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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended            March 31, 2003

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 May 1, 2003:

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REGIS CORPORATION

INDEX

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PART I - FINANCIAL INFORMATION

REGIS CORPORATION

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

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REGIS CORPORATION

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

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REGIS CORPORATION

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

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REGIS CORPORATION

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

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REGIS CORPORATION

	1.		BASIS OF PRESENTATION OF UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
			The unaudited interim Consolidated Financial Statements of Regis Corporation (the Company) as of March 31, 2003 and for the three and nine months ended March 31, 2003 and 2002, reflect, in the opinion of management, all adjustments necessary to fairly present the consolidated financial position of the Company as of March 31, 2003 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 and nine month periods ended March 31, 2003 and 2002 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 April 22, 2003 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 Used and Sold:
			On an interim basis, product costs are determined by applying estimated gross profit margins to service and product revenues. The estimated gross profit margins are based on historical experience, adjusted to reflect management’s judgment of current factors, including results from physical inventories, which are performed at least semi-annually. A physical inventory count performed in the fall of fiscal 2003 produced a favorable overall physical inventory result that contributed approximately $2.8 million to reported net income during fiscal 2003, or approximately $0.06 per diluted share for the nine month period ended March 31, 2003. The favorable physical inventory result was accounted for as a change in estimate associated with inventory gross profit margins, and thus reduced the cost of service and product sales.

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			Stock Options:
			At March 31, 2003, the Company has two stock-based employee compensation plans, the 2000 Stock Option Plan and the 1991 Stock Option Plan, which are described more fully in Note 8 to the 2002 Annual Report to Shareholders. The Company accounts for those plans using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and applies Statement of Financial Accounting Standards (FAS) No. 123, “Accounting for Stock-Based Compensation” for disclosure purposes only. The FAS No. 123 disclosures include pro forma net income and earnings per share as if the fair value-based method of accounting had been used. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock on the date of grant.
			If compensation for employee stock options had been determined based on FAS No. 123, the Company’s pro forma net income and pro forma earnings per share for the three and nine months ended March 31, 2003, would have been as follows:

	The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

			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.

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	2.		NEW ACCOUNTING PRONOUNCEMENTS:
			Effective July 1, 2002, the Company adopted the provisions of 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 Standard did not have a material impact on the financial statements as of or for the period ended March 31, 2003.
			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 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 adoption of FAS 146 did not have a material impact on the financial statements as of or for the period ended March 31, 2003.
			In November, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation requires a guarantor to recognize a liability for the fair value of newly issued guarantees. The recognition provisions of this Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Interpretation did not have a material impact on the financial statements as of or for the period ended March 31, 2003. However, it did result in additional disclosures included as part of the Consolidated Financial Statements for the period ending March 31, 2003.
			On December 31, 2002, the FASB issued FAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The Standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the Standard amends the disclosure requirements of FAS No. 123, “Accounting for Stock Based Compensation,” to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The initial adoption of FAS 148 did not have an impact on the Consolidated Statement of Operations or the Consolidated Balance Sheet, although it resulted in the addition of disclosures included as part of the Consolidated Financial Statements for the period ending March 31, 2003, summarizing the effects of stock-based compensation on interim operating results.

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			On January 17, 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” The Interpretation expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity, referred to as a variable interest entity. As discussed in Note 6 to the Consolidated Financial Statements in the Company’s June 30, 2002 Annual Report to Shareholders, the Company entered into a five-year operating lease agreement in June 2000 relating to its Salt Lake distribution center. Based on the Company’s analysis of the new Interpretation, the current operating lease structure is with a variable interest entity. Under Interpretation No. 46, if no modifications are made to the existing lease structure, the Company will be required to consolidate the leased asset and the related debt in its Consolidated Balance Sheet effective July 1, 2003. At this time, the Company expects to modify the existing lease agreement prior to the July 1, 2003 deadline and the Company is currently evaluating the impact on the Consolidated Financial Statements.
			In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF No. 02-16, “Accounting for Consideration Received from a Vendor by a Customer” (EITF 02-16). EITF 02-16 provides guidance as to how customers should account for cash consideration received from a vendor. EITF 02-16 presumes that cash received from a vendor represents a reduction of the prices of the vendor’s products or services, unless the cash received represents a payment for assets or services provided to the vendor or a reimbursement of costs incurred by the customer to sell the vendor’s products. The provisions of EITF 02-16 will apply to all agreements entered into or modified after December 31, 2002. The adoption of EITF 02-16 did not have a material impact on the Company’s financial statements as of or for the period ended March 31, 2003.
	3.		DERIVATIVE INSTRUMENTS:
			In the normal course of business, the Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company has established policies and procedures that govern the management of these exposures. By policy, the Company does not enter into such contracts for the purpose of speculation. The following details the Company’s policies and use of financial instruments.
			Interest Rate Risk:
			The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration the earnings implications associated with the volatility of short-term interest rates. As part of this policy, the Company has elected to maintain a combination of floating and fixed rate debt. The Company has entered into the following financial instruments:

