.1
Net income 4.0 4.0 3.8 3.5
Operating income, excluding
nonrecurring items 8.4 8.0 8.1 7.7
Net income, excluding nonrecurring items 4.4 4.0 4.2 3.8
</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
12
<PAGE>
RESULTS OF OPERATIONS
REVENUES
REVENUES for the second quarter of fiscal 1999 grew to a record $226.8
million, an increase of $27.9 million or 14.0 percent, over the same period
in fiscal 1998. Revenues for the first six months of fiscal 1999 were a
record $441.4 million, an increase of $53.7 million or 13.9 percent, over the
same period in fiscal 1998. System-wide sales, inclusive of non-consolidated
sales generated from franchise salons, increased to $293.8 million and $576.1
million, respectively, for the second quarter and first six months of fiscal
1999, representing increases of 11.7 percent and 11.6 percent over the same
periods a year ago. These increases in company-owned and system-wide sales
are the result of the total number of salons added to the system through
acquisitions and net salon openings, as well as same-store sales increases
from existing salons.
For the second quarters and first six months of fiscal 1999 and 1998,
respectively, revenues by division are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
THREE MONTHS SIX MONTHS
----------------------- ----------------------
1999 1998 1999 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Regis Hairstylists $ 83,640 $ 74,352 $161,065 $145,782
Strip Center Salons (primarily Supercuts) 32,696 24,771 65,041 49,582
MasterCuts 30,790 27,252 60,208 53,190
Trade Secret 35,326 30,322 66,307 57,408
Wal-Mart/SmartStyle 13,311 9,148 25,661 17,659
International 24,643 26,475 50,121 50,641
Franchise income 6,442 6,632 12,964 13,371
-------- --------- -------- --------
$226,848 $198,952 $441,367 $387,633
-------- --------- -------- --------
-------- --------- -------- --------
</TABLE>
Same-store sales for domestic company-owned salons increased 5.5 percent and
5.6 percent in the second quarter and first six months of fiscal 1999,
respectively, compared to 6.2 percent and 6.0 percent in the same periods in
fiscal 1998. System-wide same-store sales for the second quarter and first
six months of fiscal 1999 increased 5.3 percent and 5.4 percent,
respectively, compared to 5.4 percent in the same periods a year ago.
Same-store sales increases achieved are due to an increase in the number of
customers served and market based price increases in certain salon divisions,
such as Regis Hairstylists and MasterCuts. A total of 19 million and 38
million customers system-wide were served during the second quarter and first
six months of fiscal 1999, respectively. The Company utilizes an
audiovisual-based training system in its company-owned salons. Management
believes this training system provides its employees with improved customer
service and technical skills, and positively contributes to the increase in
customers served.
SERVICE REVENUES in the second quarter of fiscal 1999 were $154.3 million, an
increase of $20.3 million or 15.1 percent, over the same period in fiscal
1998. In the first six months of fiscal 1999, service revenues were $303.3
million, an increase of $39.2 million or 14.9 percent, over the same period a
year ago. The increase in service revenues is a result of salon acquisitions
the Company has made during the past twelve months, strong service same-store
sales increase of 6.8 percent and 6.6 percent in the second quarter and first
six months of fiscal 1999, respectively, and accelerated new salon
construction.
13
<PAGE>
PRODUCT REVENUES in the second quarter of fiscal 1999 grew to $66.1 million,
an increase of $7.8 million or 13.4 percent, over the same period in fiscal
1998. In the first six months of fiscal 1999, product revenues were $125.1
million, an increase of $14.9 million or 13.5 percent, over the same period
in fiscal 1998. These increases continue a trend of escalating product
revenues due to product same-store sales growth of 2.6 percent and 3.5 in the
second quarter and first six months of fiscal 1999, respectively, a
reflection of the continuous focus on product awareness, training and
acceptance of national label merchandise. Product revenues as a percent of
total company-owned revenues remained fairly consistent at 30.0 percent and
29.2 percent of revenues for the second quarter and first six months of
fiscal 1999.
FRANCHISE INCOME, including royalties, initial franchise fees and product
sales made by the Company to franchisees, decreased slightly to $6.4 million
and $13.0 million in the second quarter and first six months of fiscal 1999,
respectively. The decrease in franchise income is a result of a reduction in
royalty rates charged to franchisees, partially offset by increases in
franchise sales, which are not included in the Company's consolidated
revenues. The Company expects that the reduction in royalty rates will not
have an adverse affect on earnings due to a corresponding decrease in the
costs of services provided to franchisees.
