UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission file number 0-11230

Regis Corporation
(Exact name of registrant as specified in its charter)

 

(952)947-7777
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes  o   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 3, 2006:

 

REGIS CORPORATION

INDEX

Part I.		Financial Information
		Item 1.		Condensed Consolidated Financial Information:
				Condensed Consolidated Balance Sheet as of September 30, 2006 and June 30, 2006
				Condensed Consolidated Statement of Operations for the three months ended September 30, 2006 and 2005
				Condensed Consolidated Statement of Cash Flows for the three months ended September 30, 2006 and 2005
				Notes to Condensed Consolidated Financial Information
				Review Report of Independent Registered Public Accounting Firm
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk
		Item 4.		Controls and Procedures
Part II.		Other Information
		Item 1.		Legal Proceedings
		Item 1A.		Risk Factors
		Item 2.		Unregistered sales of Equity Securities and Use of Proceeds
		Item 4.		Submission of Matters to a Vote of Security Holders
		Item 6.		Exhibits
		Signature

 

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PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Information

REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
as of September 30, 2006 and June 30, 2006
(Dollars in thousands, except per share amounts)

		September 30, 2006			June 30, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	146,860		$	135,397
Receivables, net		73,652			62,558
Inventories		207,720			193,999
Deferred income taxes		15,938			16,224
Other current assets		44,038			33,588
Total current assets		488,208			441,766
Property and equipment, net		490,610			483,764
Goodwill		795,398			778,228
Other intangibles, net		216,858			216,831
Other assets		70,121			61,475
Total assets		$	2,061,195		$	1,982,064
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current portion		$	153,326		$	101,912
Accounts payable		80,599			70,807
Accrued expenses		223,415			230,236
Total current liabilities		457,340			402,955
Long-term debt		537,770			520,357
Other noncurrent liabilities		188,527			187,345
Total liabilities		1,183,637			1,110,657
Commitments and contingencies
Shareholders’ equity:
Preferred stock, authorized 250,000 shares at September 30, 2006 and June 30, 2006
Common stock, $.05 par value; issued and outstanding 44,858,121 and 45,303,459 common shares at September 30, 2006 and June 30, 2006, respectively		2,244			2,266
Additional paid-in capital		213,982			232,284
Accumulated other comprehensive income		61,288			58,066
Retained earnings		600,044			578,791
Total shareholders’ equity		877,558			871,407
Total liabilities and shareholders’ equity		$	2,061,195		$	1,982,064

 

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

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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the three months ended September 30, 2006 and 2005
(Dollars in thousands, except per share amounts)

		2006			2005
Revenues:
Service		$	434,552		$	390,969
Product		184,925			173,752
Royalties and fees		19,766			19,508
		639,243			584,229
Operating expenses:
Cost of service		245,525			221,859
Cost of product		94,229			88,536
Site operating expenses		55,806			49,716
General and administrative		77,953			74,067
Rent		92,172			82,835
Depreciation and amortization		29,542			25,896
Total operating expenses		595,227			542,909
Operating income		44,016			41,320
Other income (expense):
Interest		(9,838		)	(8,264		)
Other, net		811			799
Income before income taxes		34,989			33,855
Income taxes		(11,896		)	(11,696		)
Net income		$	23,093		$	22,159
Net income per share:
Basic		$	0.51		$	0.49
Diluted		$	0.50		$	0.48
Weighted average common and common equivalent shares outstanding:
Basic		45,044			44,964
Diluted		46,132			46,336
Cash dividends declared per common share		$	0.04		$	0.04

 

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

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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the three months ended September 30, 2006 and 2005
(Dollars in thousands)

