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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended            September 30, 2002

OR

For the transition period from  ________________________   to _____________________

________________

Commission file number      011230

Regis Corporation

(952)947-7777

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 4, 2002:

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REGIS CORPORATION

INDEX

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

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

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

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
for the three months ended September 30, 2002 and 2001
(Dollars in thousands, except per share amounts)

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

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REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the three months ended September 30, 2002 and 2001
(Dollars in thousands)

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

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REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		BASIS OF PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
		The unaudited interim Consolidated Financial Statements of Regis Corporation (the Company) as of September 30, 2002 and for the three months ended September 30, 2002 and 2001, reflect, in the opinion of management, all adjustments necessary to fairly present the consolidated financial position of the Company as of September 30, 2002 and the consolidated results of its operations and its cash flows for the interim periods. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.
		The Consolidated Balance Sheet data for June 30, 2002 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended June 30, 2002.
		With respect to the unaudited financial information of the Company for the three month periods ended September 30, 2002 and 2001 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated October 29, 2002 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
		Cost of Product Sales: On an interim basis, product costs are determined by applying an estimated gross profit margin to product revenues.
		Reclassifications: Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income or shareholders’ equity as previously presented.
2.		NEW ACCOUNTING PRONOUNCEMENTS:
		Effective July 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (FAS) No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The initial adoption of this Statement had no impact on the Consolidated Statement of Operations.

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		In June 2002, the Financial Accounting Standards Board (FASB) issued FAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires that a liability for costs associated with an exit or disposal activities be recognized and measured initially at fair value when the liability is incurred. The provisions of the standard are effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of FAS 146 to have any impact on the Consolidated Statement of Operations.
3.		DERIVATIVE INSTRUMENTS:
		In the normal course of business, the Company is exposed to changes in interest rates and foreign currency rates. In addition, the Company has investments in foreign subsidiaries, and the net assets of these subsidiaries are exposed to currency exchange-rate volatility. The Company has established policies and procedures that govern the management of these exposures through the use of financial instruments. By policy, the Company does not enter into such contracts for the purpose of speculation. The Company uses interest rate swaps to convert a portion of its variable rate debt to fixed rates, or to convert a portion of its nonprepayable fixed rate debt to variable rate debt.
		At September 30, 2002 and 2001, Regis had interest rate swap contracts to pay fixed rates of interest (ranging from 5.1 to 7.2 percent during the first quarters of fiscal 2003 and 2002) and receive variable rates of interest based on the three-month LIBOR rate (1.8 percent during the first quarter of fiscal 2003 and ranging from 2.6 to 3.8 percent during the first quarter of fiscal 2002) on $25.0, $30.0 and $11.8 million notional amounts of indebtedness through April 2003, June 2003 and June 2005, respectively. These swaps have been designated as cash flow hedges of interest payments on a portion of the Company’s revolving credit facility and rental payments on the Company’s warehouse operating lease. During the first quarter of fiscal 2003 and 2002, no hedge ineffectiveness occurred. The pay-fixed receive-variable interest rate swaps resulted in net settlement losses of approximately $.9 and $.5 million that have been transferred from accumulated other comprehensive income to earnings during the first quarter of fiscal 2003 and 2002, respectively. Such amounts are classified as part of interest expense in the Consolidated Statement of Operations. As of September 30, 2002, the Company estimates, based on current interest rates that approximately $3.1 million of deferred net unrealized losses on derivative instruments accumulated in other comprehensive income are expected to be transferred to earnings during the next twelve months. Such amounts will be transferred to earnings as interest payments are made on the variable rate debt. The net gain recorded in other comprehensive income, net of tax, was $.1 million during the first quarter of fiscal 2003 and the net loss recorded in other comprehensive income, net of tax, was $1.0 million during the first quarter of fiscal 2002.
		During the third quarter of fiscal 2002, the Company entered into interest rate swap contracts to pay variable rates of interest based on the three-month and six-month LIBOR rate plus a credit spread (ranging from 2.7 to 6.3 percent during the three months ended September 30, 2002) and receive fixed rates of interest (ranging from 6.7 to 8.2 percent) on an aggregate $111.0 million notional amount of indebtedness, with maturation dates between July 2003 and March 2009. These swaps have been designated as fair value hedges of a portion of the Company’s senior term notes. No hedge ineffectiveness occurred during the quarter. As a result, the swaps did not have a net impact on earnings.
		During the first quarter of fiscal 2002, the Company entered into a cross-currency swap, with a notional amount of $21.3 million, to hedge a portion of its net investments in its foreign operations. The purpose of this hedge is to protect against adverse movements in exchange rates. The cross-currency swap hedges approximately 13 percent of the Company’s net investments in foreign operations at September 30, 2002. For the quarter ended September 30, 2002 and 2001, $.3 million of gain, net of tax, and $.3 million of loss, net of tax, related to this derivative was charged to the cumulative translation adjustment account, which is a component of other comprehensive income.

