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TABLE OF CONTENTS
Item 1. Business
TABLE OF CONTENTS18. Financial Statements and Supplementary Data

Table of Contents

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

FORM 10-K

(Mark One)  

ý

 

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

For the fiscal year ended June 30, 20112013

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 1-12725

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

Minnesota
State or other jurisdiction of
incorporation or organization
 41-0749934
(I.R.S. Employer
Identification No.)

7201 Metro Boulevard, Edina, Minnesota
(Address of principal executive offices)

 

55439
(Zip Code)

(952) 947-7777
(registrant'sRegistrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, par value $0.05 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange

          Securities registered pursuant to Section 12(g) of the Act:None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

          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 ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý Accelerated filer o Non-accelerated filer o
(Do not check if a
smaller reporting company)
 Smaller reporting company o

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

          The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, December 31, 2010,2012, was approximately $944,774,658.$737,540,488. The registrant has no non-voting common equity.

          As of August 12, 2011,9, 2013, the registrant had 57,728,62456,627,334 shares of Common Stock, par value $0.05 per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the registrant's definitive Proxy Statement for the annual meeting of shareholders to be held on October 27, 201122, 2013 (the "2011"2013 Proxy Statement") (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of June 30, 2011)2013) are incorporated by reference into Part III.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This annual report, 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," "forecast," "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 the impact of significant initiatives and changes in our management and organizational structure; negative same-store sales; the success of our stylists and our ability to attract and retain talented stylists; the effect of changes to healthcare laws; changes in regulatory and statutory laws; the Company's reliance on management information systems; competition within the personal hair care industry, which remains strong, both domestically and internationally; changes in economic conditions; the continued ability of the Company to implement cost reduction initiatives; certain of the terms and provisions of the outstanding convertible notes; failure to optimize our brand portfolio; the ability of the Company to maintain satisfactory relationships with certain companies and suppliers; financial performance of our joint ventures; changes in interest rates and foreign currency exchange rates; changes in consumer tastes and fashion trends; our ability to protect the security of personal information about our guests; or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.


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REGIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2011
2013
INDEX

 
  
  
 Page(s) 

Part I.

        

 

Item 1.

 

Business

  34 

   

Executive Officers of the Registrant

  2113 

 

Item 1A.

 

Risk Factors

  2315 

 

Item 1B.

 

Unresolved Staff Comments

  2619 

 

Item 2.

 

Properties

  2719 

 

Item 3.

 

Legal Proceedings

  2719 

 

Item 4.

 

ReservedMine Safety Disclosures

  2719 

Part II.

        

 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Repurchase or Purchases of Equity Securities

  2820 

 

Item 6.

 

Selected Financial Data

  3022 

 

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  3123 

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  7241 

 

Item 8.

 

Financial Statements and Supplementary Data

  7643 

   

Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting

  7744 

   

Report of Independent Registered Public Accounting Firm

  7845 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  14390 

 

Item 9A.

 

Controls and Procedures

  14390 

 

Item 9B.

 

Other Information

  14390 

Part III.

        

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

  14491 

 

Item 11.

 

Executive Compensation

  14491 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  14491 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  14491 

 

Item 14.

 

Principal Accounting Fees and Services

  14491 

Part IV.

        

 

Item 15.

 

Exhibits and Financial Statement Schedules

  14592 

 

Signatures

  15095 

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PART I

Item 1.    Business

General:

        Regis Corporation owns, franchises and operates beauty salons. The Company is listed on the NYSE under the ticker symbol "RGS." Unless the context otherwise provides, when we refer to the "Company," "we," "our," or "us," we are referring to Regis Corporation, the Registrant, together with its subsidiaries.

(a)   General Development of Business

        In 1922, Paul and Florence Kunin opened Kunin Beauty Salon, which quickly expanded into a chain of value priced salons located in department stores. In 1958, the chain was purchased by their son and renamed Regis Corporation. In December 2004, the Company purchased Hair Club for Men and Women. On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc (EEG). On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in the newly formed entity, Provalliance. The Company acquired an additional equity interest in Provalliance in March 2011. On February 20, 2008, the Company acquired the capital stock of Cameron Capital I, Inc. (CCI), a wholly-owned subsidiary of Cameron Capital Investments, Inc. CCI owned and operated PureBeauty and BeautyFirst salons. On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret), which included CCI. Additionally, the Company continues to acquire hair and retail product salons. Regis Corporation is listed on the NYSE under the ticker symbol "RGS." Discussions of the general development of the business take place throughout this Annual Report on Form 10-K.

(b)   Financial Information about Segments

        Segment data for the years ended June 30, 2011, 2010 and 2009 are included in Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

(c)   Narrative Description of Business

        The following topical areas are discussed below in order to aid in understanding the Company and its operations:

Topic
Page(s)

Background

4

Industry Overview

5

Salon Business Strategy

5

Salon Concepts

8

Salon Franchising Program

14

Salon Markets and Marketing

16

Salon Education and Training Programs

16

Salon Staff Recruiting and Retention

17

Salon Design

17

Salon Management Information Systems

17

Salon Competition

18

Hair Restoration Business Strategy

18

Affiliated Ownership Interest

20

Corporate Trademarks

20

Corporate Employees

21

Executive Officers

21

Corporate Community Involvement

22

Governmental Regulations

22

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Background:

        Based in Minneapolis, Minnesota, the Company's primary business is owning, operating and franchising hair and retail product salons. In addition to the primary hair and retail product salons, the Company owns Hair Club for Men and Women, a provider of hair restoration services.        As of June 30, 2011,2013, the Company owned, franchised or held ownership interests in approximately 12,700 worldwide locations.9,763 locations worldwide. The Company's locations consistedconsist of 9,8199,517 company-owned and franchisefranchised salons 96 hair restoration centers, and 2,786246 locations in which the Company maintains anwe maintain a non-controlling ownership interest of less than 100 percent. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market consumer marketplace. The Company's hair restoration centers offer three hair restoration solutions; hair systems, hair transplants and hair therapy, which are targeted at the mass market consumer.

        The Company is organized to manage its operations based on significant lines of business—salons and hair restoration centers. Salon operations are managed based on geographical location—North America and International. The Company's North American salon operations are comprised of 7,483 company-owned salons and 1,936 franchise salons operating in the United States, Canada and Puerto Rico. The Company's International operations are comprised of 400 company-owned salons. The Company's worldwide salon locations operate primarily under the trade names of Regis Salons, MasterCuts, SmartStyle, Supercuts, Cost Cutters, and Sassoon. The Company's hair restoration centers are located in the United States and Canada. During fiscal year 2011, the number of customer visits at the Company's company-owned salons approximated 91 million. The Company had approximately 55,000 corporate employees worldwide during fiscal year 2011.

        On August 1, 2007, the Company contributed 51 of its wholly-owned accredited cosmetology schools to EEG in exchange for a 49.0 percent equity interest in EEG. EEG is the largest beauty school operator in North America with 102 accredited cosmetology schools with revenues of approximately $193 million annually and is overseen by the Empire Beauty School management team.

        In January 2008, the Company's effective ownership interest increased to 55.1 percent related to the buyout of EEG's minority interest shareholder. The Company accounts for the investment in EEG under the equity method of accounting as Empire Beauty School retains majority voting interest and has full responsibility for managing EEG. Refer to Note 6 to the Consolidated Financial Statements for additional information.

        On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed entity, Provalliance. The merger with the operations of the Franck Provost Salon Group which are also located in continental Europe, created Europe's largest salon operator with approximately 2,600 company-owned and franchise salons as of June 30, 2011.

        The Company contributed to Provalliance the shares of each of its European operating subsidiaries, other than the Company's operating subsidiaries in the United Kingdom and Germany. The contributed subsidiaries operate retail hair salons in France, Spain, Switzerland and several other European countries primarily under the Jean Louis David™ and Saint Algue™ brands. This transaction has created significant growth opportunities for Europe's salon brands. The Franck Provost Salon Group management structure has a proven platform to build and acquire company-owned stores as well as a strong franchise operating group that is positioned for expansion. The merger agreement contains a right (Equity Put) to require the Company to purchase an additional ownership interest in Provalliance between specified dates in 2010 to 2018. The Company recorded a $25.7 million other than temporary impairment charge in its fourth quarter ended June 30, 2009 on its investment in Provalliance as a result of increased debt and reduced earnings expectations that reduced the fair value of Provalliance below carrying value as of June 30, 2009.


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        In March of 2011, the Company elected to honor and settle a portion of the Equity Put and acquired approximately 17 percent additional equity interest in Provalliance for $57.3 million (approximately € 40.4 million), bringing the Company's total equity interest to approximately 47 percent.

        On February 16, 2009, the Company sold Trade Secret. The Company concluded, after a comprehensive review of its strategic and financial options, to divest Trade Secret. The sale of Trade Secret included 655 company-owned salons and 57 franchise salons, all of which had historically been reported within the Company's North America reportable segment. The Company recorded an impairment charge related to this transaction of $183.3 million during the year ended June 30, 2009.

Industry Overview:

        Management estimates that annual revenues of the hair care industry are approximately $50 to $56 billion in the United States and approximately $150 to $170 billion worldwide. The Company estimates that it holds approximately two percent of the worldwide market. The hair salon and hair restoration markets are each highly fragmented, with the vast majority of locations independently owned and operated. However, the influence of salon chains on these markets, both franchise and company-owned, has increased substantially. Management believes that salon chains will continue to have a significant influence on these markets and will continue to increase their presence. As the Company is the principal consolidator of these chains in the hair care industry, it prevails as an established exit strategy for independent salon owners and operators, which affords the Company numerous opportunities for continued selective acquisitions.

Salon Business Strategy:

        The Company's goal is to provide high quality, affordable hair care services and products to a wide range of mass market consumers, which enables the Company to expand in a controlled manner. The key elements of the Company's strategy to achieve these goals are taking advantage of (1) growth opportunities, (2) economies of scale and (3) centralized control over salon operations in order to ensure (i) consistent, quality services and (ii) a superior selection of high quality, professional products. Each of these elements is discussed below.

        Salon Growth Opportunities.    The Company's salon expansion strategy focuses on organic (new salon construction and same-store sales growth of existing salons) and salon acquisition growth.


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        Economies of Scale.    Management believes that due to its size and number of locations, the Company has certain advantages which are not available to single location salons or small chains. Economies of scale are realized through the centralized support system offered by the home office. Additionally, due to its size, the Company has numerous financing and capital expenditure alternatives, as well as the benefits of buying retail products, supplies and salon fixtures directly from manufacturers. Furthermore, the Company can offer employee benefit programs, training and career path opportunities that are often superior to its smaller competitors.

        Centralized Control Over Salon Operations.    The Company manages its expansive salon base through a combination of area and regional supervisors, corporate salon directors and chief operating officers. Each area supervisor is responsible for the management of approximately ten to 12 salons. Regional supervisors oversee the performance of five to seven area supervisors or approximately 50 to 80 salons. Salon directors manage approximately 200 to 300 salons while chief operating officers are responsible for the oversight of an entire salon concept. This operational hierarchy is key to the Company's ability to expand successfully. In addition, the Company has an extensive training program, including the production of training DVDs for use in the salons, to ensure its stylists are knowledgeable in the latest haircutting and fashion trends and provide consistent quality hair care services. Finally, the Company tracks salon activity for all of its company-owned salons through the utilization of daily sales detail delivered from the salons' point of sale system. This information is used to reconcile cash on a daily basis.


 2011 2010 2009  Fiscal Years 

Haircutting and styling (including shampooing & conditioning)

 72% 72% 73%

 2013 2012 2011 

Haircutting and styling

 72% 72% 72%

Hair coloring

 18 18 17  19 19 18 

Hair waving

 3 4 4  3 3 3 

Other

 7 6 6  6 6 7 
              

 100% 100% 100% 100% 100% 100%
              

        Salon operations are managed geographically—North America and International. The Company's North American salon operations are comprised of 7,084 company-owned salons and 2,082 franchised salons operating in the United States, Canada and Puerto Rico. The Company's International operations are comprised of 351 company-owned salons in the United Kingdom. The Company's salons operate primarily under the trade names of SmartStyle, Supercuts, MasterCuts, Regis Salons, and Cost Cutters, and they generally serve two categories within the industry. SmartStyle, Supercuts, MasterCuts, Cost Cutters, and other regional trade names are generally within the affordable category, offering high quality, convenience and value priced hair care and beauty services and retail products. Regis Salons, among other trade names, are in the mass premium category offering upscale hair care and beauty services and retail products. The Company's North American business is comprised of 6,222 company-owned salons operating in the affordable category, located mainly in strip center locations and Walmart Supercenters, and 862 company-owned salons operating in the premium category, primarily in mall based locations. During fiscal years 2013 and 2012, the number of guest visits at the Company's company-owned salons approximated 85 and 89 million, respectively.

        Financial information about our segment and geographic areas for fiscal years 2013, 2012 and 2011 are included in Note 14 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

        Since fiscal year 2012, the Company has been evaluating its portfolio of assets, investments and businesses, with the strategic objective of simplifying our business model, focusing on our core business of operating beauty salons, improving our long-term profitability and maximizing shareholder value. This evaluation has led to several disposals during fiscal year 2013. In April 2013, the Company sold Hair Club for Men and Women (Hair Club) for approximately $165 million. See Note 2 to the Consolidated Financial Statements for further discussion on Hair Club. In September 2012, the Company sold its 46.7 percent equity interest in Provalliance for $103.4 million. See Note 5 to the


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        We are standardizing plan-o-grams and eliminating products in order to make it easier for guests to shop and stylists to sell retail products, to engage key vendors to provide product training to our stylists and to improve salon appearance.


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Stylists

        Training.    We strive to offer stylist training programs that educate both technically and experientially. We employ full and part-time artistic directors whose duties are to train salon stylists in current styling trends. We utilize training materials to help all levels of field employees navigate the running of a salon. Our guests' experiential training program provides stylists with essential elements of guest service training. We supplement these training programs and lead by example with field leaders who are present in salons providing coaching and mentoring.

        Organization.    We recently reorganized our field organization, excluding salons within the mass premium category, to enable localized mentoring and decision making, improve geographic proximity and increase local market efficiency. Incentives have been redesigned to align field interests with those of the Company's shareholders by rewarding ownership behaviors focused on profitable revenue growth. This new organization structure provides a career path for our people who desire to ascend within the Company.

        Technology.    The recent installation of POS systems and salon workstations throughout North America enables communication with salons and stylists, delivery of online and digital training to stylists, real-time salon level analytics on guest retention, wait times, stylist productivity and salon performance.

Salon Support

        Our corporate headquarters is referred to as Salon Support. This acknowledges that creating guests for life mandates a service-oriented, guest-focused mentality in supporting our field organization to grow our business profitably.

        Organization.    In addition to investments made by the Company to reorganize the field organization and to help our stylists develop professionally, we are aligning Salon Support and associated objectives and priorities around our field structure to enhance the effectiveness and efficiency of the service provided to our field organization.

        Simplification.    Since fiscal year 2012, the Company has been evaluating its portfolio of assets, investments and businesses, with the strategic objective of simplifying our business model, focusing on our core business of operating beauty salons and improving our long-term profitability and maximizing shareholder value. This evaluation has led to the sale of our Hair Club and Provalliance businesses during fiscal year 2013.

        We are standardizing plan-o-grams and eliminating products in an effort to simplify and manage our ongoing retail inventory assortment. Simplification and standardization will reduce inventory management time in our salons and throughout our supply chain and enable distribution efficiencies.

        Operating Margins.    We continue to learn from and view our franchise business as a means to strengthening our brand leverage and growing our revenues and profitability. We have dedicated resources selling new franchises, as well as converting underperforming salons to franchisees. As a result we will generate additional royalties and fees which we can reinvest in our core salon business.

        Our organization also remains focused on identifying and driving cost saving and profit enhancing initiatives.


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Salon Concepts:

        The Company's salon concepts focus on providing high quality hair care services and professional products, primarily to the middle consumermass market. The Company's North American salon operations consist of 9,419 salons (including 1,936 franchise salons), operating under several concepts, each offering attractive and affordable hair care products and services in the United States, Canada and Puerto Rico. The Company's International salon operations consist of 400 hair care salons located in Europe, primarily in the United Kingdom. The number of new salons expected to be opened within the upcoming fiscal year is discussed within Management's Discussion and Analysis of Financial Condition and Results of Operations. In addition to these openings, the Company typically acquires several hundred salons each year. The number of acquired salons, and the concept under which the acquisitions will fall, vary based on the acquisition opportunities which develop throughout the year.


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Salon Development

        The table on the following pages set forth the number of system wide salons (company-owned and franchise) opened at the beginning and end of eachA description of the last five years, as well as the number of salons opened, closed, relocated, converted and acquired during each of these periods.