		2006			2005
Cash flows from operating activities:
Net income		$	23,093		$	22,159
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		25,068			21,768
Amortization		2,989			2,878
Deferred income taxes		5,039			83
Asset impairment		1,485			1,250
Excess tax benefits from stock-based compensation plans		(1,170		)	(2,713		)
Stock-based compensation		1,146			1,675
Other noncash items affecting earnings		187			(136		)
Changes in operating assets and liabilities:
Receivables		(10,906		)	2,488
Inventories		(11,875		)	(14,514		)
Other current assets		(10,196		)	(9,558		)
Other assets		(1,404		)	(400		)
Accounts payable		10,562			8,459
Accrued expenses		(6,933		)	958
Other noncurrent liabilities		4,485			3,606
Net cash provided by operating activities		31,570			38,003
Cash flows from investing activities:
Capital expenditures		(23,929		)	(29,654		)
Proceeds from sale of assets		118			21
Purchase of salon, school and hair restoration center net assets, net of cash acquired		(22,767		)	(35,963		)
Loans and investments		(7,250		)	—
Net investment hedge settlement		(8,897		)	—
Net cash used in investing activities		(62,725		)	(65,596		)
Cash flows from financing activities:
Borrowings on revolving credit facilities		1,211,806			656,729
Payments on revolving credit facilities		(1,149,000		)	(617,930		)
Proceeds from issuance of long-term debt		25,000			—
Repayments of long-term debt		(25,458		)	(12,051		)
Excess tax benefits from stock-based compensation plans		1,170			2,713
Other, primarily increase in negative book cash balances		1,177			3,426
Repurchase of common stock		(25,057		)	—
Proceeds from issuance of common stock		3,857			5,274
Dividends paid		(1,840		)	(1,805		)
Net cash provided by financing activities		41,655			36,356
Effect of exchange rate changes on cash and cash equivalents		963			327
Increase in cash and cash equivalents		11,463			9,090
Cash and cash equivalents:
Beginning of period		135,397			102,718
End of period		$	146,860		$	111,808

 

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

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REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)

1.                                      BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The unaudited interim Condensed Consolidated Financial Information of Regis Corporation (the Company) as of September 30, 2006 and for the three months ended September 30, 2006 and 2005, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2006 and the consolidated results of its operations and its cash flows for the interim periods.  Adjustments consist only of normal recurring items, except for any discussed in the notes below.  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 Consolidated Balance Sheet data for June 30, 2006 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  The unaudited interim Condensed Consolidated Financial Information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2006 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

With respect to the unaudited condensed financial information of the Company for the three month periods ended September 30, 2006 and 2005 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information.  However, their separate report dated November 3, 2006 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information.  Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

Inventories:

Inventories consist principally of hair care products held either for use in services or for sale. Inventories are stated at the lower of cost or market with cost determined on a weighted average basis. Cost of product used in salon services is determined by applying estimated gross profit margins to service revenues, which are based on historical factors including product pricing trends and estimated shrinkage. In addition, the estimated gross profit margin is adjusted based on the results of physical inventory counts performed at least semi-annually. Cost of product sold to salon customers is determined based on the actual cost of product to the Company, adjusted for an estimated shrinkage factor.  Product and service inventories are adjusted based on the results of physical inventory counts performed at least semi-annually.

Stock-Based Employee Compensation:

Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan) and the 2000 Stock Option Plan. Additionally, the Company has outstanding stock options under its 1991 Stock Option Plan, although the Plan terminated in 2001.  Under these plans, three types of stock-based compensation awards are granted:  stock options, equity-based stock appreciation rights (SARS) and restricted stock.  These stock-based awards expire within ten years from the grant date.  The company recognizes compensation expense for these awards on a straight-line basis over the five-year vesting period (includes retirement eligible recipients as there is no accelerated vesting terms for these recipients).

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A summary of option activity under the Plan as of September 30, 2006, and changes during the three month period then ended is presented below:

 

There are an additional 420,493 shares expected to vest with a $34.03 weighted average exercise price and a weighted average remaining contractual life of 8.0 years. The total intrinsic value of options exercised during the three months ended September 30, 2006 and 2005, was $4.9 and $7.3 million, respectively.

As of September 30, 2006, 187,445 unvested restricted stock shares with a weighted average grant-date fair value of $36.91 were outstanding, of which 192,855 were outstanding at June 30, 2006.

As of September 30, 2006, 222,250 SARS with a weighted average grant-date fair value of $37.37 were outstanding, of which 231,250 were outstanding at June 30, 2006.

The company’s primary employee stock-based compensation grant occurs during the fourth quarter. The total unrecognized compensation cost related to unvested stock-based compensation arrangements was $12.8 million and the related weighted average period over which it is expected to be recognized is approximately 3.4 years.