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4.		SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME:
		The Company recorded increases in equity of $7.5 million primarily related to shares issued in connection with salon acquisitions, $2.4 million related to shares held in the Company’s equity compensation plans and $0.3 million related to the tax benefit realized upon exercise of stock options, partially offset by $4.4 million related to shares repurchased under the Company’s stock repurchase program, to additional paid-in capital during the three months ended September 30, 2002.
		Components of comprehensive income for the Company include net income, changes in fair market value of financial instruments designated as hedges of interest rate 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, 2002 and 2001 were as follows:

5.		NET INCOME PER SHARE:
		Stock options covering approximately 302,935 and 832,650 shares were excluded from the shares used in the computation of diluted earnings per share for first quarter of fiscal 2003 and 2002, respectively, since they were anti-dilutive.
		The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:

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6.		TRANSACTION AND RESTRUCTURING LIABILITIES:
		As of June 30, 2002, the Company’s restructuring liability related to the October 31, 1999 merger with Supercuts UK totaled approximately $713,000. During the first three months of fiscal 2003, such liabilities were reduced by cash payments of $77,000 and increased by $9,000 related to translation rates, resulting in balance of $645,000 at September 30, 2002. This remaining amount will be satisfied through periodic contractual payments by the end of fiscal 2004.
7.		SEGMENT INFORMATION:
		The Company operates or franchises 7,056 domestic salons and 2,082 international salons. The Company executes its domestic operations through five primary concepts: Regis Salons, MasterCuts, Trade Secret, SmartStyle and Strip Center (primarily Supercuts and Cost Cutters) salons. Each of the concepts offers similar products and services, concentrates on the mass-market consumer marketplace and have consistent distribution channels. All of the salons within the North American concepts are located within high traffic retail (destination) shopping locations and the individual salons generally display similar economic characteristics. The Company’s international operations, which are primarily in Europe, are located in salons operating in malls, leading department stores, mass merchants and high-street locations. Based on the way in which the Company manages its business, it has presented its domestic and international operations as two reportable operating segments, domestic and international.
		Summarized financial information concerning the Company’s reportable operating segments is shown in the following table as of September 30, 2002 and 2001:

         * Includes franchise revenues less franchise direct costs.

8.		ACQUISITIONS:
		During the three months ended September 30, 2002 and 2001, the Company made numerous acquisitions. These acquisitions have been recorded using the purchase method of accounting. Accordingly, the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. These acquisitions individually and in the aggregate are not material to the Company’s operations. Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

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Based upon purchase price allocations, which may have components representing preliminary allocations, the components of the aggregate purchase prices of the acquisitions made during the periods ended September 30, 2002 and 2001 and the allocation of the purchase price were as follows:

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REVIEW REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Directors of Regis Corporation:

We have reviewed the accompanying consolidated balance sheet of Regis Corporation as of September 30, 2002, and the related consolidated statements of operations and of cash flows for the three month periods ended September 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of June 30, 2002, and the related consolidated statements of operations, of changes in shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated August 27, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the accompanying consolidated balance sheet information as of June 30, 2002, is fairly stated, in all material respects in relation to the consolidated balance sheet from which it has been derived.

PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
October 29, 2002

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

Summary

Regis Corporation (the Company), based in Minneapolis, Minnesota, is the world’s largest owner, operator, franchisor and acquirer of hair and retail product salons. The Regis worldwide operations include 9,138 salons at September 30, 2002 operating in two reportable operating segments: domestic and international. Each of the Company’s concepts have generally similar products and services. The Company is organized to manage its operations based on geographical location. The Company’s domestic segment includes 7,056 salons, including 2,207 franchised salons, operating in North America primarily under the trade names of Regis Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. The Company’s international operations include 2,082 salons, including 1,696 franchised salons, located throughout Europe, primarily in the United Kingdom, France, Italy and Spain. The Company has over 43,000 employees worldwide.

First quarter fiscal 2003 revenues grew to a record $399.2 million, including franchise revenues of $25.9 million, a 14.2 percent increase over the first quarter of fiscal 2002.

Operating income in first quarter of fiscal 2003 increased to $36.3 million, a 20.5 percent increase over the corresponding period of fiscal 2002.

Net income in the first quarter of fiscal 2003 increased to $19.7 million, or $.44 per diluted share, a net income and earnings per share increase of 28.4 and 22.2 percent, respectively, from first quarter fiscal 2002.

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Results of Operations

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

	(1)		Computed as a percent of company-owned revenues.
	(2)		Computed as a percent of service revenues.
	(3)		Computed as a percent of product revenues.
	(4)		Computed as a percent of franchise revenues.

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CRITICAL ACCOUNTING POLICIES

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. However, actual results could differ from these estimates.

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

•		useful lives assigned to long-lived and intangible assets;
•		recoverability of long-lived and intangible assets, including goodwill;
•		allocation of the purchase price to acquired assets and liabilities, including goodwill and intangibles;
•		various commitments and contingencies; and
•		product costs.

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

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

The Company makes numerous acquisitions that are recorded using the purchase method of accounting. Accordingly, the purchase prices are allocated to assets acquired, including intangible assets, and liabilities assumed based on their estimated fair values at the dates of acquisition. Fair value is estimated based on the amount for which the asset or liability could be bought or sold in a current transaction between willing parties.

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

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

RESULTS OF OPERATIONS

Revenues
Revenues for the first quarter of fiscal 2003 grew to a record $399.2 million, an increase of $49.6 million or 14.2 percent, over the same period in fiscal 2002. Approximately 58 percent of this increase was attributable to salon acquisitions and 32 percent to new salon construction, with the remaining increase primarily due to revenue growth from International operations. Mall and strip center based domestic salons, all associated with operations in the United States and Canada (domestic salons), accounted for $35.9 million of the increase in total revenues, while franchise revenues increased $10.4 million, primarily due to International operations, and revenue from company-owned International operations increased $3.3 million.

Revenues by concept for the quarters ended September 30, 2002 and 2001 were as follows:

Included in the table above, primarily as part of Strip Center Salons during the first quarter of both fiscal 2003 and 2002, as well as International during the first quarter of fiscal 2003, are franchise revenues of $25.9 and $15.5 million for the three months ended September 30, 2002 and 2001, respectively.

During the first quarter of fiscal 2003 and 2002, same-store sales from all domestic company-owned salons open more than 12 months increased 1.0 and 3.2 percent, respectively. Same-store sales increases achieved during the first quarter of fiscal 2003 were driven primarily by a shift in the mix of service sales toward higher priced salon services, such as hair color and waxing services, as well as increased product sales. Same-store sales increases during the first three months of fiscal 2003 were lower than the corresponding quarter of the prior fiscal year primarily due to the strength of product promotions in July and August of fiscal 2002 and an overall decline in the state of the economy as compared to the first three months of fiscal 2002.

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System-wide sales, inclusive of non-consolidated sales generated from franchisee salons, increased to $694.0 million during the first quarter of fiscal 2003, representing an increase of 35.2 percent over the same period last year. The increase in system-wide sales during the first three months of fiscal 2003 was primarily the result of salons added to the system through acquisitions, as well as net salon openings. System-wide same-store sales increased 1.5 and 3.8 percent in the first quarter of fiscal 2003 and 2002, respectively. A total of 34.5 and 30.1 million customers were served system-wide in the first quarter of fiscal 2003 and 2002, respectively. The increase in total customers was primarily the result of additional salons added to the system.