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			Interest Rate Swap Contracts:   (Pay fixed rates, receive variable rates)
			The Company had interest rate swap contracts to pay fixed rates of interest (ranging from 5.1 to 7.2 percent) and receive variable rates of interest based on the three-month LIBOR rate (ranging from 1.3 to 2.0 percent during the first nine months of fiscal 2003 and 1.9 to 3.8 percent during the corresponding period of the prior fiscal year) on a $66.8 million notional amount. The $66.8 million is composed of $55.0 million of floating rate debt and an $11.8 million variable rate operating lease obligation. The interest rate swap contracts are scheduled to mature between April 2003 and June 2005. These contracts have been designated as cash flow hedges.
			The Company’s cash flow hedges are recorded at fair value within other non-current liabilities in the Consolidated Balance Sheet, with a corresponding offset, net of tax, in other comprehensive income within shareholders’ equity. The net gain recorded in other comprehensive income, net of tax, was $1.4 and $1.0 million during the third quarter of fiscal 2003 and 2002, respectively. The net gain recorded in other comprehensive income, net of tax, was $3.7 and $1.3 million during the first nine months of fiscal 2003 and 2002, respectively.
			As interest or rental payments are made on the underlying hedged items, an adjustment to interest or rental expense based on the net settlement amounts on the swaps is recorded in the Consolidated Income Statement. Effectively, the net settlement amounts are transferred out of other comprehensive income to earnings at each interest or rental payment date, as the net gain or loss recorded within other comprehensive income is based on estimated future cash flows of net settlement amounts. The cash flow swaps resulted in charges to interest and rental expense of approximately $0.9 and $0.8 million during the third quarters of fiscal 2003 and 2002, respectively. During the first nine months of fiscal 2003 and 2002, the cash flow swaps resulted in charges to interest and rental expense of approximately $2.6 and $1.9 million, respectively. As of March 31, 2003, the Company estimates, based on current interest rates, that approximately $0.8 million of charges to interest and rental expense will be recorded in the Consolidated Income Statement during the next twelve months. During the first nine months of fiscal 2003 and 2002, the cash flow swaps were fully effective.
			(Pay variable rates, receive fixed rates)
			The Company has interest rate swap contracts to pay variable rates of interest based on the three-month and six-month LIBOR rates plus a credit spread (ranging from 2.2 to 6.2 percent during the nine months ended March 31, 2003 and 3.3 to 6.5 percent during the nine months ended March 31, 2002) and receive fixed rates of interest (ranging from 6.7 to 8.2 percent) on an aggregate $88.5 million notional amount, with maturation dates between July 2003 and March 2009. These swaps were designated as hedges of a portion of the Company’s senior term notes (in order to mitigate exposure to interest rate risk related to the fixed-rate notes), and are being accounted for as fair value swaps.
			During the second quarter of fiscal 2003, the Company terminated certain of its interest rate swap contracts, thereby lowering the aggregate notional amount by $20.0 million. The termination resulted in the Company realizing a gain of $1.5 million, which is deferred in long-term debt in the Consolidated Balance Sheet and will be amortized against interest expense over the remaining life of the underlying debt, which will mature in March 2009.

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			The Company’s fair value swaps are recorded at fair value within other assets in the Consolidated Balance Sheet, with a corresponding adjustment to the underlying senior term note within long-term debt of $7.6 million at March 31, 2003. No hedge ineffectiveness occurred during the quarter or year-to-date. As a result, the fair value swaps did not have a net impact on earnings.
			Foreign Currency Exchange Risk:
			The majority of the Company’s revenue, expense and capital purchasing activities are transacted in United States dollars. However, because a portion of the Company’s operations consists of activities outside of the United States, the Company has transactions in other currencies, primarily the Canadian dollar, British pound and Euro. In preparing the Consolidated Financial Statements, the Company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. Different exchange rates from period to period impact the amounts of reported income and the amount of foreign currency translation recorded in accumulated other comprehensive income. As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, Regis may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of March 31, 2003, the Company has entered into the following financial instrument:
			Hedge of the Net Investment in Foreign Subsidiaries:
			The Company has 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 hedged approximately 10 and 14 percent of the Company’s net investments in foreign operations at March 31, 2003 and June 30, 2002, respectively. The Company’s cross-currency swap is recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet. The corresponding offset, net of tax, is charged to the cumulative translation adjustment account, which is a component of other comprehensive income. For the three and nine months ended March 31, 2003, $0.8 and $1.7 million of loss, net of tax, related to this derivative was charged to the cumulative translation adjustment account, respectively. For the three and nine months ended March 31, 2002, $0.4 and $0.3 million of gain, net of tax, related to this derivative was charged to the cumulative translation adjustment account, respectively.
	4.		SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME:
			Additional Paid-In Capital
			The Company recorded an increase in additional paid-in capital of $3.6 million during the first nine months of fiscal 2003. This increase is comprised of increases of $19.0 million primarily related to shares issued in connection with salon acquisitions, $5.1 million related to shares held in the Company’s equity compensation plans and $1.2 million related to the tax benefit realized upon exercise of stock options, largely offset by $21.7 million related to shares repurchased under the Company’s stock repurchase program.