Recent Accounting Pronouncements:

On July 13, 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48), was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 (i.e., the beginning of the Company’s fiscal year 2008), and the provisions are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 must be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company is currently evaluating the impact of FIN 48 on its Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (i.e., the beginning of the Company’s fiscal year 2009). The Company is currently evaluating the impact of SFAS No. 157 on its Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 amends SFAS No. 87, Employers’ Accounting for Pensions (SFAS No. 87), SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits (SFAS No. 88), SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106) and SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132(R)).  SFAS No. 158 requires balance sheet recognition of the funded status for all pension and postretirement benefit plans as of the end of the Company’s current fiscal year (i.e., in the Company’s fiscal year 2007 Annual Report on Form 10-K). The impact of initial adjustment will be recorded as an adjustment of the ending balance of other comprehensive income. Subsequent changes in funded status must also be recognized as a component of other comprehensive income to the extent they have not yet been recognized as a component of net periodic benefit cost pursuant to SFAS No. 87, SFAS No. 88 or SFAS No. 106. The Company has

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unfunded deferred compensation contracts covering key executives based on their accomplishments within the Company which will be subject to the provisions of SFAS No. 158.  The Company intends to fund its future obligations under these contracts through company-owned life insurance policies on the participants.  The Company is currently evaluating the impact of SFAS No. 158 on its Consolidated Financial Statements.

2.             SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME:

Additional Paid-In Capital

The decrease in additional paid-in capital during the three months ended September 30, 2006 was due to the following:

 

Comprehensive Income

Components of comprehensive income for the Company include net income, changes in fair market value of financial instruments designated as hedges of interest rate or foreign currency exposure and foreign currency translation charged or credited to the cumulative translation account within shareholders’ equity. Comprehensive income for the three months ended September 30, 2006 and 2005 were as follows:

 

3.                                      NET INCOME PER SHARE:

The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:

 

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Stock options, SARs and restricted stock representing 675,052 and 437,750 shares were excluded from the shares used in the computation of diluted earnings per share for the three months ended September 30, 2006 and 2005, respectively, as they were anti-dilutive.

Restricted stock awards of 187,445 and 141,650 shares for the three months ended September 30, 2006 and 2005, respectively, were excluded from the computation of basic weighted average shares outstanding as such shares were not yet vested at these dates.

4.             GOODWILL AND OTHER INTANGIBLES:

The tables below contain detail related to our recorded goodwill and other intangibles as of September 30, 2006 and June 30, 2006.

 

Goodwill acquired includes adjustments to prior year acquisitions, including the finalization of the purchase price allocation to identifiable intangible assets of the hair restoration centers which resulted in the decrease to the recorded goodwill for that segment during the quarter.

The table below presents other intangible assets as of September 30, 2006 and June 30, 2006:

 

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All intangible assets have been assigned an estimated finite useful life and are amortized over the number of years that approximate their respective useful lives (ranging from four to 40 years). The Company follows the straight-line method of amortization, which approximates the economic benefit amortized to earnings in that reporting period. The weighted average amortization periods, in total and by major intangible asset class, are as follows:

 

Total amortization expense related to amortizable intangible assets was approximately $2.8 and $2.7 million during the three months ended September 30, 2006 and 2005, respectively.   As of September 30, 2006, future estimated amortization expense related to amortizable intangible assets is estimated to be:

 

5.             ACQUISITIONS, LOANS AND INVESTMENTS:

Acquisitions

During the three months ended September 30, 2006 and 2005, the Company made numerous acquisitions and the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.  Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

The components of the aggregate purchase prices of the acquisitions made during the three months ended September 30, 2006 and 2005 and the allocation of the purchase prices were as follows:

 

In a limited number of acquisitions, the Company guarantees that the stock issued in conjunction with the acquisition will reach a certain market price. If the stock should not reach this price during an agreed upon time frame (typically three years from the date of acquisition), the Company is obligated to issue additional consideration to the sellers. Once the agreed upon stock price is met or exceeded for a period of five consecutive days, the contingency is met and

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the Company is no longer liable. At June 30, 2006, one contingency of this type exists, which expires in March of 2008. Based on the September 30, 2006 market price, the Company would be required to provide an additional 64,371 shares with an aggregate market value on that date of $2.3 million related to these acquisition contingencies if the agreed upon time frames were all assumed to have expired September 30, 2006. These contingently issuable shares have been included in the calculation of diluted earnings per share.