Service Revenues. Service revenues in the first quarter of fiscal 2003 grew to $263.1 million, an increase of $29.5 million or 12.6 percent, over the same period in fiscal 2002. The increase in service revenues was primarily a result of acquisitions and new salon construction.

Product Revenues. Product revenues in the first quarter of fiscal 2003 grew to $110.3 million, an increase of $9.7 million, or 9.7 percent, over the same period in fiscal 2002. This increase continues a trend of escalating product revenues due to strong product same-store sales growth, a reflection of the continuous focus on product awareness, training and acceptance of national label merchandise. As a percent of company-owned revenues, product sales fell 60 basis points as compared to the first quarter of fiscal 2002 due to the strength of product promotions in July and August of fiscal 2002.

Franchise Revenues. Franchise revenues, including royalties and initial franchise fees from franchisees, and product and equipment sales made by the Company to franchisees, increased to $25.9 million in the first quarter of fiscal 2003, compared to $15.5 million for the corresponding period of fiscal 2002. The increase in franchise revenues was primarily the result of increased franchise royalties and fees related to the recently acquired European franchise companies, Groupe Gerard Glemain (GGG) and Jean Louis David (JLD), as well as increased sales of product to franchisee salons.

Cost of Revenue
The aggregate cost of service and product revenues for company-owned salons in the first quarter of fiscal 2003 was $204.3 million compared to $185.9 million in the same period in fiscal 2002. The resulting combined gross margin percentage for the first quarter of fiscal 2003 improved 90 basis points to 45.3 percent of company-owned revenues.

Service margins improved 70 basis points in the first quarter of fiscal 2003 to 43.9 percent of company-owned revenues. This improvement was primarily due to initiatives that resulted in lower payroll and payroll related costs as compared to the corresponding period of fiscal 2002.

Product margins improved 160 basis points to 48.6 percent of company-owned revenues in the first quarter of fiscal 2003. This improvement was primarily the result of improved purchasing power, enabling the Company to buy retail product from vendors at lower prices, as well as a continuing shift in the mix of sales towards products with higher profit margins.

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Direct Salon
This expense category includes direct costs associated with salon operations such as salon advertising, insurance, telephone, utilities and janitorial costs. For the first quarter of fiscal 2003, direct salon expense of $35.4 million increased to 9.5 percent of company-owned revenues from 9.3 percent in the same period a year ago. The 20 basis point increase as a percent of company-owned revenues was primarily the result of higher workers’ compensation costs.

Rent
Rent expense during the first quarter of fiscal 2003 was $53.8 million, compared to $47.2 million in the same period of fiscal 2002. Rent expense increased 30 basis points as a percentage of company-owned revenues in the first quarter of fiscal 2003 primarily due to higher minimum rents related to acquired salons operating under the Regis and Strip Center Salon concepts. Additionally, common area costs continued to increase due to landlords in regional malls passing on increased insurance, utility and maintenance costs to their tenants.

Depreciation – Salon Level
Depreciation expense at the salon level remained consistent as a percent of company-owned revenues at 3.4 percent during the first quarter of fiscal 2003 as compared to the corresponding period of fiscal 2002.

Direct Salon Contribution
For reasons previously discussed, direct salon contribution, representing company-owned salon revenues less associated operating expenses, increased in the first quarter of fiscal 2003 to $67.1 million, compared to $58.7 million during the same period of fiscal 2002. As a percent of sales, direct salon contribution improved 40 basis points to 18.0 percent of company-owned revenues during the first three months of fiscal 2003.

Franchise Direct Costs, Including Product and Equipment
Franchise direct costs include all direct costs related to franchise salons, such as the cost of products and equipment sold to franchisees and direct costs incurred at the Home Office and in Europe to support franchising activities. Franchise direct costs increased to $13.8 million, or 53.3 percent of franchise revenues, during the period ended September 30, 2002. The increase was primarily related to additional support costs associated with the recently acquired European franchise companies, GGG and JLD. Additionally, growth in the sale of retail product to franchisees contributed to the overall dollar increase.