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			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 exposures and changes in foreign currency translation, including the impact of the cross-currency swap, recorded in the cumulative translation account within shareholders’ equity. Comprehensive income for the three and nine months ended March 31, 2003 and 2002 were as follows:

	5.		NET INCOME PER SHARE:
			Stock options covering 353,590 shares for the third quarter of fiscal 2003, and 341,633 and 1,500 shares for the first nine months of fiscal 2003 and 2002, respectively, were excluded from the shares used in the computation of diluted earnings per share since they were anti-dilutive. During the third quarter of the prior fiscal year, there were no stock options excluded as the average market value of the Company’s common stock was greater than the exercise price of all options.
			The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:

	6.		NONRECURRING INCOME TAX BENEFIT:
			In the prior fiscal year, the Company implemented certain tax strategies resulting in approximately $1.8 million of economic benefit, or $0.04 per diluted share for the three and nine months ended March 31, 2002, which was recognized as a nonrecurring income tax benefit in the third quarter of the prior fiscal year by reducing income tax expense.

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	7.		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 nine months of fiscal 2003, such liabilities were reduced by cash payments of $236,000 and increased by $28,000 related to translation rates, resulting in balance of $505,000 at March 31, 2003. This remaining amount will be satisfied through periodic contractual payments ending in June of 2004.
	8.		SEGMENT INFORMATION:
			The Company operates or franchises 7,220 domestic salons and 2,133 international salons. The Company operates its domestic (North American) 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 has consistent distribution channels. All of the salons within the North American concepts are located in high traffic destination retail 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 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 for the periods ended March 31, 2003 and 2002:

*

Includes company-owned and franchise revenues less company-owned operating expenses and franchise direct costs.

	9.		ACQUISITIONS:
			During the nine month periods ended March 31, 2003 and 2002, 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 March 31, 2003 and 2002, and the allocation of the purchase prices, were as follows:

			The Company has guaranteed that stock issued in certain acquisitions will reach a certain market price. If the stock should not reach this price during the agreed-upon time frame (typically three years from the date of acquisition), the Company is obligated to issue additional shares 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 the Company is no longer liable. Based on the March 31, 2003 market price, the Company would be required to provide an additional 247,483 shares related to these acquisition contingencies if the agreed-upon time frames were all assumed to have expired March 31, 2003. These contingently issuable shares have been included in the calculation of diluted earnings per share for the three and nine months ended March 31, 2003.
	10.		FINANCING:
			During the second quarter of fiscal 2003, the Company extended its revolving credit facility through November of fiscal 2006. In the third quarter of fiscal 2003, the Company renewed one of its private placement debt facilities, thereby extending its terms through October 1, 2005 and increasing its related borrowing capacity from $125.0 to $246.0 million. No other significant changes were made to either of the facilities’ terms. There were no other significant financing activities during the first nine months of fiscal 2003.

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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 March 31, 2003 and the related consolidated statements of operations for the three and nine month periods ended March 31, 2003 and 2002 and of cash flows for the nine months ended March 31, 2003 and 2002. 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
April 22, 2003

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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 Company’s worldwide operations include 9,353 salons at March 31, 2003 operating in two reportable operating segments: domestic and international. Each of the Company’s concepts generally have similar products and services, concentrates on the mass-market consumer marketplace and generally display similar economic characteristics. The Company is organized to manage its operations based on geographical location. The Company’s domestic segment includes 7,220 salons, including 2,214 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 2,133 salons, including 1,734 franchised salons, located throughout Europe, primarily in the United Kingdom, France, Italy and Spain. The Company has approximately 45,000 employees worldwide.

Third quarter fiscal 2003 revenues grew to a record $422.3 million, including franchise revenues of $25.4 million, a 16.8 percent increase over the third quarter of the prior fiscal year. Revenues for the first nine months of fiscal 2003 grew to a record $1.2 billion, including franchise revenues of $77.4 million, a 15.6 percent increase over the first nine months of the prior fiscal year.

Operating income in third quarter of fiscal 2003 increased to $38.6 million, a 17.5 percent increase over the corresponding period of the prior fiscal year. Operating income in the first nine months of fiscal 2003 increased to $118.2 million, a 23.6 percent increase over the corresponding period of the prior fiscal year.

Net income in the third quarter of fiscal 2003 increased to a record $20.9 million, or $0.46 per diluted share, a net income and earnings per share increase of 8.1 and 4.5 percent, respectively, from the third quarter of the prior fiscal year. During the first nine months of fiscal 2003, net income increased 24.2 percent to $64.2 million and earnings per diluted share increased 20.3 percent to $1.42 as compared to the corresponding period of the prior fiscal year. During the third quarter of the prior fiscal year, the Company recognized a nonrecurring income tax benefit (see Note 6 to the Consolidated Financial Statements) of $1.8 million, thereby increasing earnings per diluted share by $0.04 for the three and nine months ended March 31, 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.