COMPANY-OWNED AND FRANCHISE SALON SUMMARY

NORTH AMERICAN SALONS:
 2011 2010 2009 2008 2007 

REGIS SALONS

                
 

Open at beginning of period

  1,049  1,071  1,078  1,099  1,079 
 

Salons constructed

  12  14  20  14  17 
 

Acquired

  9  3  23  4  49 
 

Less relocations

  (10) (11) (14) (11) (14)
            
  

Salon openings

  11  6  29  7  52 
 

Conversions

  (1)     1  (1)
 

Salons closed

  (36) (28) (36) (29) (31)
            
 

Total, Regis Salons

  1,023  1,049  1,071  1,078  1,099 
            

MASTERCUTS

                
 

Open at beginning of period

  600  602  615  629  642 
 

Salons constructed

  6  15  14  7  15 
 

Acquired

           
 

Less relocations

  (5) (7) (10) (6) (12)
            
  

Salon openings

  1  8  4  1  3 
 

Conversions

  1         
 

Salons closed

  (14) (10) (17) (15) (16)
            
 

Total, MasterCuts

  588  600  602  615  629 
            

TRADE SECRET

                

Company-owned salons:

                
 

Open at beginning of period

      674  613  615 
 

Salons constructed

      10  16  20 
 

Acquired

        65  3 
 

Franchise buybacks

        5   
 

Less relocations

    �� (4) (11) (11)
            
  

Salon openings

      6  75  12 
 

Conversions

        5  1 
 

Salons sold

      (655)    
 

Salons closed

      (25) (19) (15)
            
 

Total company-owned salons

        674  613 
            

Franchise salons:

                
 

Open at beginning of period

      106  19  19 
 

Salons constructed

      1  2   
 

Acquired(2)

        93   
 

Less relocations

        (1)  
            
  

Salon openings

      1  94   
 

Franchise buybacks

        (5)  
 

Interdivisional reclassification(4)

      (43)    
 

Salons sold

      (57)    
 

Salons closed

      (7) (2)  
            
 

Total franchise salons

        106  19 
            
 

Total, Trade Secret

        780  632 
            

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NORTH AMERICAN SALONS:
 2011 2010 2009 2008 2007 

SMARTSTYLE/COST CUTTERS IN WALMART

                

Company-owned salons:

                
 

Open at beginning of period

  2,374  2,300  2,212  2,000  1,739 
 

Salons constructed

  65  80  71  207  242 
 

Acquired

           
 

Franchise buybacks

    5  24  12  21 
 

Less relocations

  (1) (3) (2) (3) (2)
            
  

Salon openings

  64  82  93  216  261 
 

Conversions

           
 

Salons closed

  (45) (8) (5) (4)  
            
 

Total company-owned salons

  2,393  2,374  2,300  2,212  2,000 
            

Franchise salons:

                
 

Open at beginning of period

  119  122  146  151  164 
 

Salons constructed

  3  2  1  7  8 
            
  

Salon openings

  3  2  1  7  8 
 

Franchise buybacks

    (5) (24) (12) (21)
 

Salons closed

  (2)   (1)    
            
 

Total franchise salons

  120  119  122  146  151 
            
 

Total, SmartStyle/Cost Cutters in Walmart

  2,513  2,493  2,422  2,358  2,151 
            

SUPERCUTS

                

Company-owned salons:

                
 

Open at beginning of period

  1,100  1,114  1,132  1,094  1,036 
 

Salons constructed

  24  10  27  33  45 
 

Acquired

        3   
 

Franchise buybacks

  73  12  6  38  37 
 

Less relocations

  (3) (2) (2) (6) (5)
            
  

Salon openings

  94  20  31  68  77 
 

Conversions

  13    (2)    
 

Salons closed

  (49) (34) (47) (30) (19)
            
 

Total company-owned salons

  1,158  1,100  1,114  1,132  1,094 
            

Franchise salons:

                
 

Open at beginning of period

  1,034  1,022  997  990  978 
 

Salons constructed

  43  42  51  71  69 
 

Acquired(2)

           
 

Less relocations

  (7) (6) (7) (6) (7)
            
  

Salon openings

  36  36  44  65  62 
 

Conversions

  10  9  1    1 
 

Franchise buybacks

  (73) (12) (6) (38) (37)
 

Salons closed

  (20) (21) (14) (20) (14)
            
 

Total franchise salons

  987  1,034  1,022  997  990 
            
 

Total, Supercuts

  2,145  2,134  2,136  2,129  2,084 
            

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NORTH AMERICAN SALONS:
 2011 2010 2009 2008 2007 

PROMENADE

                

Company-owned salons:

                
 

Open at beginning of period

  2,382  2,450  2,399  2,223  1,995 
 

Salons constructed

  26  18  36  33  56 
 

Acquired

  18    71  135  193 
 

Franchise buybacks

  5  6  53  95  35 
 

Less relocations

  (10) (10) (16) (8) (12)
            
  

Salon openings

  39  14  144  255  272 
 

Conversions

  (14)   1  (5)  
 

Salons closed

  (86) (82) (94) (74) (44)
            
 

Total company-owned salons

  2,321  2,382  2,450  2,399  2,223 
            

Franchise salons:

                
 

Open at beginning of period

  867  901  914  1,008  1,026 
 

Salons constructed

  21  34  40  49  66 
 

Acquired(2)

           
 

Less relocations

  (7) (9) (7) (5) (12)
            
  

Salon openings

  14  25  33  44  54 
 

Conversions

  (9) (9)     (1)
 

Franchise buybacks

  (5) (6) (53) (95) (35)
 

Interdivisional reclassification(4)

      43     
 

Salons closed

  (38) (44) (36) (43) (36)
            
 

Total franchise salons

  829  867  901  914  1,008 
            
 

Total, Promenade

  3,150  3,249  3,351  3,313  3,231 
            

INTERNATIONAL SALONS(1):
 2011 2010 2009 2008 2007 

Company-owned salons:

                
 

Open at beginning of period

  404  444  472  481  453 
 

Salons constructed

  13  2  4  15  25 
 

Acquired

        25  12 
 

Franchise buybacks

          4 
 

Less relocations

  (2)   (1) (1) (3)
            
  

Salon openings

  11  2  3  39  38 
 

Conversions

        1   
 

Affiliated joint ventures

        (40)  
 

Salons closed

  (15) (42) (31) (9) (10)
            
 

Total company-owned salons

  400  404  444  472  481 
            

Franchise salons:

                
 

Open at beginning of period

        1,574  1,587 
 

Salons constructed

        50  110 
 

Acquired(2)

           
 

Less relocations

          (1)
            
  

Salon openings

        50  109 
 

Conversions

        3   
 

Franchise buybacks

          (4)
 

Affiliated joint ventures(3)

        (1,587)  
 

Salons closed

        (40) (118)
            
 

Total franchise salons

          1,574 
            
 

Total, International Salons

  400  404  444  472  2,055 
            

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 2011 2010 2009 2008 2007 

TOTAL SYSTEM WIDE SALONS

                

Company-owned salons:

                
 

Open at beginning of period

  7,909  7,981  8,582  8,139  7,559 
 

Salons constructed

  146  139  182  325  420 
 

Acquired

  27  3  94  232  257 
 

Franchise buybacks

  78  23  83  150  97 
 

Less relocations

  (31) (33) (49) (46) (59)
            
  

Salon openings

  220  132  310  661  715 
 

Conversions

  (1)   (1) 2   
 

Affiliated joint ventures

        (40)  
 

Salons sold

      (655)    
 

Salons closed

  (245) (204) (255) (180) (135)
            
 

Total company-owned salons

  7,883  7,909  7,981  8,582  8,139 
            

Franchise salons:

                
 

Open at beginning of period

  2,020  2,045  2,163  3,742  3,774 
 

Salons constructed

  67  78  93  179  253 
 

Acquired(2)

        93   
 

Less relocations

  (14) (15) (14) (12) (20)
            
  

Salon openings

  53  63  79  260  233 
 

Conversions

  1    1  3   
 

Franchise buybacks

  (78) (23) (83) (150) (97)
 

Affiliated joint ventures(3)

        (1,587)  
 

Salons sold

      (57)    
 

Salons closed

  (60) (65) (58) (105) (168)
            
 

Total franchise salons

  1,936  2,020  2,045  2,163  3,742 
            

Total Salons

  9,819  9,929  10,026  10,745  11,881 
            

(1)
Canadian and Puerto Rican salonsCompany's salon concepts are included in the Regis Salons, MasterCuts, SmartStyle, Supercuts, and Promenade and not included in the International salon totals.

(2)
Represents primarily the acquisition of franchise networks.

(3)
Represents European operating subsidiaries contributed to Franck Provost Salon Group.

(4)
On February 16, 2009, the Company announced the completion of the sale of its Trade Secret retail product division. As a result of this transaction, the Company reported the Trade Secret operations as discontinued operations for all periods presented. Forty-three franchise salons were not included in the sale of Trade Secret to the purchaser of Trade Secret and are not reported as discontinued operations. These franchise salons are now included in Promenade salons.

        In the preceding table, relocations represent a transfer of location by the same salon concept and conversions represent the transfer of one concept to another concept.listed below:

        Regis Salons.SmartStyle.    Regis Salons are primarily mall based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. In recent years, the Company has expanded its Regis Salons into strip centers. As of June 30, 2011, of the 1,023 total Regis Salons, 156 Regis Salons were located in strip centers. The customer mix at Regis Salons is approximately 79 percent women, and both appointments and walk-in customers are common. TheseSmartStyle salons offer a full range of custom styling, cutting, hair coloring and waving services, as well as professional hair care products.products and are located exclusively in Walmart Supercenters. SmartStyle has a walk-in guest base, pricing is promotional and services are focused on the family. Professional retail product sales contribute considerably to overall revenues at approximately 33 percent. Additionally, the Company has 123 franchised Cost Cutters salons located in Walmart Supercenters.

        Supercuts.    Supercuts salons provide consistent, high quality hair care services and professional products to its guests at convenient times and locations and at value prices. This concept appeals to men, women and children, although male guests account for approximately 64 percent of the guest mix. Service revenues represent approximately 8389 percent of the concept's total company-owned Supercuts revenues. The average ticket was approximately $42 and $41 for fiscal years 2011 and 2010, respectively. Regis Salons compete in their existing markets primarily by emphasizing the high quality of the services provided. Included within the Regis Salon concept are various other trade names, including Carlton Hair, Sassoon, Mia & Maxx Hair Studios, Hair by Stewarts, Hair Excitement, and Heidi's.


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        The average initial capital investment required for a new Regis Salon is approximately $190,000 to $240,000, excluding average opening inventory costs of approximately $18,900. Average annual salon revenues in a Regis Salon which has been open five years or more are approximately $400,000.

        MasterCuts.    MasterCuts issalons are a full service, mall based salon group which focuses on the walk-in consumer (no appointment necessary) thatwho demands moderately priced hair care services. MasterCuts salons emphasize quality hair care services, affordable prices and time saving services for the entire family. These salons offer a full range of custom styling, cutting, hair coloring and waving services as well as professional hair care products. The customer mix at MasterCuts is split relatively evenly between men and women. Service revenues composecomprise approximately 8180 percent of the concept's total revenues.

        Regis Salons.    Regis Salons are primarily mall based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. The average ticket was approximately $22 and $21 for fiscal years 2011 and 2010, respectively.

        The average initial capital investment required for a new MasterCuts salonguest mix at Regis Salons is approximately $125,000 to $175,000, excluding average opening inventory costs of approximately $14,600. Average annual salon revenues in a MasterCuts salon which has been open five years or more80 percent women, and both appointments and walk-in guests are approximately $277,000.

        SmartStyle.    The SmartStyle salons share many operating characteristics of the Company's other salon concepts; however, they are located exclusively in Walmart Supercenters. SmartStyle has a walk-in customer base, pricing is promotional and services are focused on the family.common. These salons offer a full range of custom styling, cutting, hair coloring and waving services, as well as professional hair care products. The customer mix at SmartStyle Salons is approximately 76 percent women. Professional retail product sales contribute considerably to overall revenues at approximately 33 percent. Additionally, the Company has 120 franchise salons located in Walmart Supercenters. The average ticket was approximately $21 and $20 for fiscal years 2011 and 2010, respectively.

        The average initial capital investment required for a new SmartStyle salon is approximately $35,000 to $45,000, excluding average opening inventory costs of approximately $12,700. Average annual salon revenues in a SmartStyle salon which has been open five years or more are approximately $244,000.

        Strip Center Salons.    The Company's Strip Center Salons are comprised of company-owned and franchise salons operating in strip centers across North America under the following concepts:

        Supercuts.    The Supercuts concept provides consistent, high quality hair care services and professional products to its customers at convenient times and locations and at a reasonable price. This concept appeals to men, women and children, although male customers account for approximately 66 percent of the customer mix. Service revenues represent approximately 89 percent of total company-owned Supercuts revenues. The average ticket was approximately $17 for fiscal years 2011 and 2010.

        The average initial capital investment required for a new Supercuts salon is approximately $75,000 to $100,000, excluding average opening inventory costs of approximately $7,600. Average annual salon revenues in a company-owned Supercuts salon which has been open five years or more are approximately $269,000.

        The Supercuts franchise salons provide consistent, high quality hair care services and professional products to customers at convenient times and locations and at a reasonable price. These Supercuts franchise salons appeal to men, women and children. Service revenues represent approximately 9281 percent of the Supercuts franchiseconcept's total revenues. Average annual revenuesRegis Salons compete in a Supercuts franchise salon which has been open five years or moretheir existing markets primarily by providing high quality services. Included within the Regis Salon concept are approximately $338,000.various other trade names, including Carlton Hair, Sassoon, Hair by Stewarts, Hair Excitement, and Renee Beauty.

        Cost Cutters (franchise salons).    The Cost Cutters concept is a full service salon concept providing value priced hair care services for men, women and children. These full service salons also sell a complete line of professional hair care products. The customer mix at Cost Cutters is split relatively


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evenly between men and women. Average annual salon revenues in a franchised Cost Cutters salon which has been open five years or more are approximately $280,000.

        In addition to the franchise salons, the Company operates company-owned Cost Cutters salons, as discussed below under Promenade Salons.

        Promenade Salons.        Promenade.    Promenade Salons are made up of successfulacquired regional company-owned salon groups acquired over the past several years operating under the primary concepts of Hair Masters, Cool Cuts for Kids, Style America, First Choice Haircutters, Famous Hair, Cost Cutters, BoRics, Magicuts, Holiday Hair, Head Start, Fiesta Salons and TGF, as well as other concept names. Most concepts offer a full range of custom hairstyling, cutting, coloring and waving, as well as hair care products. Hair Masters offers moderately-priced services to a predominately female demographic, while the other concepts primarily cater to time-pressed, value-oriented families. The customer mix is split relatively evenly between men and women at most concepts. Service revenues represent approximately 89 percent of total company-owned Promenade revenues. The average ticket was approximately $20 and $19 for fiscal years 2011 and 2010, respectively.

        The average initial capital investment required for a new Promenade Salon is approximately $60,000 to $80,000, excluding average opening inventory costs of approximately $8,600. Average annual salon revenues in a Promenade Salon which has been open five years or more are approximately $241,000.

        Other Franchise Concepts.    This group of franchise salons includes primarily First Choice Haircutters, Magicuts, Beauty Supply Outlets and Pro-Cuts. These concepts function primarily in the high volume, value priced hair care market segment, with key selling features of value, convenience, quality and friendliness, as well as a complete line of professional hair care products. In addition to these franchise salons, the Company operates company-owned First Choice Haircutters and Magicuts salons, as previously discussed above under "Strip Center Salons".

        Subsequent to June 30, 2011, the Company acquired an ownership interest in a franchise concept that combines modern grooming techniques with classic barbershop elements. This ownership interest along with the Company's other men's franchise concepts will allow the Company to expand its focus on the male demographic.

        International Salons.    The Company's International salons are comprised of company-owned salons operating in the United Kingdom primarily under the Supercuts, Regis and Sassoon concepts. These salons offer similar levels of service as theour North American salons previously mentioned. However, the initial capital investment required is typically between £135,000 and £145,000 for a Regis salon, and between £55,000 and £65,000 for a Supercuts salon. Average annual salon revenues for a salon which has been open five years or more are approximately £225,000 in a Regis salon and £189,000 in a Supercuts salon.salons. Sassoon is one of the world's most recognized names in hair fashion and appeals to women and men looking for a prestigious full service hair salon. Salons are usually located onin prominent high-streethigh-traffic locations and offer a full range of custom hairstyling, cutting, coloring and waving, as well as professional hair care products.

        The initial capital investment required is approximately £450,000. Average annualtables on the following pages set forth the number of system wide locations (company-owned and franchised) and activity within the various salon revenues for a salon which has been open five years or more is approximately £826,000.concepts.


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System-wide location counts(5)

 
 June 30, 
 
 2013 2012 2011 

Company-owned salons:

          

SmartStyle/Cost Cutters in Walmart Stores

  2,490  2,441  2,393 

Supercuts

  1,210  1,228  1,158 

MasterCuts

  532  569  588 

Regis salons

  862  953  1,023 

Promenade

  1,990  2,133  2,321 
        

Total North American Salons

  7,084  7,324  7,483 
        

Total International Salons(1)

  351  398  400 
        

Total, Company-owned salons

  7,435  7,722  7,883 
        

Franchised salons:

          

SmartStyle/Cost Cutters in Walmart Stores

  123  122  120 

Supercuts

  1,116  1,040  987 

Promenade

  843  854  829 
        

Total North American Salons

  2,082  2,016  1,936 
        

Total International Salons(1)

       
        

Total, Franchised salons

  2,082  2,016  1,936 
        

Ownership interest locations:

          

Equity ownership interest locations(4)

  246  2,811  2,786 
        

Grand Total, System-wide

  9,763  12,549  12,605 
        


Constructed Locations (net relocations)

 
 Fiscal Years 
 
 2013 2012 2011 

Company-owned salons:

          

SmartStyle/Cost Cutters in Walmart Stores

  51  49  64 

Supercuts

  45  56  21 

MasterCuts

  3  2  1 

Regis salons

  3  3  2 

Promenade

  39  43  16 
        

Total North American Salons

  141  153  104 
        

Total International Salons(1)

  12  13  11 
        

Total, Company-owned salons

  153  166  115 
        

Franchised salons:

          

SmartStyle/Cost Cutters in Walmart Stores

  1  2  3 

Supercuts

  70  65  36 

Promenade

  47  37  14 
        

Total North American Salons

  118  104  53 
        

Total International Salons(1)

       
        

Total, Franchised salons

  118  104  53 
        

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Closed Locations

 
 Fiscal Years 
 
 2013 2012 2011 

Company-owned salons:

          

SmartStyle/Cost Cutters in Walmart Stores

  (2) (1) (45)

Supercuts

  (49) (48) (49)

MasterCuts

  (40) (21) (14)

Regis salons

  (94) (73) (36)

Promenade

  (179) (174) (86)
        

Total North American Salons

  (364) (317) (230)
        

Total International Salons(1)

  (59) (16) (15)
        

Total, Company-owned salons

  (423) (333) (245)
        

Franchised salons:

          

SmartStyle/Cost Cutters in Walmart Stores

      (2)

Supercuts

  (11) (12) (20)

Promenade

  (58) (39) (38)
        

Total North American Salons

  (69) (51) (60)
        

Total International Salons(1)

       
        

Total, Franchised salons

  (69) (51) (60)
        


Acquired Locations

 
 Fiscal Years 
 
 2013 2012 2011 

Company-owned salons:

          

SmartStyle/Cost Cutters in Walmart Stores

       

Supercuts

    1   

MasterCuts

       

Regis salons

      9 

Promenade

      18 
        

Total North American Salons

    1  27 
        

Total International Salons(1)

    1   
        

Total, Company-owned salons

    2  27 
        

Franchised salons(2):

          

SmartStyle/Cost Cutters in Walmart Stores

       

Supercuts

       

Promenade

    31   
        

Total North American Salons

    31   
        

Total International Salons(1)

       
        

Total, Franchised salons

    31   
        

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Conversions (including net franchisee transactions)(3)

 
 Fiscal Years 
 
 2013 2012 2011 

Company-owned salons:

          

SmartStyle/Cost Cutters in Walmart Stores

       

Supercuts

  (14) 61  86 

MasterCuts

      1 

Regis salons

      (1)

Promenade

  (3) (57) (9)
        

Total North American Salons

  (17) 4  77 
        

Total International Salons(1)

       
        

Total, Company-owned salons

  (17) 4  77 
        

Franchised salons:

          

SmartStyle/Cost Cutters in Walmart Stores

       

Supercuts

  17    (63)

Promenade

    (4) (14)
        

Total North American Salons

  17  (4) (77)
        

Total International Salons(1)

       
        

Total, Franchised salons

  17  (4) (77)
        

(1)
Canadian and Puerto Rican salons are included in the North American salon totals.