COST OF REVENUES
The aggregate cost of service and product revenues in the second quarter of
fiscal 1999 were $123.9 million, compared to $108.5 million in the same
period in fiscal 1998. For the first six months of fiscal 1999, the
aggregate cost of service and product revenues were $239.5 million, compared
to $211.6 million in the same period a year ago. The resulting combined
gross margin percentages for the second quarter and first six months of
fiscal 1999 improved 20 basis points and 60 basis points to 43.8 percent and
44.1 percent of company-owned revenues, respectively, compared to 43.6
percent and 43.5 percent of company-owned revenues in the same periods in
fiscal 1998. As discussed below, these improvements were primarily due to
strong same-store sales and increased sales leverage in the Company's fixed
cost payroll divisions.
SERVICE MARGINS declined slightly to 42.6 percent in the second quarter of
fiscal 1999, compared to 42.8 percent in the same period in fiscal 1998.
This 20 basis point reduction is primarily due to timing of supply purchases
in the Company's domestic divisions partially offset by payroll control and
leverage from strong service same-store sales increases of 6.8 percent and
continued sales maturation.
For the first six months of fiscal 1999, service margins were 43.1 percent,
compared to 42.8 percent in the same period in fiscal 1998. This 30 basis
point improvement is primarily due to continued sales leverage of fixed cost
payrolls in the Supercuts division, and strong service same-store sales
growth of 6.6 percent.
PRODUCT MARGINS improved to 46.6 percent and 46.5 percent in the second
quarter and first six months of fiscal 1999, compared to 45.4 percent and
45.1 percent in the same periods a year ago. The respective 120 basis point
and 140 basis point improvements are primarily a result of sales leveraging
and decreased product costs in Trade Secret and Supercuts salons resulting
from the benefit of Regis' purchasing power.
14
<PAGE>
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. Direct
salon expense of $18.8 million improved as a percent of company-owned
revenues to 8.5 percent in the second quarter of fiscal 1999 from 9.3 percent
in the same period in fiscal 1998. For the first six months of fiscal 1999,
direct salon expense of $37.3 million improved as a percent of company-owned
revenues to 8.7 percent from 9.4 percent in the same period in fiscal 1998.
These improvements resulted from an increased ability to leverage these costs
against increased revenues, which is a result of strong same-store sales and
a maturing salon base.
RENT
Rent expense in the second quarter of fiscal 1999 was $30.0 million, or 13.6
percent of company-owned revenues, compared to $26.3 million, or 13.7 percent
of company-owned revenues, in the same period in fiscal 1998. Rent expense
in the first six months of fiscal 1999 was $58.8 million or 13.7 percent of
company-owned revenues, compared to $51.7 million or 13.8 percent of
company-owned revenues in the same period in fiscal 1998. The percentage
improvements in both periods are primarily due to leveraging this fixed cost
against strong same-store sales.
DEPRECIATION - SALON LEVEL
Depreciation expense at the salon level remained consistent at 3.2 percent of
company-owned revenues in both the second quarter of fiscal 1999 and 1998.
For the first six months of fiscal 1999, salon depreciation expense was 3.3
percent of company-owned revenues, comparable to the 3.2 percent in the same
period a year ago.
DIRECT SALON CONTRIBUTION
For the reasons described above, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in
the second quarter of fiscal 1999 to $40.7 million, or 18.5 percent of
company-owned revenues, compared to $33.6 million or 17.5 percent of
company-owned revenues in the same period of fiscal 1998. For the first six
months of fiscal 1999, direct salon contribution improved to $78.7 million,
or 18.4 percent of company-owned revenues, compared to $63.6 million or 17.0
percent of company-owned revenues in the same period a year ago.
15
<PAGE>
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 $24.7 million, or 10.9 percent of total
revenues in the second quarter of fiscal 1999, compared to $21.8 million, or
11.0 percent of total revenues in the same period in fiscal 1998. This 10
basis point improvement is a result of leveraging the fixed portion of this
cost against sales volumes during the quarter.
For the first six months of fiscal 1999, SG&A expenses were $49.1 million, or
11.1 percent of total revenues, compared to $42.0 million, or 10.8 percent of
total revenues in the same period in fiscal 1998. The 30 basis point increase
in this category is a result of the fixed portion of this cost growing at a
faster rate than sales primarily due to the accelerated growth of newly
acquired and constructed salons.
DEPRECIATION AND AMORTIZATION - CORPORATE
Corporate depreciation and amortization increased to 1.4 percent of total
revenues in both the second quarter and first six months of fiscal 1999,
compared to 1.1 percent in the same periods a year ago. This increase is
related to additional depreciation associated with the Company's fiscal 1998
purchases of additional corporate office buildings and new distribution
center as well as an increased level of intangible assets, primarily
goodwill, associated with the Company's acquisition activity during the past
twelve months.