The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in customer base of the acquired salons, which is not recorded as an identifiable intangible asset under current accounting guidance, as well as the limited value and customer preference associated with the acquired hair salon brand. Key factors considered by consumers of hair salon services include personal relationships with individual stylists (driven by word of mouth referrals), service quality and price point competitiveness. These attributes represent the “going concern” value of the salon. While the value of the acquired customer base is the primary driver of any potential acquisition’s cash flows (which determines the purchase price), it is neither known nor identifiable at the time of the acquisition. The cash flow history of a salon primarily results from repeat walk-in customers driven by the existing personal relationship between the customer and the stylist(s). Under SFAS No. 141, Business Combinations, a walk-in customer base does not meet the criteria for recognition apart from goodwill.

Residual goodwill further represents the Company’s opportunity to strategically combine the acquired business with the Company’s existing structure to serve a greater number of customers through its expansion strategies. In the acquisitions of international salons, beauty schools and hair restoration centers, the residual goodwill primarily represents the growth prospects that are not captured as part of acquired tangible or identified intangible assets. Generally, the goodwill recognized in the North American salon transactions and certain beauty school transactions is expected to be fully deductible for tax purposes and the goodwill recognized in the international salon transactions is non-deductible for tax purposes. Goodwill generated in certain acquisitions, such as Hair Club, is not deductible for tax purposes due to the acquisition structure of the transaction.

During the three months ended September 30, 2006 and 2005, the Company purchased salon operations from its franchisees. The Company evaluated the effective settlement of the preexisting franchise contracts and associated rights afforded by those contracts in accordance with Emerging Issues Task Force (EITF) No. 04-1, Accounting for Preexisting Relationships Between the Parties to a Business Combination. The Company determined that the effective settlement of the preexisting franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the preexisting contracts. Therefore, no settlement gain or loss was recognized with respect to the Company’s franchise buybacks.

Loans and Investments

During the three months ended September 30, 2006, the Company invested $5.3 million in the preferred stock of a privately held entity. This investment was recorded within other assets in the Condensed Consolidated Balance Sheet and as an investing activity within the Condensed Consolidated Statement of Cash Flows.

The Company also holds a 19.9 percent interest in the voting common stock of another privately held entity; the Company is accounting for this investment under the equity method. As of September 30 and June 30, 2006, the Company has $8.0 and $6.0 million, respectively, in long-term notes receivable outstanding under a credit agreement with the entity that is the majority corporate investor in this investment. The long-term notes receivable are included within other assets in the Condensed Consolidated Balance Sheet and as investing activities within the Condensed Consolidated Statement of Cash Flows. Refer to Note 3 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2006 Annual Report on Form 10-K for additional details.

6.             LITIGATION:

The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide wage and hour violations. Estimated recorded reserve amounts are not significant; however, litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although company counsel believes that the Company has valid defenses in these matters, it could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

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7.             SEGMENT INFORMATION:

The Company operates or franchises 9,431 North American salons (located in the United States, Canada and Puerto Rico), 2,059 international salons, 55 beauty schools and 89 hair restoration centers.  The Company operates its North American salon operations through five primary concepts: Regis Salons, MasterCuts, Trade Secret, SmartStyle and Strip Center salons.  Each of the concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels.  All of the company-owned and franchise salons within the North American salon concepts are located in high traffic, retail shopping locations that attract mass market consumers, and the individual salons generally display similar economic characteristics. The salons share interdependencies and a common support base.  The Company’s international salon operations, which are primarily in Europe, are located in malls, leading department stores, mass merchants and high-street locations.  The Company’s beauty schools are located in the United States and the United Kingdom. The Company’s hair restoration centers are located in the United States and Canada.

Based on the way the Company manages its business, it has reported its North American salons, international salons, beauty schools and hair restoration centers as four separate reportable operating segments.

Financial information for the Company’s reporting segments is shown in the following tables:

 

		For the Three Months Ended September 30, 2006
		Salons						Beauty			Hair Restoration			Unallocated
		North America			International			Schools			Centers			Corporate			Consolidated
		(Dollars in thousands)
Revenues:
Service		$	371,199		$	33,690		$	16,964		$	12,699		$	—		$	434,552
Product		153,908			13,441			2,401			15,175			—			184,925
Royalties and fees		9,799			8,744			—			1,223			—			19,766
		534,906			55,875			19,365			29,097			—			639,243
Operating expenses:
Cost of service		212,372			17,978			8,036			7,139			—			245,525
Cost of product		79,704			7,992			1,802			4,731			—			94,229
Site operating expenses		48,105			2,354			4,330			1,017			—			55,806
General and administrative		29,045			10,170			2,367			6,277			30,094			77,953
Rent		76,895			10,995			2,236			1,664			382			92,172
Depreciation and amortization		20,139			1,872			812			2,334			4,385			29,542
Total operating expenses		466,260			51,361			19,583			23,162			34,861			595,227
Operating income (loss)		68,646			4,514			(218		)	5,935			(34,861		)	44,016
Other income (expense):
Interest		—			—			—			—			(9,838		)	(9,838		)
Other, net		—			—			—			—			811			811
Income (loss) before income taxes		$	68,646		$	4,514		$	(218	)	$	5,935		$	(43,888	)	$	34,989