Corporate and Franchise Support Costs
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). Corporate and franchise support costs (CFSC) were $39.9 million in the first quarter of fiscal 2003, compared to $35.3 million in the same period in fiscal 2002. As a percent of total revenues, CFSC decreased ten basis points for the three months ended September 30, 2002 to 10.0 percent. This improvement was primarily due to duplicative costs incurred during the first half of fiscal 2002 associated with operating three distribution centers, prior to closing the Company’s Minneapolis distribution center in December 2001.

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Depreciation and Amortization – Corporate
Corporate depreciation and amortization remained consistent at 0.7 percent of total revenues in the first quarter of fiscal 2003 and 2002.

Operating Income
Operating income in the first quarter of fiscal 2003 improved to $36.3 million, or 9.1 percent of total revenues, an increase of 20.5 percent, or 50 basis points, over the same period in fiscal 2002.

Interest
Interest expense in the first quarter of fiscal 2003 increased $363,000 to $5.1 million. As a percent of total revenues, interest expense improved ten basis points to 1.3 percent primarily due to a reduction in interest rates on the Company’s variable rate debt.

Income Taxes
The Company’s effective income tax rate for the first three months of fiscal 2002 was 37.5 percent, compared to 39.7 percent in the first three months of fiscal 2002. The improvement in the fiscal 2003 effective rate was primarily due to the GGG and JLD French tax structures and the successful resolution of certain tax matters related to previous periods, as well as tax savings resulting from certain tax strategies adopted late in fiscal 2002. Management expects the underlying effective tax rate for all of fiscal 2003 to be approximately 38.3 percent.

Net Income
Net income in the first quarter of fiscal 2003 grew to $19.7 million, or $.44 per diluted share, compared to $15.4 million, or $.36 per diluted share in the same period in fiscal 2002. The increase in earnings per diluted share primarily resulted from sales increases and improved gross margins.

Effects of Inflation
The Company primarily compensates its Regis Salon and International salon employees with percentage commissions based on the sales they generate, thereby enabling salon payroll expense as a percent of revenues to remain relatively constant. Accordingly, this provides the Company certain protection against inflationary increases as payroll expense and related benefits (the Company’s major expense components) are, with respect to these divisions, variable costs of sales. The Company does not believe inflation, due to its low rate, has had a significant impact on the results of operations associated with hourly paid hairstylists for the remainder of its mall-based and strip center salons.

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

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LIQUIDITY AND CAPITAL RESOURCES
Customers pay for salon services and merchandise in cash at the time of sale, which reduces the Company’s working capital requirements. Net cash provided by operating activities for the first three months of fiscal 2003 decreased to $29.2 million compared to $36.2 million during the same period in fiscal 2002. Although operating performance improved, the decline in net cash provided by operations was primarily due to increased inventory levels due to the timing of purchases and sales.

Capital Expenditures and Acquisitions
During the first three months of fiscal 2003, the Company had worldwide capital expenditures of $17.1 million, of which $1.0 million related to acquisitions. The Company constructed 109 new corporate salons in the first quarter of fiscal 2003, including 14 new Regis Salons, 12 new MasterCuts salons, 10 new Trade Secret salons, 50 new SmartStyle salons, 18 new Strip Center Salons and 5 new International salons, and completed 59 major remodeling projects. All capital expenditures during the first three months of fiscal 2003 were funded by the Company’s operations and borrowings under its revolving credit facility.

The Company anticipates its worldwide salon development program for fiscal 2003 will include approximately 435 new company-owned salons, 300 to 350 new franchised salons, 175 major remodeling and conversion projects and 400 to 500 acquired salons. It is expected that expenditures for these development activities will be approximately $140 to $155 million, of which $75 million is allocated to new salon construction and remodeling and conversions.

Contractual Obligations and Commercial Commitments
There have been no significant changes in unconditional purchase obligations, significant other commercial commitments such as commitments under lines of credit, standby letters of credit or standby repurchase obligations or other commercial commitments since June 30, 2002.

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

As a part of its salon development program, the Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations, and continues to enter into transactions to acquire established hair care salons and businesses.

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Financing
There were no significant financing activities during the first quarter of fiscal 2003. Derivative activities are discussed in Note 3 to the Consolidated Financial Statements.