NONRECURRING ITEMS
Nonrecurring items included in operating income consist of gains(losses) on
assets and business dispositions and other items of a nonrecurring nature.
See discussion of year 2000 remediation within Liquidity and Capital
Resources, and also see Note 5 to the unaudited Consolidated Financial
Statements for a description of the nonrecurring items.
OPERATING INCOME
Operating income in the second quarter of fiscal 1999, excluding nonrecurring
items, improved to $19.0 million, an increase of $3.1 million or 19.9 percent
over the same period in fiscal 1998. Operating income, excluding
nonrecurring items, as a percentage of total revenues grew to 8.4 percent in
the second quarter of fiscal 1999 compared to 8.0 percent in the same period
in fiscal 1998. Exclusive of nonrecurring items, operating income in the
first six months of fiscal 1999 improved to $35.6 million, or 8.1 percent of
total revenues, an increase of $5.7 million, or 18.9 percent over the prior
year period operating income of $29.9 million, or 7.7 percent of total
revenues. These improvements are primarily attributable to improved gross
margins and the leveraging of direct salon expenses.
16
<PAGE>
INTEREST
Interest expense in the second quarter and first six months of fiscal 1999
was $2.8 million and $5.5 million, respectively, representing 1.2 percent of
total revenues in the second quarter as well as the first six months of
fiscal 1999, compared to $2.5 million and $4.9 million, or 1.2 percent and
1.3 percent of total revenues, in the same periods in fiscal 1998. Interest
expense as a percent of total revenues has remained consistent between the
two periods because, although debt levels have increased, average interest
rates were lower during the period.
INCOME TAXES
The Company's annual effective income tax rate for all of fiscal 1999 is
estimated to be slightly less than 40.0 percent, compared to 40.2 percent for
fiscal year 1998. The anticipated reduction in the annual effective tax rate
is a result of reduced state income taxes.
NET INCOME
Net income in the second quarter of fiscal 1999 grew to $9.1 million, or $.37
per diluted share, compared to a net income of $8.0 million, or $.33 per
diluted share in the same period in fiscal 1998. Exclusive of nonrecurring
items, net income in the second quarter of fiscal 1999 increased to $10.0
million, or $.41 per diluted share, compared to net income in the same period
in fiscal 1998 of $8.0 million, or $.33 per diluted share, an earnings per
share increase of 24.2 percent.
For the first six months of fiscal 1999, net income grew to $16.9 million or
$.69 per diluted share, compared to net income of $13.8 million or $.57 per
diluted share in the same period in fiscal 1998. Exclusive of nonrecurring
items in both periods, net income in the first six months of fiscal 1999
increased to $18.6 million or $.76 per diluted share, compared to net income
in the same period in fiscal 1998 of $14.9 million or $.62 per diluted share,
an earnings per share increase of 22.6 percent.
LIQUIDITY AND CAPITAL RESOURCES
Customers generally pay for salon services and merchandise in cash at the
time of sale, which reduces the Company's working capital requirements. Net
cash provided by operating activities in the first six months of fiscal 1999
grew to $33.9 million compared to $32.2 million during the same period in
fiscal 1998. The increase between the two periods is due to improved
operating performance in the current year.
During the first six months of fiscal 1999, the Company had worldwide capital
expenditures of $32.7 million, of which $3.3 million related to acquisitions
of 109 salons, and $0.4 million of capital lease obligations that were
entered into during the current year. The Company constructed 143 new salons
(20 new Regis Hairstylists salons, 25 new MasterCuts salons, 23 new Trade
Secret salons, 43 new Wal-Mart/SmartStyle salons, 22 new Strip Center Salons
and 10 new International salons), and completed 35 major remodeling projects.
All salon capital expenditures during the first six months of fiscal 1999
were funded by cash flow from the Company's operations and borrowings under
its revolving credit facilities.
17
<PAGE>
The Company anticipates its worldwide salon development program for fiscal
1999 will include the construction of 275 to 300 new company-owned salons,
and 125 major remodeling and conversion projects. It is expected the
Company's total capital expenditures in fiscal 1999 will be approximately
$55.0 million. Expenditures will be funded in part through borrowings under
existing credit facilities and capital lease arrangements.
FINANCING
See Note 4 to the unaudited Consolidated Financial Statements.
Management believes that cash generated from operations and amounts available
under its revolving credit facilities will be sufficient to fund its
anticipated capital expenditures and required debt repayments for the
foreseeable future.