 

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		For the Three Months Ended September 30, 2005
		Salons						Beauty			Hair Restoration			Unallocated
		North America			International			Schools			Centers			Corporate			Consolidated
		(Dollars in thousands)
Revenues:
Service		$	337,193		31,373			$	11,802		$	10,601		$	—		$	390,969
Product		146,513			11,701			1,420			14,118			—			173,752
Royalties and fees		9,837			8,407			—			1,264			—			19,508
		493,543			51,481			13,222			25,983			—			584,229
Operating expenses:
Cost of service		193,916			17,014			4,837			6,092			—			221,859
Cost of product		75,891			7,200			1,120			4,325			—			88,536
Site operating expenses		45,009			1,826			1,825			1,056			—			49,716
General and administrative		28,377			10,541			1,925			5,524			27,700			74,067
Rent		69,886			9,838			1,399			1,451			261			82,835
Depreciation and amortization		18,205			1,819			491			2,245			3,136			25,896
Total operating expenses		431,284			48,238			11,597			20,693			31,097			542,909
Operating income (loss)		62,259			3,243			1,625			5,290			(31,097		)	41,320
Other income (expense):
Interest		—			—			—			—			(8,264		)	(8,264		)
Other, net		—			—			—			—			799			799
Income (loss) before income taxes		$	62,259		$	3,243		$	1,625		$	5,290		$	(38,562	)	$	33,855

 

8.             DERIVATIVE FINANCIAL INSTRUMENTS:

During September 2006, the Company’s cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the Company’s net investment in its foreign operations) was settled, resulting in a cash outlay of $8.9 million.  This cash outlay was recorded within investing activities within the Condensed Consolidated Statement of Cash Flows.  Approximately $0.1 million of tax-effected gain related to this derivative was charged to the cumulative translation adjustment account during both the quarter ended September 30, 2006 and the quarter ended September 30, 2005.  The cumulative tax-effected net loss recorded in accumulated other comprehensive income related to the cross-currency swap was $7.9 million at September 30, 2006.  This amount will remain deferred within OCI indefinitely, as the event which would trigger its release from OCI and recognition in earnings is the sale or liquidation of the Company’s international operations that the cross-currency swap hedged (and the Company has no intent to sell or liquidate this portion of its business operations).

9.             INCOME TAXES:

The reported effective tax rate for the three months ended September 30, 2006 and 2005 was 34.0% and 34.5%, respectively.  An income tax benefit associated with a favorable ruling received from the IRS increased reported net income by approximately $0.8 million for the three months ended September 30, 2006 and favorably impacted the reported tax rate.  For the three months ended September 30, 2005, the reported effective tax rate included the benefit from the reinstatement of the Work Opportunity Tax Credit.

10.          SUBSEQUENT EVENT:

In October 2006, the Company invested $10 million to form a new limited liability company called Intelligent Nutrients, LLC. The Company and Intelligent Nutrients, Inc. (a company owned by Horst Rechelbacher, founder of the Aveda Corporation) each hold a 50 percent interest in the newly formed LLC. Intelligent Nutrients, LLC currently carries a wide variety of organic, harmonically grown™ products, including dietary supplements, coffees, teas and aromatics.  Additionally, a full line of professional hair-care and personal care products is in development and is expected to be available in calendar year 2007.  These products will be offered at the Company’s corporate and franchise salons, as well as other independently owned salons.