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

The Company operates in international markets and translates the financial statements of its international subsidiaries to U.S. dollars for financial reporting purposes, and accordingly is subject to fluctuations in currency exchange rates.

Dividends
During the first three months of fiscal 2003, the Company paid dividends totaling $1.3 million, or $.03 per share. On November 5, 2002, the Board of Directors of the Company declared a $.03 per share quarterly dividend payable on December 3, 2002 to shareholders of record on November 19, 2002.

Outlook
Regis Corporation is the world’s largest owner, operator, franchisor and acquirer of hair and retail product salons in the $135 billion hair care industry. The 9,138 company-owned and franchised salons, which generated $694.0 million of system-wide sales in the first quarter of fiscal year 2003, are located in the United States, Canada, France, Italy, the United Kingdom, Spain, Belgium, Switzerland, Poland, Brazil and Puerto Rico.

Over the last ten years, the Company has been able to average double-digit revenue and earnings growth through its strategy of building, acquiring and franchising salons in high traffic locations throughout North America and Europe.

Eight times larger than its nearest competitor, the Company maintains just a two percent worldwide market share, signaling substantial opportunities for long-term future growth.

Near-term
For fiscal year 2003, the Company expects revenue growth of 12 to 14 percent and growth in diluted earnings per share to a range of $1.82 to $1.85, an increase of 14 to 16 percent. The Company plans to achieve this revenue growth through the combination of salon acquisitions (6.0 to 6.5 percent), new salon construction (4.0 to 5.0 percent) and same-store sales increases (2.0 to 2.5 percent). Earnings for fiscal year 2003 are also expected to benefit from the continued improvement in both service and product margins.

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

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

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

In addition to growth in salon services, the Company has been successful in growing the retail product business. During fiscal year 2002, retail product sales increased 10 percent to $110 million. Through the offering of the largest assortment of professional hair care products in the industry and superior merchandising, the Company is confident that it can continue to successfully grow its retail product business. Today, the Company estimates that it serves approximately 10 percent of the U.S. retail product market.

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

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

This quarterly report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward–looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include competition within the personal hair care industry, which remains strong, both domestically and internationally, and price sensitivity; changes in economic condition; changes in consumer tastes and fashion trends; labor and benefit costs; legal claim; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new salon development; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; the ability of the Company to successfully identify and acquire salons that support its growth objectives; or other factors not listed above. The ability of the Company to meet its expected revenue growth is dependent on salon acquisitions, new salon construction and same-store sales increases, all of which are affected by many of the aforementioned risks. Additional information concerning potential factors that could affect future financial results is set forth in the Company’s Form 10-K and included in Form S-3 Registration Statement filed with the Securities and Exchange Commission on October 4, 2002.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, some of which bears interest at floating rates based on LIBOR plus an applicable borrowing margin. To a lesser extent, the Company is also exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries.

As of September 30, 2002, the Company had $62.6 million of floating and $248.5 of fixed rate debt outstanding. The Company manages its interest rate risk by balancing the amount of fixed and floating rate debt. On occasion the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. Generally, the terms of the interest rate swap agreements contain quarterly settlement dates based on the notional amounts of the swap contracts. As of September 30, 2002, the Company has entered into interest rate swap agreements covering $55.0 million of its floating rate obligations and $111.0 million of its fixed rate obligations, as discussed in Note 3 of the Registrant’s September 30, 2002 quarterly report on Form 10-Q.

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

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The table below presents information about the Company’s debt obligations, variable lease obligations and derivative financial instruments that are sensitive to changes in interest rates. For fixed rate debt obligations, the table presents principal amounts and related weighted-average interest rates by year of maturity. For variable rate obligations, the table presents principal amounts and the weighted-average interest rates as of September 30, 2002. For variable lease obligations, the table presents the maximum potential obligation under the residual value guarantee. For the Company’s derivative financial instruments, the table presents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract.

Expected maturity date as of September 30,

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The table below provides information about the Company’s net investments in foreign operations and derivative financial instruments by functional currency and presents such information in U.S. dollar equivalents. The table summarizes the Company’s exposure to foreign currency translation risk related to its net investments in its foreign subsidiaries along with its derivative financial instruments used to hedge against such exposure.