(2)
Represents the acquisition of a franchise network.

(3)
During fiscal years 2013, 2012 and 2011, the Company acquired zero, 11 and 78 salon locations, respectively, from franchisees. During fiscal years 2013, 2012 and 2011, the Company sold 17, 7 and 1 salon locations, respectively, to franchisees.

(4)
On September 27, 2012, the Company sold its equity interest in Provalliance.

(5)
In April 2013, the Company sold Hair Club that operated 98 and 96 locations as of June 30, 2012 and 2011, respectively. These locations are excluded from system-wide location counts.

Salon Franchising Program:

        General.    The Company has various franchising programs supporting its 1,936 franchise2,082 franchised salons as of June 30, 2011,2013, consisting mainly of Supercuts, Cost Cutters, First Choice Haircutters, Magicuts, and Pro-Cuts.Magicuts. These salons have been included in the discussions regarding salon counts and concepts on the preceding pages.


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        The Company provides its franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, professional marketing, promotion and advertising programs, and other forms of support designed to help the franchisee build a successful business.

        Standards of Operations.    The Company does not control the day to day operations of its franchisees, including hiring and firing, establishing prices to charge for products and services, business hours, personnel management and capital expenditure decisions. However, the franchise agreements afford certain rights to the Company, such as the right to approve location,locations, suppliers and the sale of a franchise. Additionally, franchisees are required to conform to the Company's established operational policies and procedures relating to quality of service, training, salon design and decor, of stores, and trademark


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usage. The Company's field personnel make periodic visits to franchise storesfranchised salons to ensure that the storesthey are operating in conformity with the standards for each franchising program. All of the rights afforded to the Company with regard to the franchisefranchised operations allow the Company to protect its brands, but do not allow the Company to control the franchise operations or make decisions that have a significant impact on the success of the franchisefranchised salons.

        To further ensure conformity, the Company may enter into the lease for the store site directly with the landlord, and subsequently sublease the site to the franchisee. The franchise agreement and sublease provide the Company with the right to terminate the sublease and gain possession of the store if the franchisee fails to comply with the Company's operational policies and procedures. See Note 10 to the Consolidated Financial Statements for further information about the Company's commitments and contingencies, including leases.

        Franchise Terms.    Pursuant to their franchise agreement with the Company, each franchisee pays an initial fee for each store and ongoing royalties to the Company. In addition, for most franchise concepts, the Company collects advertising funds from franchisees and administers the funds on behalf of the concept. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory, payroll costs and certain other items, including initial working capital. The majority of franchise agreements provide the Company a right of first refusal if the store is to be sold and the franchisee must obtain the Company's approval in all instances where there is a sale of a franchise location.

        Additional information regarding each of the major franchisee brands is listed below:


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        Franchisee Training.    The Company provides new franchisees with training, focusing on the various aspects of store management, including operations, personnel management, marketing fundamentals and financial controls. Existing franchisees receive training, counseling and information from the Company on a continuous basis. The Company provides store managers and stylists with extensive technical training for Supercuts franchises. For further description of the Company's education and training programs, see the "Salon Education and Training Programs" section of this document.

Salon Markets and Marketing:

        The Company maintainsutilizes various advertising, sales and promotion programsmarketing vehicles for its salons, budgeting aincluding traditional advertising, guest relationship management, digital channels, and promotional/pricing based programs. A predetermined percentallocation of revenuesrevenue is used for such programs. The Company has developed promotional tactics and institutional sales messages for each of its concepts targeting certain customer types and positioning each concept in the marketplace. Print,Most marketing vehicles including radio, television,print, online, and billboardtelevision advertising are developed and supervised at the Company's headquarters, but mostSalon Support headquarters; however, the majority of advertising is done increated for our salon local markets. In the immediate marketpast year, the Company completed significant research to enhance our understanding of guest expectations and needs so we are well positioned to create affinity for our salons. Utilizing this


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research, the particular salon.Company will be reviewing its brand strategy with the intent to create more clear communication platforms, identities and differentiation points for our brands to drive consumer preference.

Franchise Brands

        Most franchise concepts maintain separate advertising funds (the Funds) that provide comprehensive advertisingmarketing and sales promotion support for each system. The Supercuts advertising fund is the Company's largest advertising fund and is administered by a council consisting of primarily franchisee representatives. The council has overall control of all of the advertising fund's expenditures and operates in accordance with terms of the franchise operating and other agreements. All stores, company-owned and franchised, contribute to the Funds,advertising funds, the majority of which are allocated to the contributing market for media placement and local marketing activities. The remainder is allocated for the creation of national advertising campaigns and system wide activities. This intensive advertising program creates significant consumer awareness, a strong concept image and high loyalty.

Salon Education and Training Programs:

        The Company has an extensive hands-on training program for their stylists which emphasizes technical training in hairstyling and cutting, hair coloring, texturizing services and hair treatment regimes, as well as customer service skills and product sales. The objective of the training programs is to ensure that customers receive professional and quality services, which the Company believes will result in additional repeat customers, referrals and product sales.

        The Company has over 130 full and part-time artistic directors who train stylists the techniques to provide salon services and instruct stylists in current styling trends. Stylist training is achieved through seminars, workshops and DVD-based programs. The Company was the first in its industry to develop a DVD-based training system in its salons and currently has over 200 DVD titles designed to enhance the technical skills of stylists.

        The Company has customer service training programs designed to improve the interaction between employees and customers. Employees are trained in the proper techniques in greeting the customer, telephone courtesy and professional behavior through a series of professionally designed DVDs, along with instructional seminars.


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        The Company also provides regulatory compliance training for all its field employees. This training is designed to help supervisors and stylists understand employee regulatory requirements and compliance with these standards.

Salon Staff Recruiting and Retention:

        Recruiting quality managers and stylists is essential to the establishment and operation of successful salons. In search of salon managers, the Company's supervisory team recruits or develops and promotes from within those stylists that display initiative and commitment. The Company has been and believes it will continue to be successful in recruiting capable managers and stylists. The Company believes that its compensation structure for salon managers and stylists is competitive within the industry. Stylists benefit from the Company's high-traffic locations and receive a steady source of new business from walk-in customers. In addition, the Company offers a career path with the opportunity to move into managerial and training positions within the Company.

Salon Design:

        The Company's salons are designed, built and operated in accordance with uniform standards and practices developed by the Company based on its experience. Salon fixtures and equipment are generally uniform, allowing the Company to place large orders for these items with cost savings due to the economies of scale.

        The size of the Company's salons ranges from 500 to 5,000 square feet, with the typical salon having about 1,200 square feet. At present, the cost to the Company of normal tenant improvements and furnishing of a new salon, including inventories, ranges from approximately $25,000 to $225,000, depending on the size of the salon and the concept. Less than ten percent of all new salons will have costs greater than normal with a cost between $225,000 and $500,000 to furnish. International Sassoon salons costs could be even greater than the ranges above. Of the total leasehold costs, approximately 70 percent of the cost is for leasehold improvements and the balance is for salon fixtures, equipment and inventories.

        The Company maintains its own design and real estate department, which designs and supervises the leasehold installations, furnishing and fixturing of all new company-owned salons and certain franchise locations. The Company has developed considerable expertise in designing salons. The design and real estate staff focus on visual appeal, efficient use of space, cost and rapid completion times.

Salon Management Information Systems:

        At all of its company-owned salons, the Company utilizes a point-of-sale (POS) information system to collect daily sales information and customer demographics. Salon employees deposit cash receipts into a local bank account on a daily basis. The POS system sends the amount expected to be deposited to the corporate office, where the amount is reconciled daily with local deposits transferred into a centralized corporate bank account. The customer information is then used to determine effectiveness of promotions and the loyalty base of each salon that feed into salon operational decisions. The information is also used to generate payroll information, monitor salon performance, manage salon staffing and payroll costs, and anticipate industry pricing and staffing trends. The corporate information systems deliver information on product sales to improve its inventory control system, including recommendations for each salon of monthly product replenishments. Recent innovations to increase inventory cycle counts and install high speed connections at each salon are expected to improve stylist productivity and improve customer satisfaction with the checkout process.

        The goal of information systems is to maximize the overall value to the business while improving the output per dollar spent by implementing cost-effective solutions and services. Management believes that its information systems provide the Company with operational efficiencies as well as advantages in


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planning and analysis which are generally not available to competitors. The Company continually reviews and improves its information systems to ensure systems and processes are kept up to date and that they will meet the growing needs of the Company.

        Historically, because of the Company's large size and scale requirements it has been necessary for the Company to internally develop and support its own proprietary POS information system. The Company has recently identified a third party POS software alternative that has a system that meets our current and enhanced functionality requirements and will cost significantly less to implement and support. This new technology will be implemented in our salons in fiscal year 2012 will allow the Company to stay current and meet customers' expectations.

Salon Competition:

        The hair care industry is highly fragmented and competitive. In every area in which the Company has a salon, there are competitors offering similar hair care services and products at similar prices. The Company faces competition within malls from companies which operate salons within department stores and from smaller chains of salons, independently owned salons and, to a lesser extent, salons which, although independently owned, are operating under franchises from a franchising company that may assist such salons in areas of training, marketing and advertising.

        At the individual salon level the barriers to enter the market are not considerable; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, recruitment of experienced hair care management and adequate store staff, and leasing of quality sites. The principal factors of competition in the affordable hair care category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of differentiation versus the competition. In order to obtain locations in shopping malls, the Company must be competitive as to rentals and other customary tenant obligations.

Hair Restoration Business Strategy:

        Hair Club for Men and Women (Hair Club) is the largest U.S. provider of hair loss solutions and the only company offering a comprehensive menu of proven hair loss products and services. The Company leverages its strong brand, best-in-class service model and comprehensive menu of hair restoration alternatives to build an increasing base of repeat customers that generate recurring cash flow for the Company. From its traditional non-surgical hair replacement systems, to hair transplants, hair therapies and hair care products and services, Hair Club offers a solution for anyone experiencing or anticipating hair loss. The Company's operations, presented under the Hair Restoration Centers reporting unit, consist of 96 locations (29 franchise locations) in the United States and Canada. The domestic hair restoration market is estimated to generate over $4 billion annually. The competitive landscape is highly fragmented and comprised of approximately 4,000 locations. Hair Club and its franchisees have the largest market share, with approximately five percent based on customer count.


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        In an effort to provide privacy to its customers, Hair Club offices are located primarily in office and professional buildings within larger metropolitan areas. Following is a summary of the company-owned and franchise hair restoration centers in operation at June 30, 2011, 2010, and 2009:

 
 2011 2010 2009 

Company-owned hair restoration centers:

          
 

Open at beginning of period

  62  62  57 
 

Constructed

  3  4  8 
 

Acquired

       
 

Franchise buybacks

  4    2 
 

Less relocations

  (1) (4) (5)
        
  

Site openings

  6    5 
        
 

Sites closed

  (1)    
        
 

Total company-owned hair restoration centers

  67  62  62 
        

Franchise hair restoration centers:

          
 

Open at beginning of period

  33  33  35 
 

Acquired

       
 

Franchise buybacks

  (4)   (2)
 

Less Relocations

       
        
  

Site openings

  (4)   (2)
        
 

Sites closed

       
        
 

Total franchise hair restoration centers

  29  33  33 
        

Total hair restoration centers

  96  95  95 
        

        Hair Restoration Growth Opportunities.    The Company's hair restoration centers expansion strategy focuses on organic growth (successfully converting new leads into customers at existing centers, broadening the menu of services and products at each location and to a lesser extent, new center construction) and acquisition growth.


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Affiliated Ownership Interests:

        The Company maintains ownership interests in salons, beauty schools and hair restoration centers.salons. The primary ownership interests areinterest is a 55.1 percent interest in Provalliance, EEG and Hair Club for Men, Ltd.Empire Education Group, Inc. (EEG), which areis accounted for as an equity method investments.

        The Company maintains a 46.7 percent ownership interest in Provalliance. The fiscal year 2008 merger of the operations of the European operating subsidiaries with the Franck Provost Salon Group created a newly formed entity, Provalliance. The Franck Provost Salon Group management structure has a proven platform to build and acquire company-owned stores as well as a strong franchise operating group that is positioned for expansion. In March of 2011, the Company acquired approximately 17 percent additional equity interest in Provalliance.

        The Company maintains a 55.1 percent ownership interest in EEG.investment. Contributing the Company's beauty schools in fiscal year 2008 to EEG leveragesleveraged EEG's management expertise, while enabling the Company to maintain a vested interest in the highly profitable beauty school industry.

        The Company maintains a 50.0 percent ownership in Hair Club for Men, Ltd. Hair Club for Men, Ltd. operates Hair Club centers in Illinois and Wisconsin.

Corporate Trademarks:

        The Company holds numerous trademarks, both in the United States and in many foreign countries. The most recognized trademarks are "Regis Salons,"SmartStyle," "Supercuts," "MasterCuts," "SmartStyle,"Regis Salons," "Cost Cutters," "Hair Masters," "First Choice Haircutters," "Magicuts"Haircutters" and "Hair Club for Men and Women."Magicuts."

        "Sassoon" is a registered trademark of Procter & Gamble. The Company has a license agreement to use the Sassoon name for existing salons and academies, and new salon development.

        Although the Company believes the use of these trademarks is an element in establishing and maintaining its reputation as a national operator of high quality hairstyling salons, and is committed to protecting these trademarks by vigorously challenging any unauthorized use, the Company's success and continuing growth are the result of the quality of its salon location selections and real estate strategies.


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Corporate Employees:

        During fiscal year 2011,2013, the Company had approximately 55,000 full-50,000 full and part-time employees worldwide, of which approximately 48,00044,000 employees were located in the United States. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its employee relations are amicable.

Executive Officers:

        In February of 2011 the Company announced that Randy Pearce would assume the role of President from Paul Finkelstein, effective immediately. Mr. Finkelstein will continue to serve as Chairman of the Board of Directors and Chief Executive Officer until the appointment of a new Chief Executive Officer, which is expected to be in February 2012. Mr. Finkelstein will become Executive Chairman upon the appointment of a new Chief Executive Officer. In connection with these executive changes, Eric Bakken was promoted to Executive Vice President, General Counsel and Business Development, David Bortnem was promoted to Corporate Chief Operating Officer and Brent Moen was promoted to Chief Financial Officer.

Information relating to Executive Officers of the Company follows:

Name
 Age Position

Paul FinkelsteinDaniel Hanrahan

 69Chairman of the Board of Directors and Chief Executive Officer

Randy Pearce

 56 President

David Bortnem

45Executive Vice President, Corporate and Chief OperatingExecutive Officer

Eric Bakken

 4446 Executive Vice President, Chief Administrative Officer and General Counsel and Business Development

Gordon Nelson

60Executive Vice President, Fashion, Education

Norma Knudsen

 5355 Executive Vice President, Merchandising

Brent MoenSteven Spiegel

 4451Executive Vice President and Chief Financial Officer

Heather Passe

42 Senior Vice President and Chief FinancialMarketing Officer

Doug Reynolds

57Senior Vice President and Chief Information Officer

        Paul Finkelstein is the Chairman of the Board of Directors and Chief Executive Officer. HeDaniel Hanrahan has served as Chairman of the Board of Directors, President and CEO from 2004 to 2011, as President and Chief Executive Officer since August 2012. He most recently served as President of Celebrity Cruises, a subsidiary of Royal Caribbean Cruises Ltd., from 1996February 2005 to 2004,July 2012, and as its President and Chief OperatingExecutive Officer from 1988 to 1996since September 2007. Mr. Hanrahan has served on the board of directors of Cedar Fair, L.P., an amusement-resort operator, since 2012, and as Executive Vice President from 1987 to 1988.is a member of its Audit Committee.


        Randy Pearce was appointed to President in 2011. He served as Senior Executive Vice President from 2006 to 2011, as Executive Vice President from 1999 to 2006, as Chief Administrative Officer from 1999 to 2011 and as Chief Financial Officer from 1998 to 2011. Additionally, he was Senior Vice President, Finance from 1998 to 1999, Vice PresidentTable of Finance from 1995 to 1997 and Vice President of Financial Reporting from 1991 to 1994. During fiscal year 2006, he was also elected Director and Audit Committee Chair of Ascena Retail Group, Inc., which operates a chain of women's apparel specialty stores.

        David Bortnem was appointed to Corporate Chief Operating Officer in 2011. He served as Chief Operating Officer of MasterCuts from 2006 to 2011, as Vice President for the MasterCuts division from 2003 to 2006, and as Vice President for the Regis division from 2000 to 2003. He joined the Company in 1998 as a Salon Director.Contents

        Eric Bakken has served as Executive Vice President, Chief Administrative Officer and General Counsel since 2010.April 2013. He served as Executive Vice President, General Counsel and Business Development and Interim Corporate Chief Operating Officer from 2012 to April 2013, and performed the function of principal executive officer between July 2012 and August 2012, Executive Vice President from 2010 to 2012, Senior Vice President from 2006 to 2009, General Counsel from 2004 to 2006, as Vice President, Law from 1998 to 2004 and as a lawyer to the Company from 1994 to 1998.

        Gordon Nelson has served as Executive Vice President, Fashion, Education and Marketing of the Company since 2006. In April of 2011 the Company announced the retirement of Gordon Nelson effective June 30, 2012. He served as Senior Vice President from 1994 to 2006 and in other roles with the Company from 1977 to 1994.


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Norma Knudsen has served as Executive Vice President, Merchandising since July 2006. She served as Chief Operating Officer, Trade Secret from February 1999 through 2009 and as Vice President, Trade Secret Operations from 1995 to 1999.

        Brent Moen was appointed to SeniorSteven Spiegel has served as Executive Vice President and Chief Financial Officer in 2011. Hesince December 2012.

        Heather Passe has served as Senior Vice President and Corporate Controller from 2006 to 2011,Chief Marketing Officer since July 2012.

        Doug Reynolds has served as Senior Vice President of Finance from 2002 to 2006, and as Director of Finance from 2000 to 2002.Chief Information Officer since May 2012.

Corporate Community Involvement:

        Many of the Company's employees volunteer their time to support charitable events for breast cancer research. Proceeds collected from such events are distributed through the Regis Foundation for Breast Cancer Research. The Company's community involvement also includes a major sponsorship role for the Susan G. Komen Twin Cities Race for the Cure. This 5K run and one mile walk is held in Minneapolis, Minnesota on Mother's Day to help fund breast cancer research, education, screening and treatment. Through its community involvement efforts, the Company has helped raise millions of dollars in fundraising for breast cancer research.