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REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Directors of Regis Corporation:

We have reviewed the accompanying condensed consolidated balance sheet of Regis Corporation as of September 30, 2006 and the related condensed consolidated statements of operations and of cash flows for the three month periods ended September 30, 2006 and 2005.  This interim financial information is the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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 the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of June 30, 2006, and the related consolidated statements of operations, of changes in shareholders’ equity and comprehensive income and of cash flows for the year then ended, management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006 and the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006; and in our report dated September 8, 2006, which contained an explanatory paragraph indicating the Company changed its method of accounting for share-based payments as of July 1, 2005, we expressed unqualified opinions thereon.  The consolidated financial statements and management’s assessment of the effectiveness of internal control over financial reporting referred to above are not presented herein.  In our opinion, the accompanying consolidated balance sheet information as of June 30, 2006, 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
November 3, 2006

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial information with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.  Our MD&A is presented in 5 sections:

•                    Management’s Overview

•                    Critical Accounting Policies

•                    Overview of Results

•                    Results of Operations

•                    Liquidity and Capital Resources

MANAGEMENT’S OVERVIEW

Regis Corporation (RGS) owns or franchises beauty salons, hair restoration centers and educational establishments. As of September 30, 2006, our worldwide operations included 11,490 system wide North American and international salons, 89 hair restoration centers and 55 beauty schools. Each of our salon concepts offer generally similar products and services and serves mass market consumers. Our salon operations are organized to be managed based on geographical location. Our North American salon operations include 9,431 salons, including 2,171 franchise salons, operating in the United States, Canada and Puerto Rico primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. Our international salon operations include 2,059 salons, including 1,596 franchise salons, located throughout Europe, primarily in the United Kingdom, France, Italy and Spain. Our beauty schools are managed in aggregate, regardless of geographical location, and include 51 locations in the United States and four locations in the United Kingdom. Our hair restoration centers are located in the United States and Canada. During the three months ended September 30, 2006, we had approximately 59,000 corporate employees worldwide.

Our growth strategy consists of two primary, but flexible, components. Through a combination of organic and acquisition growth, we seek to achieve our long-term objective of eight to 12 percent annual revenue growth. We anticipate that going forward, the mix of organic and acquisition growth will be roughly equal. However, depending on several factors, including the ability of our salon development program to keep pace with the availability of real estate for new construction, student enrollment, hair restoration lead generation, the availability of attractive acquisition candidates and same-store sales trends, this mix will vary from year to year. We believe achieving revenue growth of eight to 12 percent, including same-store sales increases in excess of two percent, will allow us to increase annual earnings at a low-double-digit growth rate. We anticipate expanding our presence in both North America and Europe. Additionally, we desire to enter the Asian market within the next five years.

Maintaining financial flexibility is a key element in continuing our successful growth. With strong operating cash flow and balance sheet, we are confident that we will be able to financially support our long-term growth objectives.

Salon Business

The strength of our salon business is in the fundamental similarity and broad appeal of our salon concepts that allow flexibility and multiple salon concept placements in shopping centers and neighborhoods. Each concept generally targets the middle market customer, however, each attracts a different demographic. We anticipate expanding all of our salon concepts. In addition, we anticipate testing and developing new salon concepts to complement our existing concepts.

We execute our salon growth strategy by focusing on real estate. Our salon real estate strategy is to add new units in convenient locations with good visibility and customer traffic, as well as appropriate trade demographics. Our various salon and product concepts operate in a wide range of retailing environments, including regional shopping malls, strip centers and Wal-Mart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives. In fiscal 2007, although we have tempered our outlook for constructed salons to between 325 to 400 units, we still expect to add between 500 and 700 net locations through a combination of organic, acquisition and franchise growth. Our long-term outlook anticipates that we will add between 800 to 1,000 net locations each year through a combination of organic, acquisition and franchise growth.

Organic salon revenue growth is achieved through the combination of new salon construction and salon same-store sales increases. Each fiscal year, we anticipate building several hundred company-owned salons. We anticipate our franchisees will open several hundred salons as well. Older, unprofitable salons will be closed or relocated. Our long-term outlook for our salon business is for annual consolidated low single digit same-store sales increases. Based on current fashion and economic cycles

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(i.e., longer hairstyles and lengthening of customer visitation patterns), we project our annual fiscal year 2007 consolidated same-store sales increase to be in a range of flat to one percent.

Historically, our salon acquisitions have varied in size from as small as one salon to over one thousand salons. The median acquisition size is approximately ten salons. From fiscal year 1994 to September 30, 2006, we acquired 7,387 salons, net of franchise buybacks. We anticipate adding several hundred company-owned salons each year from acquisitions. Some of these acquisitions may include buying salons from our franchisees.