DIVIDENDS
During the first six months of fiscal 1999, the Company paid quarterly
dividends of $1.4 million, or $.06 per share. In February 1999, the board of
directors approved a three-for-two stock split of its common stock in the
form of a 50 percent stock dividend, simultaneous with the payment of its
second quarter dividend. Shareholders of record on February 15, 1999, will
realize a 50 percent increase in the regular quarterly dividend payable on
March 1, 1999. The board declared a quarterly dividend payable on that date
of $0.03 per share on a post-split basis.
YEAR 2000
The Company previously initiated a comprehensive project to prepare its
computer systems for the Year 2000. The Company has completed the awareness
and assessment phases of the project and is in the process of remediation,
validation and implementation. These phases are planned to be completed by
late summer of calendar year 1999. Accordingly, management believes the Year
2000 will not have a significant impact on operations. If necessary
modifications and conversions are not completed on a timely basis, the Year
2000 could have an adverse effect on the Company's operations. At this time,
the Company believes it is unnecessary to adopt a contingency plan covering
the possibility that the project will not be completed in a timely manner,
but as part of the overall project, the Company will continue to assess the
need for a contingency plan.
Costs associated with the Year 2000 are expensed as incurred and are funded
through operating cash flows. Based on the Company's most recent assessment,
the associated expense to be incurred is estimated to be approximately $5.5
million. The Company has incurred $3.4 million related to Year 2000 project
costs from the project's inception in fiscal 1998 through the first six
months of fiscal 1999, of which $2.9 million was incurred and charged to
earnings during the first six months of fiscal 1999.
The Company is in contact with critical suppliers of products and services to
assess whether the suppliers' operations and the products and services they
provide are Year 2000 capable or to monitor their progress toward Year 2000
compliance. There can be no absolute assurance that another company's
failure to ensure Year 2000 compliance would not have an adverse effect on
the Company.
18
<PAGE>
Time and cost estimates are based on currently available information and are
management's best estimates. However, there is no guarantee that these
estimates will be achieved, and actual results may differ materially from
those anticipated. Developments which could affect estimates include, but
are not limited to, the availability and cost of trained personnel; the
ability to locate and correct all relevant computer code and equipment; and
planning and modification success of third party suppliers of products and
services. The Company will continue to assess and evaluate cost estimates
and target dates for completion of each phase of the Year 2000 project on a
periodic basis.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 15 Letter Re: Unaudited Interim Financial Information.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the six months ended
December 31, 1998.
20
<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 on Form S-3
(File Nos. 333-28511, No. 33-82094,
No. 33-86276, No. 33-89150,
No. 33-92244, No. 33-96224,
No. 33-80337, and No. 333-49165),
Form S-4 (File No. 333-12099) and
Form S-8 (File No. 33-44867 and
No. 33-89882)
We are aware that our report dated January 25, 1999, on our reviews of the
interim financial information of Regis Corporation as of December 31, 1998
and for the three and six month periods ended December 31, 1998 and 1997, and
included in the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1998, 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 such registration statements
prepared or certified by us within the meaning of Sections 7 and 11 of that
Act.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPER LLP
Minneapolis, MN
February 8, 1999
21
<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 8, 1999 By: /s/ Randy L. Pearce
------------------------------
Randy L. Pearce
Senior Vice President, Finance
Chief Financial Officer
Signing on behalf of the
registrant and as principal
accounting officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGIS
CORPORATION CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED
DECEMBER 31, 1998 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,162
<SECURITIES> 0
<RECEIVABLES> 12,106
<ALLOWANCES> 78
<INVENTORY> 58,465
<CURRENT-ASSETS> 93,686
<PP&E> 339,608
<DEPRECIATION> 148,056
<TOTAL-ASSETS> 421,616
<CURRENT-LIABILITIES> 86,667
<BONDS> 0
0
0
<COMMON> 1,197
<OTHER-SE> 207,418
<TOTAL-LIABILITY-AND-EQUITY> 421,616
<SALES> 125,064
<TOTAL-REVENUES> 441,367
<CGS> 66,934
<TOTAL-COSTS> 349,658
<OTHER-EXPENSES> 9,934<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,483
<INCOME-PRETAX> 27,992
<INCOME-TAX> 11,110
<INCOME-CONTINUING> 16,882
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,882
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.69<F2>
<FN>
<F1>Includes nonrecurring year 2000 remediation costs of $2,891.
<F2>Excluding nonrecurring items, diluted EPS would have been $.76.
</FN>
</TABLE>