Governmental Regulations:

        The Company is subject to various federal, state, local and provincial laws affecting its business as well as a variety of regulatory provisions relating to the conduct of its beauty related business, including health and safety.

        In the United States, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the FTC Rule) and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular/disclosure document containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which such registration is required. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees, and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations.

        In Canada, the Company's franchise operations are subject to bothfranchise laws and regulations in the provinces of Ontario, Alberta, Franchise ActManitoba, New Brunswick, and the Ontario Franchise Act.Prince Edward Island. The offering of franchises in Canada occurs by way of a disclosure document, which contains certain disclosures required by the Ontarioapplicable provincial laws. The provincial franchise laws and Alberta Franchise Acts. Both the Ontario and Alberta Franchise Actsregulations primarily focus on disclosure requirements, although each requires certain relationship requirements such as a duty of fair dealing and the right of franchisees to associate and organize with other franchisees.

        Governmental regulations surrounding franchise operations in Europe are similar to those in the United States.        The Company believes it is operating in substantial compliance with applicable laws and regulations governing all of its operations.

        The Company maintains an ownership interest in EEG. Beauty schools derive a significant portion of their revenue from student financial assistance originating from the U.S Department of Education's Title IV Higher Education Act of 1965. For the students to receive financial assistance at the school, the beauty schools must maintain eligibility requirements established by the U.S Department of Education.


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Financial Information about Foreign and North American Operations

        Financial information about foreign and North American markets is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and segment information in Note 1614 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Available Information

        The Company is subject to the informational requirements of the Securities and Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street NE, Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

        Financial and other information can be accessed in the Investor Information section of the Company's website atwww.regiscorp.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

Item 1A.    Risk Factors

ChangesSignificant initiatives implemented and changes in the general economic environmentour management and organizational structure may continue to adversely impact our business and results of operations.operating results.

        ChangesMr. Daniel J. Hanrahan was appointed President and Chief Executive Officer of the Company, effective August 6, 2012. During fiscal year 2013, the Company began executing upon a number of significant strategic initiatives to support and focus on its business strategies to return the United States, Canadian, United Kingdom, AsianCompany to sustainable long-term growth and other European economies have an impactprofitability. The Company rolled out a new point-of-sale system and salon workstations in over 95% of its North American salons, restructured the Company's North American field organization and is standardizing plan-o-grams and eliminating retail products. In addition, the Company's management is engaged in a strategic review of non-core assets to focus on our business. General economic factors that are beyondcore business of operating beauty salons, improving long-term profitability and maximizing shareholder value.

        Initiatives and changes of this magnitude and scope, both individually and collectively, may continue to affect our control, such as interest rates, recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons and hair restoration centers can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.operating results.

If we continue to have negative same-store sales our business and results of operations may be affected.

        Our success depends, in part, upon our ability to improve sales, as well as both gross marginscost of service and product and operating margins. Comparable same-store sales are affected by average ticket and same-store customerguest visits. A variety of factors affect same-store customerguest visits, including the guest experience, fashion trends, competition, current economic conditions, changes in our product assortment, the successeffectiveness of marketing programs and weather conditions. These factors may cause our comparable same-store sales results to differ materially from prior periods and from our expectations. Our comparable same-store sales results for the twelve months ended June 30, 2011fiscal year 2013 declined 1.72.4 percent compared to the twelve months ended June 30, 2010. We impaired $74.1 million of goodwill associated with our Promenade salon concept during fiscal year 2011. We impaired $35.3 million of goodwill associated with our Regis salon concept during fiscal year 2010. We also impaired $41.7 million of goodwill associated with our salon concepts in the United Kingdom during fiscal year 2009.2012. If negative same-store sales continue and we are unable to offset the impact with operational savings, our financial results may be further affected. Weaffected and we may be required to take additional impairment charges and to impair certain long-lived assets and goodwill and suchcharges. Such impairments could be material to our consolidated balance sheet and results of operations. The concepts that have the highest likelihood of impairment are Promenade, Regis, and Hair Restoration Centers.During


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        Iffiscal year 2013 we are unable to improvedid not record any goodwill impairment charges. During fiscal years 2012 and 2011, we recorded goodwill impairment charges of $67.7 and $74.1 million associated with our comparable same-store sales on a long-term basis or offsetRegis and Promenade salon concepts, respectively. During fiscal years 2013, 2012 and 2011, we recorded fixed asset impairment charges of $8.2, $6.6 and $6.5 million, respectively. The concept that has the impact with operational savings, our financial results may be affected.highest likelihood of impairment is Regis. Furthermore, continued declines in same-store sales performance may cause us to be in default of certain covenants in our financing arrangements.

FailureOur business is based on the success of our salons which is driven by the success of our stylists. It is important for us to control costattract and retain talented stylists.

        Guest loyalty is highly dependent upon the stylist who is providing services to our guests. Our main objective is to have our guests leave feeling satisfied and wanting to return. To ensure our guests are receiving the best possible care, we need to focus on retaining and attracting highly qualified stylists. To continue to be successful in the future we will need to continue to offer competitive wages, benefits and education and training programs to attract and retain talented stylists. Any shortcomings by stylists or the training and guidance they receive, particularly an issue affecting the quality of the guest service experience or compliance with safety and health regulations, may adversely affectbe attributed to the Company as a whole, thus damaging our reputation and brand equity and potentially affecting our results of operations.

The effect of changes to healthcare laws in the United States may increase the number of employees who participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our operating results.

        We must continueoffer comprehensive healthcare coverage to controleligible full-time and part-time employees in the United States. While we have relatively low minimum work hour requirements for United States employees to be eligible for healthcare coverage under our expense structure. Failurehealthcare plans, for various reasons a majority of our eligible employees do not participate in our plans. However, many eligible employees who do not participate in our healthcare plans may find it more advantageous to managedo so when recent changes to healthcare laws in the United States become effective. Such changes include potential fees to individuals for not obtaining healthcare coverage and being denied certain healthcare subsidies if an eligible employee declines healthcare coverage under an employer's plan. The possibility of increased enrollment when or after the law becomes effective and clarification around uncertainties with respect to this pending legislation may significantly increase our cost of product, laborhealthcare coverage costs and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affectnegatively impact our operating results.

Changes in our key relationships may adversely affect our operating results.

        We maintain key relationships with certain companies, including Walmart. Termination or modification of any of these relationships, including Walmart, could significantly reduce our revenues and have a material and adverse impact on our business, our operating results and our ability to grow.

Changes in fashion trends may impact our revenue.

        Changes in consumer tastes and fashion trends can have an impact on our financial performance. For example, trends in wearing longer hair may reduce the number of visits to, and therefore, sales at our salons.

Changes in regulatory and statutory laws may result in increased costs to our business.

        With approximately 12,7009,763 locations and 55,00050,000 employees worldwide, our financial results can be adversely impacted by regulatory or statutory changes in laws. Due to the number of people we employ, laws that increase minimum wage rates, employment taxes or increase costs to provide employee benefits may result in additional costs to our company. None of our employees are currently subject to collective bargaining arrangements. If we become subject to one or more collective bargaining agreements in the future, it could adversely impact our labor costs. Compliance with new, complex and changing laws may cause our expenses to increase. In addition, any non-compliance with these laws could result in fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products, which could adversely affect our business, financial condition and results of operations. We are also subject to laws that affect the franchisor-franchisee relationship.


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We rely heavily on our management information systems. If our systems fail to perform adequately or if we experience an interruption in their operation, our results of operations may be affected.

        The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to collect daily sales information and guest demographics, generate payroll information, monitor salon performance, manage salon staffing and payroll costs, inventory control and other functions. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could disrupt our business and may adversely affect our operating results.

If we are not able to successfully compete in our business segments,markets, our financial results may be affected.

        Competition on a market by market basis remains strong.strong as many smaller chain competitors are franchise systems with local operating strength in certain markets. Therefore, our ability to raise prices in certain markets can be adversely impacted by this competition. If we are not able to raise or maintain prices, our ability to grow same-store sales and increase our revenue and earnings may be impaired.

Changes in the general economic environment may impact our business and results of operations.

        Changes to the United States, Canadian and United Kingdom economies have an impact on our business. General economic factors that are beyond our control, such as interest rates, exchange rates, recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.

Failure to control costs may adversely affect our operating results.

        We must continue to control our expense structure. Failure to manage our cost of product, labor and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affect our operating results.

Certain of the terms and provisions of the convertible notes we issued in July 2009 may adversely affect our financial condition and operating results and impose other risks.

        In July 2009, we issued $172.5 million aggregate principal amount of our 5.0 percent convertible senior notes due 2014 in a public offering. Certain terms of the notes we issued may adversely affect our financial condition and operating results or impose other risks, such as the following:

Failure to optimize our brand portfolio could have a negative impact on our financial results.

        To be successful in the future, we must focus on optimizing our brands to increase their value and growth. Optimization of our brands will enable us to simplify our operating model. Failure to do so


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could adversely impact our ability to grow revenue and realize further efficiencies within our results of operations.

Changes in our key relationships may adversely affect our operating results.

        We maintain key relationships with certain companies, including Walmart. Termination or modification of any of these relationships could significantly reduce our revenues and have a material and adverse impact on our business, our operating results and our ability to grow.

Changes in manufacturers' choice of distribution channels may negatively affect our revenues.

        The retail products we sell are licensed to be carried exclusively by professional salons. The products we purchase for sale in our salons are purchased pursuant to purchase orders, as opposed to long-term contracts and generally can be terminated by the producer without much advance notice. Should our product manufacturers decide to utilize other distribution channels, such as large discount retailers, it could negatively impact the revenue earned from product sales.

If our joint ventures are unsuccessful our financial results may be affected.

        We have entered into joint venture arrangements with other companies in the hair salon and beauty school businesses in order to maintain and expand our operations in the United States, Asia and continental Europe.businesses. If our joint venture partners are unwilling or unable to devote their financial resources or marketing and operational capabilities to our joint venture businesses, or if any of our joint ventures are terminated, we may not be able to realize anticipated revenues and profits in the countries where our joint ventures operate and our business could be materially adversely affected. If our joint venture arrangements are not successful, we may have a limited ability to terminate or modify these arrangements. If any of our joint ventures are terminated, there can be no assurance that we will be able to attract new joint venture partners to continue the activities of the terminated joint venture or to operate independently in the countries in which the terminated joint venture conducted business.


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        During fiscal year 2011,years 2013 and 2012, we recorded an impairmentnoncash impairments of $9.2$17.9 and $19.4 million related to our investment in MY Style. During fiscal year 2009, we recorded impairments of $25.7 million and $7.8 million ($4.8 million net of tax) related to our investment in Provalliance and investment in and loans to Intelligent Nutrients, LLC, respectively.EEG. Due to economic, regulatory and other factors, we may be required to take additional noncash impairment charges related to our investments and such noncash impairments could be material to our consolidated balance sheet and results of operations. In addition, our joint venture partners may be required to take noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to our consolidated balance sheet and results of operations. Our share of our investment'sEEG's goodwill balances as of June 30, 20112013 is $102.1approximately $16 million.

We are subject to default risk on our accounts and notes receivable.

        We have outstanding accounts and notes receivable subject to collectability. If the counterparties are unable to repay the amounts due or if payment becomes unlikely our results of operations would be adversely affected. For example, during the twelve months ended June 30, 2011 the Company recorded a $31.2 million valuation reserve on the note receivable from the purchaser of Trade Secret to reflect the net realizable value.

Changes in manufacturers' choice of distribution channels may negatively affect our revenues.

        The retail products that we sell are licensed to be carried exclusively by professional salons. The products we purchase for sale in our salons are purchased pursuant to purchase orders, as opposed to long-term contracts and generally can be terminated by the producer without much advance notice. Should the various product manufacturers decide to utilize other distribution channels, such as large discount retailers, it could negatively impact the revenue earned from product sales.

Changes to interest rates and foreign currency exchange rates may impact our results from operations.

        Changes in interest rates and foreign currency exchange rates will have an impact on our expected results from operations. Currently,Historically, we managehave managed the risk related to fluctuations in interestthese rates through the use of variablefixed rate debt instruments and other financial instruments.

We rely heavily onChanges in fashion trends may impact our management information systems. If our systems fail to perform adequately or if we experience an interruption in their operation, our results of operations may be affected.revenue.

        The efficient operation of our business is dependentChanges in consumer tastes and fashion trends can have an impact on our management information systems. We rely heavily on our management information systems to collect daily sales information and customer demographics, generate payroll information, monitor salon performance, manage salon staffing and payroll costs, inventory control and other functions. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could disrupt our business and may adversely affect our operating results.

        The Company plans to implement a new point-of-sale system in our salons during fiscal year 2012. Failure to effectively implement the point-of-sale system may adversely affect our operating results.financial performance.

If we fail to protect the security of personal information about our customers,guests, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer.

        The nature of our business involves processing, transmission and storage of personal information about our customers.guests. If we experience a data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our customersguests could lose confidence in our ability


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to protect their personal information, which could cause them to stop visiting our salons altogether. Such events could lead to lost future sales and adversely affect our results of operations.


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Certain of the terms and provisions of the convertible notes we issued in July 2009 may adversely affect our financial condition and operating results and impose other risks.

        In July 2009, we issued $172.5 million aggregate principal amount of our 5.0 percent convertible senior notes due 2014 in a public offering. Certain terms of the notes we issued may adversely affect our financial condition and operating results or impose other risks, such as the following:

Item 1B.    Unresolved Staff Comments

        None.


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Item 2.    Properties

        The Company's corporate offices are headquartered in a 270,000 square foot, four building complex in Edina, Minnesota owned or leased by the Company.

        The Company also operates small offices in New York, New York; Toronto, Canada; Coventry and London, England; Boca Raton, Florida; and Chattanooga, Tennessee. These offices are occupied under long-term leases.

        The Company owns distribution centers located in Chattanooga, Tennessee and Salt Lake City, Utah. The Chattanooga facility currently utilizes 230,000 square feet while the Salt Lake City facility utilizes 210,000 square feet. The Salt Lake City facility maycan be expanded to 290,000 square feet to accommodate future growth.

        The Company operates all of its salon locations and hair restoration centers under leases or license agreements. Substantially all of its North American locations in regional malls are operating under leases with an original term of at least ten years. Salons operating within strip centers and Walmart Supercenters have leases with original terms of at least five years, generally with the ability to renew, at the Company's option, for one or more additional five year periods. Salons operating within department stores in Canada and Europe operate under license agreements, while freestanding or shopping center locations in those countries have real property leases comparable to the Company's domesticNorth American locations.

        The Company also leases the premises in which certainapproximately 80 percent of our franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases have a five year initial term and one or more five year renewal options. All lease costs are passed through to the franchisees. Remaining franchisees who do not enter into sublease arrangements with the Company negotiate and enter into leases on their own behalf.

        None of the Company's salon leases are individually material to the operations of the Company, and the Company expects that it will be able to renew its leases on satisfactory terms as they expire. See Note 108 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

Item 3.    Legal Proceedings

        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 consumer and wage and hour violations. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleges that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. The Board of Directors appointed a Special Litigation Committee to investigate the claims and allegations made in the derivative action, and to decide on behalf of the Company whether the claims and allegations should be pursued. The derivative action has been stayed by the court pending the decision of the Special Litigation Committee. We do not know when the Special Litigation Committee will complete its work, or what it will decide. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the Company's counsel believes thatactions are being vigorously defended, 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.

        During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.

        During fiscal year 2010, the Company settled two legal claims regarding certain customer and employee matters for an aggregate charge of $5.2 million plus a commitment to provide discount coupons. During the twelve months ended June 30, 2011 and 2010, payments aggregating $4.3 million and $0.9 million, respectively, were made.

Item 4.    ReservedMine Safety Disclosures

        Not applicable.


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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities

(a)
Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters; Performance Graph

        Regis common stock is listed and traded on the New York Stock Exchange under the symbol "RGS."

        The accompanying table sets forth the high and low closing bid quotations for each quarter during fiscal years 20112013 and 20102012 as reported by the New York Stock Exchange (under the symbol "RGS"). The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

        As of August 12, 2011,9, 2013, Regis shares were owned by approximately 21,00019,000 shareholders based on the number of record holders and an estimate of individual participants in security position listings. The common stock price was $13.59$17.76 per share on August 12, 2011.9, 2013.

 Fiscal Years 

 2011 2010  2013 2012 
Fiscal Quarter
 High Low High Low  High Low High Low 

1st Quarter

 $19.53 $12.84 $18.46 $11.90  $19.54 $16.26 $15.90 $12.46 

2nd Quarter

 21.69 15.58 17.54 14.89  19.59 15.79 17.36 13.79 

3rd Quarter

 18.47 16.25 19.02 14.95  18.69 16.34 18.65 15.02 

4th Quarter

 19.20 13.83 20.46 15.55  19.14 16.04 18.91 17.04 

        The Company paid quarterly dividends of $0.06 per share during each of the three month periods ended March 31, 2011fiscal year 2013 and June 30, 2011. The Company paid quarterly dividends of $0.04 per share in fiscal years 2010, and during each of the three month periods ended September 30, 2010 and December 31, 2010.2012. The Company expects to continue paying regular quarterly dividends in the foreseeable future.

Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate future filings or this Annual Report, the following performance graph and accompanying data shall not be deemed to be incorporated by reference into any such filings. In addition, they shall not be deemed to be "soliciting material" or "filed" with the SEC.

        The following graph compares the cumulative total shareholder return on the Company's stock for the last five years with the cumulative total return of the Standard and Poor's 500 Stock Index and the cumulative total return of a peer group index (the Peer Group) constructed by the Company. In addition, the Company has included the Standard and Poor's 400 Midcap Index and the Dow Jones Consumer Services Index in this analysis because the Company believes these two indices provide a comparative correlation to the cumulative total return of an investment in shares of Regis Corporation.

        The Peer Group consists of the following companies: Advance Auto Parts, Inc., AutoZone, Inc.Boyd Gaming Corp., Brinker International, Inc., CBRLOuterwall, Inc. (formerly Coinstar, Inc.), Cracker Barrel Old Country Store, DineEquity, Inc., Fossil Group, Inc., DineEquity,Fred's, Inc., Foot Locker, Inc., GameStop Corp.,Green Mountain Coffee Roasters, H&R Block, Inc., Jack in the Box, Inc., Papa John's International,Panera Bread Co., Penn National Gaming, Inc., PetSmart,Revlon, Inc., RadioShack Corp.Sally Beauty Holdings, Inc., Service Corporation International, The Cheesecake Factory, Inc., and Starbucks Corp.Ulta Salon, Inc. The Peer Group is a self-constructed peer group of companies that have comparable annual revenues, the customerguest service element is a critical component to the business, and a target of moderate customersguests in terms of income and style, excluding apparel companies.