Hair Restoration Business

Our organic growth plans for hair restoration include the construction of a modest number of new locations in untapped markets domestically and internationally. However, the success of our hair restoration business is not dependent on the same real estate criteria used for salon expansion. In an effort to provide confidentiality for our customers, hair restoration centers operate primarily in professional or medical office buildings. Further, the hair restoration business is more marketing intensive. As a result, organic growth at our hair restoration centers will be dependent on successfully generating new leads and converting them into hair restoration customers. Our growth expectations for our hair restoration business are not dependent on referral business from, or cross marketing with, our hair salon business, but these concepts will be evaluated closely for additional growth opportunities.

Beauty School Business

The beauty school business often participates in governmental programs designed to encourage education. We believe there is an opportunity to place graduates in our various salon concepts which may provide us with another competitive advantage. Similar to the salon and hair loss industries, the beauty school industry is highly fragmented. As a result, we believe there is an opportunity to consolidate this industry through acquisition. Capitalizing on these opportunities would allow us to add incremental revenue without cannibalizing our existing salon or hair restoration center businesses. During fiscal year 2007, we expect to moderate our acquisitions activity. However, in the long-term the Company will continue to evaluate acquisition targets.

The success of a beauty school location is not dependent on good visibility or strong customer traffic; however, access to parking and/or public transportation is important. The success of existing and newly constructed schools is dependent on effective marketing and recruiting to attract new enrollees.

CRITICAL ACCOUNTING POLICIES

The Condensed Consolidated Financial Information is prepared in conformity with accounting principles generally accepted in the United States of America.  In preparing the Condensed Consolidated Financial Information, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Condensed Consolidated Financial Information.  We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances.  Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Condensed Consolidated Financial Information.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2006 Annual Report on Form 10-K, as well as Note 1 to the Condensed Consolidated Financial Information contained within this Quarterly Report on Form 10-Q.  We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, purchase price allocations, revenue recognition, the cost of product used and sold, self-insurance accruals, stock-based compensation expense, legal contingencies and estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.  Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our June 30, 2006 Annual Report on Form 10-K.  There were no significant changes in or application of our critical accounting policies during the quarter ended September 30, 2006.

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OVERVIEW OF RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006

·                  Revenues increased 9.4 percent to $639 million and consolidated same-store sales decreased 0.3 percent during the three months ended September 30, 2006. Same-store sales continued to be negatively impacted by the long hair cycle, as customers tend to cut their hair less often than when they have a short or “shaped” look.

·                  The slight decrease in operating income as a percentage of consolidated revenues during the three months ended September 30, 2006 was primarily due to a first quarter same-store sales decrease of 0.3 percent in our salon business that resulted in less leverage of our fixed costs.

·                  During the quarter, we acquired 83 salons (including 40 franchise salon buybacks).  We built 129 corporate salons and closed or relocated 48 salons, for a net increase of 164 salons.  Our franchisees constructed 66 salons and closed, sold back to us or relocated 73 salons, for a net decrease of seven franchise salons during the quarter.  Additionally, we acquired one beauty school and closed one hair restoration center.  As of September 30, 2006, we had 7,723 company owned salons, 3,767 franchise salons, 55 beauty schools and 89 hair restoration centers (47 company-owned and 42 franchise locations).

·                  Total debt at the end of the quarter was $691 million and our debt-to-capitalization ratio, calculated as total debt as a percentage of total debt and shareholder’s equity at fiscal quarter end, was 44.1 percent.

RESULTS OF OPERATIONS

Consolidated Results of Operations

The following table sets forth, for the periods indicated, certain information derived from our Condensed Consolidated Statement of Operations, expressed as a percent of revenues.  The percentages are computed as a percent of total consolidated revenues, except as noted.

		Results of Operations as a Percent of Revenues
		For the Three Months Ended September 30,
		2006		2005
Service revenues		68.0	%	66.9	%
Product revenues		28.9		29.8
Franchise royalties and fees		3.1		3.3
Operating expenses:
Cost of service (1)		56.5		56.7
Cost of product (2)		51.0		51.0
Site operating expenses		8.7		8.5
General and administrative		12.2		12.7
Rent		14.4		14.2
Depreciation and amortization		4.6		4.4
Operating income		6.9		7.1
Income before income taxes		5.5		5.8
Net income		3.6		3.8

(1)   Computed as a percent of service revenues and excludes depreciation expense.

(2)   Computed as a percent of product revenues and excludes depreciation expense.

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