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        The comparison assumes the initial investment of $100 in the Company's Common Stock, the S&P 500 Index, the Peer Group, the S&P 400 Midcap Index and the Dow Jones Consumer Services Index on June 30, 20062008, and thosethat dividends, if any, were reinvested.


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Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 20112013

 June 30, 

 2006 2007 2008 2009 2010 2011  2008 2009 2010 2011 2012 2013 

Regis

 $100.00 $107.86 $74.71 $49.90 $45.06 $44.86  $100.00 $66.78 $60.31 $60.04 $71.43 $66.19 

S & P 500

 100.00 120.59 104.77 77.30 88.46 115.61  100.00 73.78 84.43 110.34 116.33 140.29 

S & P 400 Midcap

 100.00 118.51 109.81 79.04 98.74 137.63  100.00 71.98 89.92 125.33 122.40 153.23 

Dow Jones Consumer Service Index

 100.00 116.91 92.34 76.21 93.68 128.99  100.00 82.53 101.45 139.69 158.27 203.28 

Peer Group

 100.00 108.11 79.68 72.77 93.83 137.32  100.00 93.56 109.53 197.37 177.00 257.49 

(b)    Share Repurchase Program

        In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2011, 2010, and 2009,2013, a total accumulated 6.87.7 million shares have been repurchased for $226.5$241.3 million. As of June 30, 2011, $73.52013, $58.7 million remains to be spent on share repurchasesoutstanding under thisthe approved stock repurchase program.

        The Company did not repurchase any of its common stock through its share repurchase program during the twelvethree months ended June 30, 2013. The Company repurchased 909,175 shares of common stock at an average price of $16.32 per share, ranging from $15.99 to $16.84 per share, through its share repurchase program during fiscal year 2013 for a total of $14.9 million. The Company did not repurchase any of its common stock through its share repurchase program during fiscal years 2012 and 2011.


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CEO and CFO Certifications

        The certifications by our president and chief financial officer required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to this Annual Report on Form 10-K. Our CEO's annual certification pursuant to NYSE Corporate Governance Standards Section 303A.12(a) that our CEO was not aware of any violation by the Company of the NYSE's Corporate Governance listing standards was submitted to the NYSE on November 15, 2010.


Item 6.    Selected Financial Data

        Beginning with the period ended December 31, 2008, the operations of the Trade Secret concept within the North American reportable segment were accounted for as discontinued operations. Beginning with the period ended September 30, 2012 the Hair Restoration Centers operations were accounted for as discontinued operations. All periods presented will reflect Trade Secret and Hair Restoration Centers as a discontinued operation. The following discussion of results of operations will reflect results from continuing operations. Discontinued operations will be discussed at the end of this section.

        The following table sets forth in thousands (except per share data), for the periods indicated, selected financial data derived from the Company's Consolidated Financial Statements in Part II, Item 8. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 8, "Financial Statements and Supplementary Data", of this Report on Form 10-K.

 
 2011 2010 2009 2008 2007 

Revenues(a)

 $2,325,869 $2,358,434 $2,429,787 $2,481,391 $2,373,338 

Operating income(b)

  3,948  97,218  109,073  173,340  141,506 

(Loss) income from continuing operations(c)

  (8,905) 39,579  6,970  83,901  67,739 

(Loss) income from continuing operations per diluted share(c)

  (0.16) 0.71  0.16  1.92  1.48 

Total assets

  1,805,753  1,919,572  1,892,486  2,235,871  2,132,114 

Long-term debt and capital lease obligations, including current portion

  313,411  440,029  634,307  764,747  709,231 

Dividends declared

 $0.20 $0.16 $0.16 $0.16 $0.16 
 
 Fiscal Years 
 
 2013 2012 2011 2010 2009 
 
 (Dollars in thousands, except per share data)
 

Revenues

 $2,018,713 $2,122,227 $2,180,181 $2,216,648 $2,289,267 

Operating income (loss)(a)

  12,326  (2,167) (14,282) 76,881  85,202 

Income (loss) from continuing operations(a)

  4,166  (51,743) (20,939) 25,728  (6,819)

Income (loss) from continuing operations per diluted share

  0.07  (0.91) (0.37) 0.46  (0.16)

Dividends declared, per share

  0.24  0.24  0.20  0.16  0.16 


 
 June 30, 
 
 2013 2012 2011 2010 2009 
 
 (Dollars in thousands)
 

Total assets, including discontinued operations

 $1,390,492 $1,571,846 $1,805,753 $1,919,572 $1,892,486 

Long-term debt and capital lease obligations, including current portion

  174,770  287,674  313,411  440,029  634,307 


(a)
Revenues from salons, schools or hair restorations centers acquired each year were $25.6, $17.8, $82.1, $110.0, and $105.1 million during fiscal years 2011, 2010, 2009, 2008, and 2007, respectively. Revenues from the 51 accredited cosmetology schools contributed to Empire Education Group, Inc. on August 1, 2007 were $5.6, and $68.5 million in fiscal years 2008 and 2007, respectively. Revenues from the deconsolidated European franchise salon operations were $36.2 and $57.0 million in fiscal years 2008 and 2007, respectively.

(b)
The following significant items affected operating income:income (loss) and income (loss) from continuing operations:

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(c)
The following significant items affected (loss) income from continuing operations and (loss) income from continuing operations per diluted share:

Upon the March 2011 acquisition of the approximately 17 percent additional ownership interest in Provalliance, the Company recognized a net gain of approximately $2.4 million representing the settlement of a portion of the company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.

During fiscal year 2011, the Company recorded an $9.2 million other than temporary impairment on its investment in preferred shares of Yamano and premium paid at the time of it initial investment in MY Style. Impairment charges of $25.7 and $7.8 million associated with the Company's investment in Provalliance and for the full carrying value of our investment in and loans to Intelligent Nutrients, LLC were recorded in fiscal year 2009.

Fiscal year 2010 includes interest expense of $18.0 million related to make-whole payments and other fees associated with the repayment of private placement debt.

An income tax charge of approximately $3.8 million was recorded during fiscal year 2009 associated with an adjustment to correct ourthe prior yearyears deferred income tax balances. An income tax charge of approximately $3.0 million of which $1.3 million was recorded through income tax expense and $1.7 million was recorded through other comprehensive income during fiscal year 2008 was associated with repatriating approximately $30.0 million of cash previously considered to be indefinitely reinvested outside of the United States.

Item 7.    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 statements 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

BUSINESS DESCRIPTION

        Regis Corporation owns, franchises and operates beauty salons. As of June 30, 2013, the Company owned, franchised or held ownership interests in 9,763 locations worldwide. The Company's locations consist of 9,517 company-owned and franchised salons and 246 locations in which we maintain a non-controlling ownership interest of less than 100 percent. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market. See discussion within Part I, Item 1.

RESULTS OF OPERATIONS

        The following discussion of results of operations reflects results from continuing operations and reclassifications of fiscal years 2012 and 2011 cost of service, site operating expenses and general and administrative expenses to conform to current year presentation, see further discussion within Note 1 to the Consolidated Financial Statements. Hair Club has been accounted for as a discontinued operation for all periods presented, in five sections:see discussion within Note 2 to the Consolidated Financial Statements. All periods reflect the reclassification of Hair Club's results from continuing operations. Explanations are primarily for North American salons, unless otherwise noted. Discontinued operations are discussed at the end of this section.

Consolidated Revenues

        Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 4.9% during fiscal year 2013 and decreased 2.7% during fiscal year


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        Decreases of 4.9%, 2.7% and 1.6% in consolidated revenues during fiscal years 2013, 2012, and 2011, respectively, were driven by the following:

 
 Fiscal Years 
Factor
 2013 2012 2011 

Same-store sales

  (2.4)% (3.5)% (1.9)%

Closed salons

  (3.3) (2.3) (1.6)

New stores and conversions

  1.3  1.3  0.6 

Acquisitions

    0.7  1.1 

Other

  (0.5) 1.1  0.2 
        

  (4.9) (2.7)% (1.6)%
        

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        Regis Corporation (RGS) owns or franchises beauty salons and hair restoration centers. As of June 30, 2011, we owned, franchised or held ownership interests in approximately 12,700 worldwide locations. Our locations consisted of 9,819 system wide North American and International salons, 96 hair restoration centers, and 2,786 locations in which we maintain an ownership interest less than 100 percent. Our salon concepts offer generally similar products and services and serve mass market consumers. Our salon operationsSame-store sales by concept by fiscal year are organized to be managed based on geographical location. Our North American salon operations include 9,419 salons, including 1,936 franchise salons, operatingdetailed in the United States, Canadatable below:

 
 Fiscal Years 
 
 2013 2012 2011 

SmartStyle

  (1.1)% (4.3)% (1.9)%

Supercuts

  (0.7) (0.3) 0.1 

MasterCuts

  (5.1) (3.3) (0.7)

Regis

  (3.1) (4.2) (2.5)

Promenade

  (2.8) (2.7) (2.6)

Total North American Salons

  (2.3) (3.2) (1.8)

International salons

  (4.3) (9.1) (3.1)

Consolidated same-store sales

  (2.4)% (3.5)% (1.9)%
        

        The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partially offset by a 0.6% increase in average ticket. We closed 492 and Puerto Rico primarily under the trade names384 salons (including 69 and 51 franchise salons) during fiscal years 2013 and 2012, respectively. The Company constructed (net of Regis Salons, MasterCuts, SmartStyle, Supercutsrelocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012.

        The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and Cost Cutters. Our international salon operations include 4000.1% decrease in average ticket. We acquired 13 company-owned salons located in Europe, primarily in the United Kingdom. Hair Club for Men(including 11 franchise buybacks) during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011. The Company constructed (net of relocations) 166 company-owned salons during fiscal year 2012. We closed 384 and Women includes 96 North American locations, including 29305 salons (including 51 and 60 franchise locations. Duringsalons) during fiscal years 2012 and 2011, respectively.

        The same-store sales decrease of 1.9% during fiscal year 2011 we had approximately 55,000 corporate employees worldwide.was due to a 3.8% decrease in guest visits partially offset by a 1.9% increase in average ticket. We acquired 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks) during fiscal year 2010. The Company constructed (net of relocations) 115 company-owned salons during fiscal year 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during fiscal years 2011 and 2010, respectively.

        OurConsolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:

Service Revenues

        The $80.0 million decrease in service revenues during fiscal year 2013 was due to the closure of 423 company-owned salons, same-store service sales decreasing 2.0% and the comparable prior period including an additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, offset by a 0.3% increase in average ticket. Partially offsetting the decrease was growth due to newly constructed salons during fiscal year 2013.

        The $51.5 million decrease in service revenues during fiscal year 2012 growth strategy is focused on increasing customer visits. We plan to execute our strategy through four focus areaswas due the closure of putting customers333 company-owned salons and stylists first, leveraging the powersame-store service sales decreasing 3.7%. The decrease in same-store services sales was primarily a result of our salon brands, technology and connectivity, and delivering improved financial performance. Initiatives of these four focus areas include:

Salon Business

        The strength of our salon business is inaverage ticket due to promotional programs designed to generate additional guest visits. Partially offsetting the fundamental similaritydecrease was growth due to new 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 believe there are growth opportunities in all of our salon concepts. When commercial opportunities arise, 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 Walmart Supercenters. We believe that the availability of real estate will augment our ability to achieve the aforementioned long-term growth objectives. In fiscal 2012, our outlook for constructedacquired salons is approximately 285 units. Induring fiscal year 2012 capital expenditures and acquisitions are expected to be approximately $95.0 and $25.0 million, respectively.the additional day from leap year.


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        OrganicThe $22.4 million decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.4%, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2011, price increases, sales mix as the company increased hair color and waxing services, and the weakening of the United States dollar against the Canadian dollar.

Product Revenues

        The $24.3 million decrease in product revenues during fiscal year 2013 was primarily due to same-store product sales decreasing 3.9%, the closure of 423 company-owned salons and the comparable prior period including an additional day from leap year, partially offset by an increase in product sales to franchisees as a result of an increase in franchise locations.

        The $7.4 million decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 2.7%, and the closure of 333 company-owned salons, partially offset by the additional day from leap year and an increase in product sales to franchisees as a result of an increase in franchise locations.

        The $14.2 million decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.2 percent, product sales from new and acquired salons, and the weakening of the United States dollar against the Canadian dollar during fiscal year 2011.

Royalties and Fees

        Total franchised locations open at June 30, 2013 and 2012 were 2,082 and 2,016, respectively. The $0.8 million increase in royalties and fees was due to the increase in franchised locations during fiscal year 2013 and same-store sales increases at franchise locations.

        Total franchised locations open at June 30, 2012 and 2011 were 2,016 and 1,936, respectively. During fiscal year 2012, we purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchised locations. The $1.0 million increase in royalties and fees was also due to same-store sales increases at franchise locations, partially offset by the Company purchasing 11 of our franchised salons during fiscal year 2012.

        Total franchised locations open at June 30, 2011 and 2010 were 1,936 and 2,020, respectively. The 84 salon revenue is achieveddecrease in franchised locations was offset by the impact of the weakening of the United States dollar against the Canadian dollar.

Cost of Service

        The 220 basis point increase in cost of service as a percent of service revenues during fiscal year 2013 was primarily due to increased labor costs in our North American salons, a result of the Company's strategy to increase stylist hours in order to reduce guest wait times and improve the overall guest experience, and the negative leverage this created with same-store service sales declines. The Company made slight improvement during the year in optimizing salon schedules to align with guest traffic. Also contributing to the basis point increase was the Company's decision earlier in the year to compensate stylists on the gross sales amount during certain coupon events and an increase in health insurance expense due to higher claims.

        The 10 basis point decrease in cost of service as a percent of service revenues during fiscal year 2012 was due to lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims, partially offset by decreased productivity in our North American segment.


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        The 50 basis point increase in cost of service as a percent of service revenues during fiscal year 2011 was due to an increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes.

Cost of Product

        The 460 basis point increase in cost of product as a percent of product revenues was mainly attributed to our inventory simplification program, which standardizes retail plan-o-grams, eliminates retail products and consolidates from four to one private label brand. Historically, the Company has been able to recover its cost on discontinued retail inventory through in-store promotional discounts, and during the combinationfourth quarter of fiscal 2013, the Company clearanced approximately $8 million of product. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on future product sales and cost of product as a percent of product revenues, the Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a noncash inventory charge of $12.6 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product as a percent of product sales were Hurricane Sandy product donations, partially offset by reductions to commissions paid on retail sales.

        The 10 basis point increase in cost of product as a percentage of product revenues during fiscal year 2012 was primarily due to increases in freight costs due to higher fuel prices partially offset by a reduction in commissions paid to new employees on retail product sales in our North American segment.

        The 220 basis point decrease in cost of product as a percentage of product revenues during fiscal year 2011 was primarily due to previous fiscal year including $20.0 million of product sold at cost to the purchaser of Trade Secret. Partially offsetting the basis point decrease was an increase in sales of appliances that have a higher cost as a percent of revenues in our International segment.

Site Operating Expenses

        The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage from the decrease in same-store sales. Site operating expenses declined $3.1 million primarily within our North American segment due to a decrease in advertising costs, utilities and janitorial expense, partially offset by increases in salon connectivity costs to support the Company's new POS system and salon workstations and higher salon repairs and maintenance expense.

        The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.

        The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2011 was primarily due to an increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals, partially offset by a reduction in legal claims expense.

General and Administrative

        General and administrative (G&A) declined $22.9 million, or 60 basis points as a percentage of consolidated revenues, during fiscal year 2013. This improvement was primarily due to reductions in salaries and benefits from our corporate reorganization executed last year, certain cost savings


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initiatives in the current year and reduced levels of incentive pay in the current year, partly offset by costs associated with rolling out our new POS system. The Company remains focused on simplification to drive further costs efficiencies.

        The 130 basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was the result of lapping a $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret in fiscal year 2011. Also contributing to the improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in salon support workforce that occurred in January 2012. Partially offsetting these improvements were incremental costs associated with the Company's senior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets.

        The 210 basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims and negative leverage on fixed costs within this category due to negative same-store sales.

Rent

        Rent expense decreased by $7.1 million during fiscal year 2013 due to salon closures, primarily within our North American segment. The 50 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage associated with this fixed cost category.

        The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and salon closures.

        The 20 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.

Depreciation and Amortization

        The 40 basis point decrease in depreciation and amortization (D&A) as a percent of consolidated revenues during fiscal year 2013 was primarily due to our lapping $16.2 million of accelerated amortization associated with the adjustment to the useful life of the Company's previously internally developed POS system. Partially offsetting the 40 basis point improvement was $1.9 million of accelerated depreciation expense in the current year associated with a leased building in conjunction with consolidating the Company's headquarters and negative leverage from the decrease in same-store sales.

        The 70 basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated amortization expense in the current year resulting from the useful life adjustment of the Company's internally developed POS system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction andbeginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009.


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        The 20 basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales.

Goodwill Impairment

        The Company did not record a goodwill impairment charge in 2013.

        The Company recorded a goodwill impairment charge of $67.7 million related to the Regis salon concept during fiscal year 2012. Due to the continuation of decreased same-store sales, results. Once customer visitations stabilize,the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept.

        The Company recorded a $74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The $74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon concept.

Interest Expense

        Interest expense increased by $9.3 million during fiscal year 2013 primarily due to a $10.6 million make-whole payment associated with the prepayment of private placement debt in June 2013, partially offset by decreased debt levels as compared to fiscal year 2012.

        The 30 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2012 was primarily due to decreased debt levels as compared to fiscal year 2011.

        The 90 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2011 was primarily due to a reduction in interest expense due to fiscal year 2010 including $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011.

Interest Income and Other, net

        The 160 basis point increase in interest income and other, net as a percent of consolidated revenues during fiscal year 2013 was primarily due to the recognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance, partially offset by fiscal year 2012 including a favorable legal settlement and the foreign currency impact on the Company's investment in MY Style.

        Interest income and other, net as a percent of consolidated revenues during fiscal year 2012, was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret.

        The 30 basis point decrease in the interest income and other, net as a percent of consolidated revenues during fiscal year 2011 was primarily due to the foreign currency impact of the Company's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and $1.9 million in interest income recorded in the comparable prior period on the outstanding note receivable due from the purchaser of Trade Secret.


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Income Taxes

        During fiscal year 2013, the Company recognized an income tax benefit of $10.0 million on $10.1 million of income from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (99.3)%. The larger than expected effective tax rate benefit was because the $33.8 million foreign currency translation gain recognized at the time of the sale of Provalliance was primarily non-taxable, and the Company benefitted from Work Opportunity Tax Credits.

        During fiscal year 2012, the Company recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 17.5%. The smaller than expected effective tax rate was primarily because the $67.7 million Regis salon concept impairment charge was partially nondeductible for tax purposes.

        During fiscal year 2011, the Company recognized an income tax benefit of $16.3 million on $43.9 million of loss from continuing operations before income taxes and equity in income of affiliated companies, for an effective tax rate of 37.2%. Significant items impacting the effective tax rate were the $74.1 million Promenade salon concept impairment charge which was partially nondeductible for tax purposes and the Company benefited from Work Opportunity Tax Credits.

Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes

        The loss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partially offset by the Company's share of EEG's net income and a $0.6 million gain on the Provalliance equity put that automatically terminated as a result of the sale of the Company's investment in Provalliance. See Note 5 to the Consolidated Financial Statements for further discussion of each respective affiliated company.

        The loss in affiliated companies, net of taxes for fiscal year 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. In conjunction with entering into a purchase agreement to sell Provalliance, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of $17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our share of earnings of $9.7 and $4.7 million recorded for our investments in Provalliance and EEG, respectively.

        Equity in income of affiliated companies, net of taxes for fiscal year 2011 was due to equity in income of $7.8 and $5.5 million recorded for our investments in Provalliance and EEG, respectively. In addition, the Company recorded a $9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred in Japan during March 2011. The Company also recorded a $2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.

Income from Discontinued Operations, net of Taxes

        During fiscal year 2013, the Company recognized $25.0 million of income, net of taxes from discontinued operations, primarily from an after-tax gain of $17.8 million realized upon the sale of Hair Club and $12.6 million of income from Hair Club operations, net of taxes, partially offset by


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$5.4 million of expense, net of taxes associated with professional and transaction fees. See Note 2 to the Consolidated Financial Statements for further discussion on discontinued operations.

        During fiscal year 2012, the Company recognized $62.4 million of loss, net of taxes from discontinued operations, primarily from a $61.9 million loss, net of taxes from Hair Club operations, as a result of the $78.4 million goodwill impairment charge, and $1.6 million of expense, net of taxes associated with professional and transaction fees, partially offset by $1.1 million tax benefit related to the release of tax reserves associated with the disposition of our Trade Secret salon concept.

        During fiscal year 2011, the Company recognized $12.0 of income, net of taxes, from Hair Club operations.

Recent Developments

First Quarter-to-Date Fiscal 2014 Sales Trends

        As of August 25, 2013, first quarter-to-date same store service sales and product sales were down 3.4% and 14.9%, respectively. The Company believes these declines are short-term in nature, and we have seen improvement in August same-store service sales which are down 2.4%, a 180 basis point improvement since July. We expect these trends to further improve as our new field teams transition from reorganizing and hiring activities to focusing on their salons, and as we become more comfortable with and optimize our use of the new POS system. The Company has taken a number of steps to reverse this short-term trend, including providing an incentive for stylists to gain traction on our first quarter promotion and accelerating by two weeks the delivery of items within our new product assortment so that salon shelves could be reset sooner. Since salon resets were just completed several weeks ago, product sales trends have yet to show improvement.

Field Reorganization—Financial Statement Expense Classification

        Beginning in the first quarter of fiscal year 2014, the field reorganization, excluding salons within the mass premium category, will result in a change in expense classifications on our Statement of Operations. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders will spend most of their time on the salon floor leading, mentoring and serving guests. Accordingly, field leader costs, including their labor and travel costs, will directly arise from the management of salon operations. As a result, district and senior district leader labor costs will be reported within Cost of Service rather than General and Administrative expenses, and their travel costs will be reported within Site Operating expenses rather than General and Administrative expenses. This expense classification will have no financial impact on the Company's reported operating income (loss), reported net income (loss) or cash flows from operations.

Recent Accounting Pronouncements

        Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

        Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance strategic initiatives. We also anticipate having access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit or delay our strategic initiatives. There can be no assurance that we will continue to generate cash flows at or above current levels.


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        As of June 30, 2013, cash and cash equivalents were $200.5 million, with $176.4, $11.7 and $12.4 million in the United States, Canada, and Europe, respectively. As of June 30, 2013, the Company has a $33.3 million income tax receivable of which approximately $11 million is expected to be collected during the first quarter of fiscal year 2014.

        We have a $400.0 million five-year senior unsecured revolving credit facility with a syndicate of banks that expires in June 2018. As of June 30, 2013, the Company had no outstanding borrowings under the facility, and had outstanding standby letters of credit under the facility of $2.2 million, primarily related to its self-insurance program. Accordingly, unused available credit under the facility at June 30, 2013 was $397.8 million. The credit under this facility could be used to fund the convertible senior term notes should the Company choose to settle these notes in cash. Refer to additional discussion under financing arrangements.

        Our ability to access our historical trendrevolving credit facility is subject to our compliance with the terms and conditions of building several hundred company-owned salons. We anticipatesuch facility, including a maximum leverage ratio, a minimum fixed charge ratio and other covenants and requirements. At June 30, 2013, we were in compliance with all covenants and other requirements of our franchisees will open approximately 100credit agreement and senior notes.

Cash Flows

Cash Flows from Operating Activities

        Fiscal year 2013 cash provided by operating activities of $69.1 million declined by $84.6 million compared to 120 salonsthe previous fiscal year. Despite higher earnings in the current year, the decrease is attributable to decreases in revenues and increased cost of service and product resulting in changes in working capital. Cash payments of deferred compensation and income taxes also contributed to declines in cash provided by operating activities.

        Fiscal year 2012 cash provided by operating activities of $153.7 million declined by $75.5 million compared to the previous fiscal year, $51.8 million of this decrease related to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 included a tax refund related to the fiscal year 2009 loss on discontinued operations. Cash provided by operating activities was also lower due to a decrease of $6.0 million in dividends received from affiliated companies.

        Fiscal year 2011 cash provided by operating activities of $229.2 million increased by $37.0 million mainly due to an increase of $7.6 million in dividends received from affiliated companies and a $23.9 million reduction in income tax receivables.

Cash Flows from Investing Activities

        Cash provided by investing activities during fiscal year 2013 of $165.1 million was greater than the $90.9 million use of cash in fiscal year 2012. Older, unprofitable salons will be closed or relocated. Our long-term outlook for our salon business is annual consolidated low single digit same-storeIn fiscal year 2013, we received $266.2 million from the sales increases. We project our annualof Hair Club and Provalliance and $26.4 million from EEG related to principal payments on the outstanding note receivable and revolving line of credit. These were partially offset by the Company placing $24.5 million into restricted cash to collateralize its self-insurance program, enabling the Company to reduce fees associated with previously utilized standby letters of credit, and increased capital expenditures primarily related to the Company's POS system implementation.

        Cash used by investing activities of $90.9 million during fiscal year 2012 consolidated same-store sales to be in a range of negative 1.0 percent to positive 1.0 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. Fromwas less than fiscal year 19942011 of $144.3 million due to the comparable prior period including the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partially offset by an increase in capital expenditures during fiscal year 2012 for a POS system and new salon construction.


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        Cash used by investing activities of $144.3 million during fiscal year 2011 was greater compared to fiscal year 2010 of $44.6 million due to the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a disbursement of $15.0 million on the revolving credit facility with EEG and planned increases in acquisitions and capital expenditures.

Cash Flows from Financing Activities

        During fiscal years 2013, 2012 and 2011, the primary use of cash within financing activities was for repayments of long-term debt of $118.2, $29.7 and $137.7 million, respectively and dividends of $13.7, $13.9 and $11.5 million, respectively. During fiscal year 2013 the Company used $14.9 million to repurchase common stock under its share repurchase program and prepaid $89.3 million in private placement debt.

Financing Arrangements

        Financing activities are discussed in Note 7 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."

        Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. As of June 30, 2013, we acquired 8,050have $397.8 million available under our existing revolving credit facility.

        The Company's financing arrangements consists of the following:

 
  
 Interest rate %  
  
 
 
  
 Fiscal Years June 30, 
 
 Maturity Dates 2013 2012 2013 2012 
 
 (fiscal year)
  
  
 (Dollars in thousands)
 

Senior term notes

 2013 6.69 - 8.50% 6.69 - 8.50% $ $111,429 

Convertible senior notes(1)

 2015 5.00 5.00  166,454  161,134 

Revolving credit facility

 2018       

Equipment and leasehold notes payable

 2015 - 2016 4.90 - 8.75 4.90 - 8.75  8,316  14,780 

Other notes payable

 2013 5.75 - 8.00 5.75 - 8.00    331 
            

        174,770  287,674 

Less current portion(1)

        (173,515) (28,937)
            

Long-term portion

       $1,255 $258,737 
            

(1)
On or after April 15, 2014, holders may convert each of their senior convertible notes at their option at any time prior to the July 10, 2014 maturity date. As a result, the Company has included the convertible senior notes within long-term debt, current portion on the Consolidated Balance Sheet.

        In June 2013, the Company entered into a Sixth Amended and Restated Credit Agreement (Credit Agreement), which amended and restated in its entirety, the Company's existing Fifth Amended and Restated Credit Agreement that was entered into during fiscal year 2011. The Credit Agreement provides for a $400.0 million unsecured five-year revolving credit facility that expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, liquidity and other indebtedness. The Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under


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certain circumstances. Events of default under the Credit Agreement include a change of control of the Company. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2013.

        During June 2013, the Company prepaid $89.3 million of unsecured, fixed rate, senior term notes outstanding under a private shelf agreement.

        Beginning in April 2014, the holders of our convertible senior term notes may convert their notes at their option. The Company has the choice of net-cash settlement, settlement in its own shares or a combination of both. As of June 30, 2013, the notes are convertible at a conversion rate of 65.4357 shares of the Company's common stock per $1,000 principal amount of notes, representing a conversion price of approximately $15.28 per share of the Company's common stock.

        Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was as follows:

As of June 30,
 Debt to
Capitalization
 Basis Point
(Decrease)
Increase(1)
 

2013

  16.9% (750)

2012

  24.4  110 

2011

  23.3  (700)

(1)
Represents the basis point change in debt to capitalization as compared to prior fiscal year end (June 30).

        The basis point improvement in the debt to capitalization ratio as of June 30, 2013 compared to June 30, 2012 was primarily due to the prepayment of $89.3 million in private placement debt.

        The basis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the decrease in shareholders' equity as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit and a $36.6 million net impairment charge associated with our investments in Provalliance and EEG. Partially offsetting the impact of the decrease in shareholders' equity was a decrease in debt levels.

        The basis point improvement in the debt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 was primarily due to the repayment of an $85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening of the United States dollar against the Canadian dollar and British Pound.


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Contractual Obligations and Commercial Commitments

        The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2013:

 
 Payments due by period  
 
Contractual Obligations
 Within
1 years
 1 - 3 years 3 - 5 years More than
5 years
 Total 
 
 (Dollars in thousands)
 

On-balance sheet:

                

Debt obligations

 $166,454 $ $ $ $166,454 

Capital lease obligations

  7,061  1,255      8,316 

Other long-term liabilities

  4,651  4,958  3,266  7,870  20,745 
            

Total on-balance sheet

  178,166  6,213  3,266  7,870  195,515 
            

Off-balance sheet(a):

                

Operating lease obligations

  297,328  412,332  181,277  65,992  956,929 

Interest on long-term debt and capital lease obligations

  9,035  422      9,457 
            

Total off-balance sheet

  306,363  412,754  181,277  65,992  966,386 
            

Total

 $484,529 $418,967 $184,543 $73,862 $1,161,901 
            

(a)
In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the Consolidated Balance Sheet.

On-Balance Sheet Obligations

        Our long-term obligations are composed primarily of convertible debt. There were no outstanding borrowings under our revolving credit facility at June 30, 2013. Interest payments on long-term debt and capital lease obligations are estimated based on each debt obligation's agreed upon rate as of June 30, 2013 and scheduled contractual repayments.

        Other long-term liabilities of $20.8 million include $14.5 million related to the Executive Profit Sharing Plan and a salary deferral program $6.3 million (including $0.1 million in interest) related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees.

        This table excludes short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.

        The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their performance within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $3.5 and $9.5 million and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet at June 30, 2013. Refer to Note 10 to the Consolidated Financial Statements for additional information.


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        As of June 30, 2013, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 9 to the Consolidated Financial Statements for more information on our uncertain tax positions.

Off-Balance Sheet Arrangements

        Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $160.2 million, which are reimbursed to the Company by franchisees, and the guarantee of operating leases of salons operated by the purchaser of Trade Secret with future minimum lease payments of less than $3.0 million. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise buybacks. Once customer visitations normalize,owner. Management has not experienced and does not expect any material loss to result from these arrangements.

        We are a party to a variety of contractual agreements under which we anticipate adding several hundred company-owned salons each year from acquisitions. Somemay be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of these acquisitions may include buying salons fromlaw or otherwise, in the ordinary course of business. These contracts primarily relate to our franchisees.commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.

        We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.

        We continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations.

        We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2013. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Hair Restoration BusinessDividends

        We paid dividends of $0.24 per share during fiscal years 2013 and 2012 and $0.20 per share during fiscal year 2011. On August 20, 2013, the Board of Directors of the Company declared a $0.06 per share quarterly dividend payable September 17, 2013 to shareholders of record on September 3, 2013.

Share Repurchase Program

        In December 2004, we acquired Hair ClubMay 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for Men and Women. Hair Club for Men and Women is a provider of hair loss solutions with an estimated five percent sharethe repurchase of the $4 billion domestic market.Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This industry is comprisedrepurchase program has no stated expiration date. The Company repurchased 909,175 shares of numerous locations domestically and is highly fragmented.common stock through its share repurchase program during fiscal year 2013 for $14.9 million. The Company did not repurchase any shares during fiscal year 2012 or 2011. As of June 30, 2013 a result, we believe there is an opportunity to consolidate this industry through acquisition. Expandingtotal accumulated 7.7 million shares have been repurchased for $241.3 million. As of June 30, 2013, $58.7 million remains outstanding under the hair loss business organically and through acquisition would allow us to add incremental revenue which is neither dependent upon, nor dilutive to, our existing salon businesses.approved stock repurchase program.


        Our organic growth plans for the hair restoration business include the constructionTable 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, our 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 continue to be evaluated closely for additional growth opportunities.Contents

CRITICAL ACCOUNTING POLICIESRESULTS OF OPERATIONS

        The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United Statesfollowing discussion of America. In preparing the Consolidated Financial Statements, we are requiredresults of operations reflects results from continuing operations and reclassifications of fiscal years 2012 and 2011 cost of service, site operating expenses and general and administrative expenses to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believedconform 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 Consolidated Financial Statements.

        Our significant accounting policies can be found incurrent year presentation, see further discussion within Note 1 to the Consolidated Financial Statements contained in Part II, Item 8Statements. Hair Club has been accounted for as a discontinued operation for all periods presented, see discussion within Note 2 to the Consolidated Financial Statements. All periods reflect the reclassification of Hair Club's results from continuing operations. Explanations are primarily for North American salons, unless otherwise noted. Discontinued operations are discussed at the end of this Form 10-K. We believesection.


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Consolidated Results of Operations

        The following table sets forth, for the following accounting policiesperiods indicated, certain information derived from our Consolidated Statement of Operations in Item 8. The percentages are most criticalcomputed as a percent of total revenues, except as otherwise indicated.

 
 Fiscal Years 
 
 2013 2012 2011 2013 2012 2011 2013 2012 2011 
 
 
(Dollars in millions)
 
% of Total Revenues
 Basis Point
(Decrease) Increase
 

Service revenues

 $1,563.9 $1,643.9 $1,695.4  77.5% 77.5% 77.8%   (30) 30 

Product revenues

  415.7  440.0  447.5  20.6  20.7  20.5  (10) 20  (30)

Franchise royalties and fees

  39.1  38.3  37.3  1.9  1.8  1.7  10  10   

Cost of service(1)

  
930.7
  
941.7
  
972.9
  
59.5
  
57.3
  
57.4
  
220
  
(10

)
 
50
 

Cost of product(2)

  228.6  221.6  225.2  55.0  50.4  50.3  460  10  (220)

Site operating expenses

  203.9  207.0  211.2  10.1  9.8  9.7  30  10  30 

General and administrative

  226.7  249.6  285.8  11.2  11.8  13.1  (60) (130) 210 

Rent

  324.7  331.8  333.1  16.1  15.6  15.3  50  30  20 

Depreciation and amortization

  91.8  105.0  92.2  4.5  4.9  4.2  (40) 70  (20)

Goodwill impairment

    67.7  74.1    3.2  3.4  (320) (20) 180 

Interest expense

  
37.6
  
28.2
  
34.4
  
1.9
  
1.3
  
1.6
  
60
  
(30

)
 
(90

)

Interest income and other, net

  35.4  5.1  4.7  1.8  0.2  0.2  160    (30)

Income taxes(3)

  
10.0
  
4.4
  
16.3
  
99.3
  
17.5
  
37.2
  
N/A
  
N/A
  
N/A
 

Equity in (loss) income of affiliated companies, net of income taxes

  (16.0) (30.9) 6.7  (0.8) (1.5) 0.3  70  (180) (20)

Income (loss) from discontinued operations, net of taxes

  
25.0
  
(62.4

)
 
12.0
  
1.2
  
(2.9

)
 
0.6
  
410
  
(350

)
 
(20

)

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

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

(3)
Computed as a percent of income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies. The income tax benefit basis point change is noted as not applicable (N/A) as the discussion below is related to aid in fully understandingthe effective income tax rate.

Consolidated Revenues

        Consolidated revenues primarily include revenues of company-owned salons, product and evaluating our reported financial conditionequipment sales to franchisees, and results of operations.franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 4.9% during fiscal year 2013 and decreased 2.7% during fiscal year


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2012. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

North American salons:

          

SmartStyle

 $509,537 $514,050 $531,090 

Supercuts

  343,464  343,764  321,881 

MasterCuts

  146,506  159,627  165,729 

Regis

  377,635  414,752  434,249 

Promenade

  512,259  548,912  576,995 
        

Total North American Salons

  1,889,401  1,981,105  2,029,944 

International salons

  129,312  141,122  150,237 
        

Consolidated revenues

 $2,018,713 $2,122,227 $2,180,181 
        

Percent change from prior year

  (4.9)% (2.7)% (1.6)%

Salon same-store sales decrease(1)

  (2.4)% (3.5)% (1.9)%

(1)
Same-store sales are calculated on a daily basis as the total change in sales for company-owned locations which were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date same-store sales are the sum of the same-store sales computed on a daily basis. Locations relocated within a one mile radius are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

        Decreases of 4.9%, 2.7% and 1.6% in consolidated revenues during fiscal years 2013, 2012, and 2011, respectively, were driven by the following:

 
 Fiscal Years 
Factor
 2013 2012 2011 

Same-store sales

  (2.4)% (3.5)% (1.9)%

Closed salons

  (3.3) (2.3) (1.6)

New stores and conversions

  1.3  1.3  0.6 

Acquisitions

    0.7  1.1 

Other

  (0.5) 1.1  0.2 
        

  (4.9) (2.7)% (1.6)%
        

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        Same-store sales by concept by fiscal year are detailed in the table below:

 
 Fiscal Years 
 
 2013 2012 2011 

SmartStyle

  (1.1)% (4.3)% (1.9)%

Supercuts

  (0.7) (0.3) 0.1 

MasterCuts

  (5.1) (3.3) (0.7)

Regis

  (3.1) (4.2) (2.5)

Promenade

  (2.8) (2.7) (2.6)

Total North American Salons

  (2.3) (3.2) (1.8)

International salons

  (4.3) (9.1) (3.1)

Consolidated same-store sales

  (2.4)% (3.5)% (1.9)%
        

        The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partially offset by a 0.6% increase in average ticket. We closed 492 and 384 salons (including 69 and 51 franchise salons) during fiscal years 2013 and 2012, respectively. The Company constructed (net of relocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012.

        The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and 0.1% decrease in average ticket. We acquired 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011. The Company constructed (net of relocations) 166 company-owned salons during fiscal year 2012. We closed 384 and 305 salons (including 51 and 60 franchise salons) during fiscal years 2012 and 2011, respectively.

        The same-store sales decrease of 1.9% during fiscal year 2011 was due to a 3.8% decrease in guest visits partially offset by a 1.9% increase in average ticket. We acquired 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks) during fiscal year 2010. The Company constructed (net of relocations) 115 company-owned salons during fiscal year 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during fiscal years 2011 and 2010, respectively.

        Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:

Investment In and Loans to AffiliatesService Revenues

        The $80.0 million decrease in service revenues during fiscal year 2013 was due to the closure of 423 company-owned salons, same-store service sales decreasing 2.0% and the comparable prior period including an additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, offset by a 0.3% increase in average ticket. Partially offsetting the decrease was growth due to newly constructed salons during fiscal year 2013.

        The $51.5 million decrease in service revenues during fiscal year 2012 was due the closure of 333 company-owned salons and same-store service sales decreasing 3.7%. The decrease in same-store services sales was primarily a result of a 3.1% decrease in same-store guest visits and a 0.6% decrease in average ticket due to promotional programs designed to generate additional guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2012 and the additional day from leap year.


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        The $22.4 million decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.4%, as a result of a decline in same-store guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2011, price increases, sales mix as the company increased hair color and waxing services, and the weakening of the United States dollar against the Canadian dollar.

Product Revenues

        The $24.3 million decrease in product revenues during fiscal year 2013 was primarily due to same-store product sales decreasing 3.9%, the closure of 423 company-owned salons and the comparable prior period including an additional day from leap year, partially offset by an increase in product sales to franchisees as a result of an increase in franchise locations.

        The $7.4 million decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 2.7%, and the closure of 333 company-owned salons, partially offset by the additional day from leap year and an increase in product sales to franchisees as a result of an increase in franchise locations.

        The $14.2 million decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.2 percent, product sales from new and acquired salons, and the weakening of the United States dollar against the Canadian dollar during fiscal year 2011.

Royalties and Fees

        Total franchised locations open at June 30, 2013 and 2012 were 2,082 and 2,016, respectively. The $0.8 million increase in royalties and fees was due to the increase in franchised locations during fiscal year 2013 and same-store sales increases at franchise locations.

        Total franchised locations open at June 30, 2012 and 2011 were 2,016 and 1,936, respectively. During fiscal year 2012, we purchased a 60.0 percent ownership interest in a franchise network, consisting of 31 franchised locations. The $1.0 million increase in royalties and fees was also due to same-store sales increases at franchise locations, partially offset by the Company has equity investmentspurchasing 11 of our franchised salons during fiscal year 2012.

        Total franchised locations open at June 30, 2011 and 2010 were 1,936 and 2,020, respectively. The 84 salon decrease in securitiesfranchised locations was offset by the impact of certain privately held entities.the weakening of the United States dollar against the Canadian dollar.

Cost of Service

        The Company accounts for these investments under the equity method220 basis point increase in cost of accounting. The Company also has loan receivables from certainservice as a percent of these entities. Investments accounted for under the equity method are recorded at the amountservice revenues during fiscal year 2013 was primarily due to increased labor costs in our North American salons, a result of the Company's investmentstrategy to increase stylist hours in order to reduce guest wait times and adjusted each period forimprove the overall guest experience, and the negative leverage this created with same-store service sales declines. The Company made slight improvement during the year in optimizing salon schedules to align with guest traffic. Also contributing to the basis point increase was the Company's sharedecision earlier in the year to compensate stylists on the gross sales amount during certain coupon events and an increase in health insurance expense due to higher claims.

        The 10 basis point decrease in cost of the investee's income or loss. Investments are reviewedservice as a percent of service revenues during fiscal year 2012 was due to lower commissions as a result of leveraged pay plans for changesnew stylists and a decrease in circumstance or the occurrencesalon health insurance costs due to lower claims, partially offset by decreased productivity in our North American segment.


Table of events that suggest the Company's investment may not be recoverable. DuringContents

        The 50 basis point increase in cost of service as a percent of service revenues during fiscal year 2011 we recordedwas due to an impairmentincrease in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of $9.2 million related to our investment in MY Style. During fiscal year 2009, we recorded impairments of $25.7 and $7.8 million ($4.8 million net of tax) related to our investment in Provalliance and investment in and loans to Intelligent Nutrients, LLC, respectively.states increasing unemployment taxes.

Note Receivables, NetCost of Product

        The note receivable balances460 basis point increase in cost of product as a percent of product revenues was mainly attributed to our inventory simplification program, which standardizes retail plan-o-grams, eliminates retail products and consolidates from four to one private label brand. Historically, the Company has been able to recover its cost on discontinued retail inventory through in-store promotional discounts, and during the fourth quarter of fiscal 2013, the Company clearanced approximately $8 million of product. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on future product sales and cost of product as a percent of product revenues, the Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a noncash inventory charge of $12.6 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product as a percent of product sales were Hurricane Sandy product donations, partially offset by reductions to commissions paid on retail sales.

        The 10 basis point increase in cost of product as a percentage of product revenues during fiscal year 2012 was primarily due to increases in freight costs due to higher fuel prices partially offset by a reduction in commissions paid to new employees on retail product sales in our North American segment.

        The 220 basis point decrease in cost of product as a percentage of product revenues during fiscal year 2011 was primarily due to previous fiscal year including $20.0 million of product sold at cost to the purchaser of Trade Secret. Partially offsetting the basis point decrease was an increase in sales of appliances that have a higher cost as a percent of revenues in our International segment.

Site Operating Expenses

        The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage from the decrease in same-store sales. Site operating expenses declined $3.1 million primarily within our North American segment due to a decrease in advertising costs, utilities and janitorial expense, partially offset by increases in salon connectivity costs to support the Company's new POS system and salon workstations and higher salon repairs and maintenance expense.

        The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales.

        The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2011 was primarily due to an increase in advertising expense within the Company's Consolidated Balance SheetPromenade concept and an increase in self-insurance accruals, partially offset by a reduction in legal claims expense.

General and Administrative

        General and administrative (G&A) declined $22.9 million, or 60 basis points as a percentage of consolidated revenues, during fiscal year 2013. This improvement was primarily includedue to reductions in salaries and benefits from our corporate reorganization executed last year, certain cost savings


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initiatives in the current year and reduced levels of incentive pay in the current year, partly offset by costs associated with rolling out our new POS system. The Company remains focused on simplification to drive further costs efficiencies.

        The 130 basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2012 was the result of lapping a $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret and a note receivable relatedin fiscal year 2011. Also contributing to the Company's investmentimprovement during fiscal year 2012 was a reduction in MY Style. The balances are presented netsalaries and other employee benefits as a result of a valuation reserve for expected losses. The Company monitors the financial condition of its counterpartiesreduction in salon support workforce that occurred in January 2012. Partially offsetting these improvements were incremental costs associated with an outstanding note receivable and records provisions for estimated losses on receivables when it believes the counterparties are unable to make their required payments. The valuation reserve is the Company's best estimatesenior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of the amountalternatives for non-core assets.

        The 210 basis point increase in G&A costs as a percentage of probable credit losses related to existing notes receivable.

        During the third quarter ofconsolidated revenues during fiscal year 2011 the Company did not receive a scheduled interest payment relatedwas primarily due to the outstanding$31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the fair valueCompany's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of the collateralstrategic alternatives and information technology projects, legal claims and negative leverage on fixed costs within this category due to negative same-store sales.

Rent

        Rent expense decreased by $7.1 million during fiscal year 2013 due to salon closures, primarily within our North American segment. The 50 basis point increase in rent expense as a level below the carrying valuepercent of the outstanding note receivable,consolidated revenues during fiscal year 2013 was primarily due to negative leverage associated with this fixed cost category.

        The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and the purchasersalon closures.

        The 20 basis point increase in rent expense as a percent of Trade Secret provided the Company with a new five year business plan that was well below the purchaser of Trade Secret's original projections. Due to these factors that occurredconsolidated revenues during the third quarter of fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.

Depreciation and Amortization

        The 40 basis point decrease in depreciation and amortization (D&A) as a percent of consolidated revenues during fiscal year 2013 was primarily due to our lapping $16.2 million of accelerated amortization associated with the Company evaluatedadjustment to the note receivable for impairment based onuseful life of the Company's previously internally developed POS system. Partially offsetting the 40 basis point improvement was $1.9 million of accelerated depreciation expense in the current year associated with a probability weighted expected future cash flow analysis. Duringleased building in conjunction with consolidating the third quarterCompany's headquarters and negative leverage from the decrease in same-store sales.

        The 70 basis point increase in D&A as a percent of consolidated revenues during fiscal year 2012 was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated amortization expense in the current year resulting from the useful life adjustment of the Company's internally developed POS system and negative leverage from the decrease in same-store sales. Partially offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009.


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        The 20 basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales.

Goodwill Impairment

        The Company did not record a goodwill impairment charge in 2013.

        The Company recorded a $9.0goodwill impairment charge of $67.7 million valuation reserve for the excess of the carrying value of the note receivable over the present value of expected future cash flows.

        During the fourth quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret and the fair value of the collateral continued to decrease and was at a level significantly below the carrying value of the outstanding note receivable. In addition, the Company received updated financial projections that were below the projections receivedRegis salon concept during the third quarter of fiscal year 2011.2012. Due to these negative financial events in the fourth quartercontinuation of fiscal year 2011, the Company performed an extensive evaluation on the Company's option to realize the collateral under the note receivable and recorded an additional $22.2 million valuation reserve that fully reserved the carrying value of the note receivable as of June 30, 2011.

Goodwill

        Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, todecreased same-store sales, the estimated fair value of the reporting unit. TheRegis salon operations was less than the carrying value of each reporting unit is based on thethis concept's net assets, and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.

        The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth for determining terminal value. The Company's estimated


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future cash flows also take into consideration acquisition integration and maturation. Where available and as appropriate, comparative market multiples are used to corroborate the results of the discounted cash flow. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the Company believes the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations.

        In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill$67.7 million impairment is measured ascharge was the excess of the carrying value of goodwill over itsthe implied fair value.value of goodwill for the Regis salon concept.

        AsThe Company recorded a result$74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Company's annual impairment analysisPromenade salon operations was less than the carrying value of goodwill as of February 28, 2011, athis concept's net assets, including goodwill. The $74.1 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon concept.

        Historically, goodwill was tested annually for impairmentInterest Expense

        Interest expense increased by $9.3 million during the third quarter, as of February 28, of each fiscal year. Effective in the fourth quarter of fiscal year 2011, the Company adopted2013 primarily due to a new accounting policy whereby the annual impairment review of goodwill will be performed during the fourth quarter, as of April 30 instead of the third quarter of each fiscal year. The change in the annual goodwill impairment testing date was made to better align the annual goodwill impairment test$10.6 million make-whole payment associated with the timingprepayment of the Company's annual budgeting process. The changeprivate placement debt in accounting principle does not delay, accelerate or avoid an impairment charge. Accordingly, the Company believes that the accounting change described above is preferable under the circumstances. As a result of the Company's annual impairment testing of goodwill performed during the fourth quarter ofJune 2013, partially offset by decreased debt levels as compared to fiscal year 2011, no impairment charges were recorded.2012.

        As it is reasonably likely that there could be additional impairment of the Promenade salon concept's goodwillThe 30 basis point improvement in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.

        A summary of the critical assumptions utilized during the annual impairment tests of the Promenade salon concept are outlined below:


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        The following table summarizes30 basis point decrease in the approximate impact thatinterest income and other, net as a change in certain critical assumptions would have onpercent of consolidated revenues during fiscal year 2011 was primarily due to the estimated fair value of our Promenade salon concept reporting unit (the approximateforeign currency impact of the changeCompany's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the critical assumptions assumes all other assumptionscomparable prior period for administrative services, and factors remain constant,$1.9 million in thousands, except percentages):

Critical Assumptions
 Increase
(Decrease)
 Approximate
Impact on
Fair Value
 
 
  
 (In thousands)
 

Discount Rate

  1.0%$26,000 

Same-Store Sales

  (1.0) 14,000 

        As of our fiscal year 2011 annual impairment tests,interest income recorded in the estimated fair value of the Hair Restoration Centers reporting unit exceeded its respective carrying value by approximately 9.0 percent. As it is reasonably likely that there could be impairment of the Hair Restoration Centers reporting unit's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.

        A summary of the critical assumptions utilized during the annual impairment tests of the Hair Restoration Centers reporting unit are outlined below:

        The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Hair Restoration Centers reporting unitTrade Secret.


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goodwill balance (the approximate impactIncome Taxes

        During fiscal year 2013, the Company recognized an income tax benefit of $10.0 million on $10.1 million of income from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (99.3)%. The larger than expected effective tax rate benefit was because the $33.8 million foreign currency translation gain recognized at the time of the change insale of Provalliance was primarily non-taxable, and the critical assumptions assumes all other assumptions and factors remain constant, in thousands, except percentages):Company benefitted from Work Opportunity Tax Credits.

Critical Assumptions
 Increase
(Decrease)
 Approximate
Impact on
Fair Value
 
 
  
 (In thousands)
 

Discount Rate

  1.0%$21,000 

Same-Store Sales

  (1.0) 5,000 

        As of ourDuring fiscal year 2011 annual impairment test,2012, the estimated fair valueCompany recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 17.5%. The smaller than expected effective tax rate was primarily because the $67.7 million Regis salon concept exceeded its respective carrying value by approximately 18.0 percent. As it is reasonably likely that there could be impairment of the Regis salon concept's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.

        A summary of the critical assumptions utilized during the annual impairment tests of the Regis salon concept are outlined below:

        The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Regis salon concept goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant, in thousands, except percentages):

Critical Assumptions
 Increase
(Decrease)
 Approximate
Impact on
Fair Value
 
 
  
 (In thousands)
 

Discount Rate

  1.0%$13,000 

Same-Store Sales

  (1.0) 10,000 

        The respective fair values of the Company's remaining reporting units exceeded fair value by greater than 20.0 percent. While the Company has determined the estimated fair values of the Promenade, Regis, and Hair Restoration Centers reporting units to be appropriate based on the projected level of revenue growth, operating income and cash flows, it is reasonably likely that the Promenade, Regis, and Hair Restoration Centers reporting units may become impaired in future


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periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segments are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Promenade salon concept, Regis salon concept, and Hair Restoration Centers reporting units is dependent on many factors and cannot be predicted.

        As of June 30, 2011, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.

        A summary of the Company's goodwill balance as of June 30, 2011 by reporting unit is as follows:

Reporting Unit
 As of June 30,
2011
 As of June 30,
2010
 
 
 (Dollars in thousands)
 

Regis

 $103,761 $102,180 

MasterCuts

  4,652  4,652 

SmartStyle

  48,916  48,280 

Supercuts

  129,477  121,693 

Promenade

  240,910  309,804 
      

Total North America Salons

  527,716  586,609 

Hair Restoration Centers

  152,796  150,380 
      

Consolidated Goodwill

 $680,512 $736,989 
      

        As a result of the Company's annual impairment analysis of goodwill during the third quarter of fiscal year 2010, a $35.3 million impairment charge was recorded within continuing operationspartially nondeductible for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept.

        As a result of the Company's interim impairment test of goodwill during the three months ended December 31, 2008, a $41.7 million impairment charge for the full carrying amount of goodwill within the salon concepts in the United Kingdom was recorded within continuing operations. The recent performance challenges of the international salon operations indicated that the estimated fair value was less than the current carrying of this reporting unit's net assets, including goodwill.

Long-Lived Assets, Excluding Goodwill

        We assess the impairment of long-lived assets annually or when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis on salon property and equipment is performed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. When the sum of a salon's undiscounted estimated future cash flow is zero or negative, impairment is measured as the full carrying value of the related salon's equipment and leasehold improvements. When the sum of a salon's undiscounted cash flows is greater than zero but less than the carrying value of the related salon's equipment and leasehold improvements, a discounted cash flow analysis is performed to estimate the fair value of the salon assets and impairment is measured as the difference between the carrying value


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of the salon assets and the estimated fair value. The fair value estimate is based on the best information available, including market data.

        Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize material impairment charges.tax purposes.

        During fiscal years 2011, 2010, and 2009, $6.7, $6.4, and $10.2 million, respectively, of impairment was recorded within depreciation and amortization in the Consolidated Statement of Operations. In June 2009, we approved a plan to close up to 80 underperforming United Kingdom company-owned salons in fiscal year 2010 that was in addition to the July 2008 approved plan of closing up to 160 underperforming company-owned salons in fiscal year 2009. We also evaluated the appropriateness of the remaining useful lives of its affected property and equipment and whether a change to the depreciation charge was warranted.

Purchase Price Allocation

        We make numerous acquisitions. The purchase prices are allocated to assets acquired, including identifiable 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. For our acquisitions, the majority of the purchase price that is not allocated to identifiable assets, or liabilities assumed, 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, the value of which is not recorded as an identifiable intangible asset under current accounting guidance and the limited value of the acquired leased site and customer preference associated with the acquired hair salon brand. Residual goodwill further represents our opportunity to strategically combine the acquired business with our existing structure to serve a greater number of customers through our expansion strategies. Identifiable intangible assets purchased in fiscal year 2011, 2010, and 2009 acquisitions totaled $2.0, $0.1, and $1.3 million, respectively. The residual goodwill generated by fiscal year 2011, 2010, and 2009 acquisitions totaled $12.5, $2.6, and $30.8 million, respectively. See Note 4 to the Consolidated Financial Statements for further information.

Self Insurance Accruals

        The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.

        The workers' compensation, general liability and employment practice liability analysis includes applying loss development factors to the Company's historical claims data (total paid and incurred amounts per claim) for all policy years where the Company has not reached its aggregate limits to project the future development of incurred claims. The workers' compensation analysis is performed for three models; California, Texas and all other states. A variety of accepted actuarial methodologies are followed to determine these liabilities, including several methods to predict the loss development factors for each policy period. These liabilities are determined by modeling the frequency (number of claims) and severity (cost of claims), fitting statistical distributions to the experience, and then running simulations. A similar analysis is performed for both general liability and employment practices liability;


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however, it is a single model for all liability claims rather than the three separate models used for workers' compensation.

        The health insurance analysis utilizes trailing twelve months of paid and 24 months of incurred medical and prescription claims to project the amount of incurred but not yet reported claims liability amount. The lag factors are developed based on the Company's specific claim data utilizing a completion factor methodology. The developed factor, expressed as a percentage of paid claims, is applied to the trailing twelve months of paid claims to calculate the estimated liability amount. The calculated liability amount is reviewed for reasonableness based on reserve adequacy ranges for historical periods by testing prior reserve levels against actual expenses to date.

        Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. For fiscal year 2011, the Company recordedrecognized an increase in expense from changes in estimates related to prior year open policy periodsincome tax benefit of $1.4 million. For fiscal years 2010 and 2009, the Company recorded decreases in expense from changes in estimates related to prior year open policy periods$16.3 million on $43.9 million of $1.7 and $9.9 million, respectively. A 10.0 percent change in the self-insurance reserve would affect incomeloss from continuing operations before income taxes and equity in income of affiliated companies, by $4.6, $4.5,for an effective tax rate of 37.2%. Significant items impacting the effective tax rate were the $74.1 million Promenade salon concept impairment charge which was partially nondeductible for tax purposes and $4.0 million for the three years ended June 30, 2011, 2010 and 2009, respectively. The Company updates loss projections twice each year and adjusts its recorded liability to reflect the current projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.benefited from Work Opportunity Tax Credits.

Equity in (Loss) Income of Affiliated Companies, Net of Income Taxes

        In determiningThe loss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partially offset by the Company's share of EEG's net income for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur ina $0.6 million gain on the calculation of certain tax liabilities and in the determinationProvalliance equity put that automatically terminated as a result of the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

        Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not be ultimately recoverable. Should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which it is determined that the recovery is not likely.

        In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes a reserve for potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversalsale of the liabilities would resultCompany's investment in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. In the United States, fiscal years 2007 and after remain open for federal tax audit. The Company's United States federal income tax returns for the years 2007 through 2009 are currently under audit. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2007. However, the Company is under audit in a number of states in which the statute of limitations has been extended for fiscal years 2000 and forward. Internationally (including Canada), the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years.

        As of June 30, 2011 the Company's liability for uncertain tax positions was $13.5 million.Provalliance. See Note 135 to the Consolidated Financial Statements for further information.


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Contingencieseach respective affiliated company.

        We are involvedThe loss in various lawsuitsaffiliated companies, net of taxes for fiscal year 2012 was primarily due to the impairment losses of $17.2 and claims that arise from time to time in the ordinary course of our business. Accruals are$19.4 million recorded for such contingencies based on our assessment thatinvestments in Provalliance and EEG, respectively. In conjunction with entering into a purchase agreement to sell Provalliance, the occurrence is probable, and where determinable, an estimate of the liability amount. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.

        During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.

        During fiscal year 2010, the Company settled two legal claims regarding certain customer and employee matters for an aggregate charge of $5.2 million plus a commitment to provide discount coupons. During the twelve months ended June 30, 2011, the final payments aggregating $4.3 million were made.

OVERVIEW OF FISCAL YEAR 2011 RESULTS

        The following summarizes key aspects of our fiscal year 2011 results:

Pound.


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RESULTS OF OPERATIONS

        Beginning with the period ended December 31, 2008 the operations of Trade Secret concept within the North American reportable segment were accounted for as discontinued operations. All periods presented will reflect Trade Secret as a discontinued operation.        The following discussion of results of operations willreflects results from continuing operations and reclassifications of fiscal years 2012 and 2011 cost of service, site operating expenses and general and administrative expenses to conform to current year presentation, see further discussion within Note 1 to the Consolidated Financial Statements. Hair Club has been accounted for as a discontinued operation for all periods presented, see discussion within Note 2 to the Consolidated Financial Statements. All periods reflect the reclassification of Hair Club's results from continuing operations. Explanations are primarily for North American salons, unless otherwise noted. Discontinued operations will beare discussed at the end of this section.


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Consolidated Results of Operations

        The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations in Item 8, expressed as a percent of revenues.8. The percentages are computed as a percent of total revenues, except as noted.

Results of Operations as a Percent of Revenuesotherwise indicated.

 
 Fiscal Years 
 
 2013 2012 2011 2013 2012 2011 2013 2012 2011 
 
 
(Dollars in millions)
 
% of Total Revenues
 Basis Point
(Decrease) Increase
 

Service revenues

 $1,563.9 $1,643.9 $1,695.4  77.5% 77.5% 77.8%   (30) 30 

Product revenues

  415.7  440.0  447.5  20.6  20.7  20.5  (10) 20  (30)

Franchise royalties and fees

  39.1  38.3  37.3  1.9  1.8  1.7  10  10   

Cost of service(1)

  
930.7
  
941.7
  
972.9
  
59.5
  
57.3
  
57.4
  
220
  
(10

)
 
50
 

Cost of product(2)

  228.6  221.6  225.2  55.0  50.4  50.3  460  10  (220)

Site operating expenses

  203.9  207.0  211.2  10.1  9.8  9.7  30  10  30 

General and administrative

  226.7  249.6  285.8  11.2  11.8  13.1  (60) (130) 210 

Rent

  324.7  331.8  333.1  16.1  15.6  15.3  50  30  20 

Depreciation and amortization

  91.8  105.0  92.2  4.5  4.9  4.2  (40) 70  (20)

Goodwill impairment

    67.7  74.1    3.2  3.4  (320) (20) 180 

Interest expense

  
37.6
  
28.2
  
34.4
  
1.9
  
1.3
  
1.6
  
60
  
(30

)
 
(90

)

Interest income and other, net

  35.4  5.1  4.7  1.8  0.2  0.2  160    (30)

Income taxes(3)

  
10.0
  
4.4
  
16.3
  
99.3
  
17.5
  
37.2
  
N/A
  
N/A
  
N/A
 

Equity in (loss) income of affiliated companies, net of income taxes

  (16.0) (30.9) 6.7  (0.8) (1.5) 0.3  70  (180) (20)

Income (loss) from discontinued operations, net of taxes

  
25.0
  
(62.4

)
 
12.0
  
1.2
  
(2.9

)
 
0.6
  
410
  
(350

)
 
(20

)

 
 For the Years Ended
June 30,
 
 
 2011 2010 2009 

Service revenues

  75.8% 75.6% 75.5%

Product revenues

  22.5  22.7  22.9 

Royalties and fees

  1.7  1.7  1.6 

Operating expenses:

          

Cost of service(1)

  57.5  56.9  57.0 

Cost of product(2)

  47.8  49.4  50.9 

Site operating expenses

  8.5  8.5  7.8 

General and administrative

  14.6  12.4  12.0 

Rent

  14.7  14.6  14.3 

Depreciation and amortization

  4.5  4.6  4.8 

Goodwill impairment

  3.2  1.5  1.7 

Lease termination costs

    0.1  0.2 

Operating income

  0.2  4.1  4.5 
 

(Loss) income from continuing operations before income taxes and equity in income (loss) of affiliated companies

  (1.1) 2.3  3.2 

(Loss) income from continuing operations

  (0.4) 1.7  0.3 

Income (loss) from discontinued operations

    0.1  (5.4)

Net (loss) income

  (0.4) 1.8  (5.1)

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

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

(3)
Computed as a percent of income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies. The income tax benefit basis point change is noted as not applicable (N/A) as the discussion below is related to the effective income tax rate.

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Consolidated Revenues

        Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, hair restoration center revenues, and franchise royalties and fees. As compared to the prior fiscal year, consolidated revenues decreased 1.4 percent4.9% during fiscal year 20112013 and decreased 2.9 percent2.7% during fiscal year 2010.


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2012. The following table details our consolidatedtables summarize revenues and same-store sales by concept. All service revenues, product revenues (which include product and equipment sales to franchisees), and franchise royalties and fees are included within their respective concept, withinas well as the table.reasons for the percentage change:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

North American salons:

          

SmartStyle

 $509,537 $514,050 $531,090 

Supercuts

  343,464  343,764  321,881 

MasterCuts

  146,506  159,627  165,729 

Regis

  377,635  414,752  434,249 

Promenade

  512,259  548,912  576,995 
        

Total North American Salons

  1,889,401  1,981,105  2,029,944 

International salons

  129,312  141,122  150,237 
        

Consolidated revenues

 $2,018,713 $2,122,227 $2,180,181 
        

Percent change from prior year

  (4.9)% (2.7)% (1.6)%

Salon same-store sales decrease(1)

  (2.4)% (3.5)% (1.9)%

 
 For the Years Ended June 30, 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

North American salons:

          
 

Regis

 $434,249 $437,990 $474,964 
 

MasterCuts

  165,729  166,821  170,338 
 

SmartStyle

  531,090  533,094  529,782 
 

Supercuts

  321,881  314,698  310,913 
 

Promenade(3)

  576,995  607,960  631,701 
        

Total North American Salons(2)

  2,029,944  2,060,563  2,117,698 

International salons

  150,237  156,085  171,569 

Hair restoration centers

  145,688  141,786  140,520 
        
 

Consolidated revenues

 $2,325,869 $2,358,434 $2,429,787 
        
 

Percent change from prior year

  (1.4)% (2.9)% (2.1)%
 

Salon same-store sales decrease(1)

  (1.7)% (3.2)% (3.1)%

(1)
Salon same-storeSame-store sales are calculated on a daily basis as the total change in sales for company-owned salonslocations which were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date salon same-store sales are the sum of the same-store sales computed on a daily basis. SalonsLocations relocated within a one mile radius are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are calculated in local currencies so thatto remove foreign currency fluctuations do not impactfrom the calculation. Management believes that same-store sales, a component

        Decreases of organic growth, are useful in determining the increase in salon revenues attributable to its organic growth (new salon construction4.9%, 2.7% and same-store sales growth) versus growth from acquisitions.

(2)
Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as discontinued operations. All periods presented reflect Trade Secret as a discontinued operation. Accordingly, Trade Secret revenues are excluded from this presentation.

(3)
Trade Secret, Inc. was sold by Regis Corporation on February 16, 2009. The agreement included a provision that the Company would supply product to the purchaser of Trade Secret and provide certain administrative services for a transition period. For the fiscal year ended June 30, 2010 and 2009, the Company generated revenue of $20.0 and $32.2 million in product revenues, respectively, which represented 0.8 and 1.3 percent of consolidated revenues, respectively. The agreement was substantially complete as of September 30, 2009.

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        The decreases of 1.4, 2.9, and 2.1 percent1.6% in consolidated revenues during fiscal years 2011, 2010,2013, 2012, and 2009,2011, respectively, were driven by the following:

 
 Percentage Increase
(Decrease) in Revenues
For the Years Ended
June 30,
 
Factor
 2011 2010 2009 

Acquisitions (previous twelve months)

  1.1% 0.8% 3.4%

Organic

  (1.4) (3.0) (1.4)

Foreign currency

  0.4  0.2  (2.2)

Franchise revenues

  0.0  0.0  (1.1)

Closed salons

  (1.5) (0.9) (0.8)
        

  (1.4)% (2.9)% (2.1)%
        
 
 Fiscal Years 
Factor
 2013 2012 2011 

Same-store sales

  (2.4)% (3.5)% (1.9)%

Closed salons

  (3.3) (2.3) (1.6)

New stores and conversions

  1.3  1.3  0.6 

Acquisitions

    0.7  1.1 

Other

  (0.5) 1.1  0.2 
        

  (4.9) (2.7)% (1.6)%
        

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        Same-store sales by concept by fiscal year are detailed in the table below:

 
 Fiscal Years 
 
 2013 2012 2011 

SmartStyle

  (1.1)% (4.3)% (1.9)%

Supercuts

  (0.7) (0.3) 0.1 

MasterCuts

  (5.1) (3.3) (0.7)

Regis

  (3.1) (4.2) (2.5)

Promenade

  (2.8) (2.7) (2.6)

Total North American Salons

  (2.3) (3.2) (1.8)

International salons

  (4.3) (9.1) (3.1)

Consolidated same-store sales

  (2.4)% (3.5)% (1.9)%
        

        The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partially offset by a 0.6% increase in average ticket. We closed 492 and 384 salons (including 69 and 51 franchise salons) during fiscal years 2013 and 2012, respectively. The Company constructed (net of relocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012.

        The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and 0.1% decrease in average ticket. We acquired 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011. The Company constructed (net of relocations) 166 company-owned salons during fiscal year 2012. We closed 384 and 305 salons (including 51 and 60 franchise salons) during fiscal years 2012 and 2011, respectively.

        The same-store sales decrease of 1.9% during fiscal year 2011 was due to a 3.8% decrease in guest visits partially offset by a 1.9% increase in average ticket. We acquired 105 company-owned salons (including 78 franchise buybacks), and bought back four hair restoration centers from franchisees during fiscal year 2011 compared to 26 company-owned salons (including 23 franchise buybacks), and bought back zero hair restoration centers from franchisees during fiscal year 2010. The decline in organic salesCompany constructed (net of relocations) 115 company-owned salons during fiscal year 2011 was primarily due to consolidated same-store sales decrease of 1.7 percent due to a decline in same-store customer visits, partially offset by an increase in average ticket. The decline in organic sales was also due to the completion of an agreement in the prior year to supply the purchaser of Trade Secret product at cost. The Company generated revenues of $20.0 million for product sold to the purchaser of Trade Secret during the twelve months ended June 30, 2010. Partially offsetting the organic sales decrease was the construction of 146 company-owned salons during the twelve months ended June 30, 2011. We closed 305 and 269 salons (including 60 and 65 franchise salons) during the twelve months ended June 30,fiscal years 2011 and 2010, respectively.

        We acquired 26 company-owned salons (including 23 franchise buybacks), and bought back zero hair restoration centers from franchisees during fiscal year 2010 compared to 177 company-owned salons (including 83 franchise buybacks), and bought back two hair restoration centers from franchisees during fiscal year 2009. The decline in organic sales during fiscal year 2010 was primarily due to consolidated same-store sales decrease of 3.2 percent due to a decline in same-store customer visits, partially offset by an increase in average ticket. The decline in organic sales was also due to the completion of an agreement to supply the purchaser of Trade Secret product at cost. The Company generated revenues of $20.0 and $32.2 million for product sold to the purchaser of Trade Secret during the twelve months ended June 30, 2010 and 2009, respectively. Partially offsetting the organic sales decrease was the construction of 143 company-owned salons during the twelve months ended June 30, 2010. We closed 269 and 281 salons (including 65 and 51 franchise salons) during the twelve months ended June 30, 2010 and 2009, respectively.

        During fiscal year 2011, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar and British pound, as compared to the prior fiscal year's exchange rates. During fiscal year 2010, the foreign currency impact was driven by the weakening of the United States dollar against the Canadian dollar, partially offset by the strengthening of the United Stated dollar against the British pound and Euro as compared to the prior fiscal year's exchange rates. During fiscal year 2009, the foreign currency impact was driven by the strengthening of the United States dollar against the Canadian dollar, British pound, and Euro as compared to the prior fiscal year's exchange rates. Consolidated revenues are primarily composedcomprised of service and product revenues,


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as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows:

Service Revenues.Revenues    Service

        The $80.0 million decrease in service revenues includeduring fiscal year 2013 was due to the closure of 423 company-owned salons, same-store service sales decreasing 2.0% and the comparable prior period including an additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, offset by a 0.3% increase in average ticket. Partially offsetting the decrease was growth due to newly constructed salons during fiscal year 2013.

        The $51.5 million decrease in service revenues generated fromduring fiscal year 2012 was due the closure of 333 company-owned salons and same-store service revenues generated by hair restoration centers. Consolidated service revenues were as follows:sales decreasing 3.7%. The decrease in same-store services sales was primarily a result of a 3.1% decrease in same-store guest visits and a 0.6% decrease in average ticket due to promotional programs designed to generate additional guest visits. Partially offsetting the decrease was growth due to new and acquired salons during fiscal year 2012 and the additional day from leap year.


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 Decrease
Over Prior Fiscal Year
 
Years Ended June 30,
 Revenues Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $1,762,974 $(21,163) (1.2)%

2010

  1,784,137  (49,821) (2.7)

2009

  1,833,958  (28,532) (1.5)

        The $22.4 million decrease in service revenues during fiscal year 2011 was due to same-store service sales decreasing 2.3 percent,2.4%, as a result of a decline in same-store customerguest visits. Partially offsetting the decrease was growth due to new and acquired salons during the twelve months ended June 30,fiscal year 2011, price increases, sales mix as the company continues to increaseincreased hair color and waxing services, and the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2011.dollar.

Product Revenues

        The $24.3 million decrease in serviceproduct revenues during fiscal year 20102013 was primarily due to same-store serviceproduct sales decreasing 3.4 percent, as many consumers have continued to lengthen their visitation pattern due to3.9%, the economy. In addition, service revenues decreased due to the strengtheningclosure of the United States dollar against the British pound. Partially offsetting the decrease was growth due to acquisitions during the twelve months423 company-owned salons and the weakeningcomparable prior period including an additional day from leap year, partially offset by an increase in product sales to franchisees as a result of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.an increase in franchise locations.

        The $7.4 million decrease in serviceproduct revenues during fiscal year 20092012 was primarily due to same-store serviceproduct sales decreasing 2.5 percent. Same-store service sales decreased 2.5 percent due to a decline in customer visits. Service revenues were also negatively impacted due to the strengthening of the United States dollar against the Canadian dollar, British pound, and Euro2.7%, and the deconsolidationclosure of 333 company-owned salons, partially offset by the European franchise salon operations on January 31, 2008. Partially offsetting the decrease was growth due to acquisitions during the twelve monthsadditional day from leap year and an increase in average ticket.

        Product Revenues.    Product revenues are primarilyproduct sales at company-owned salons and hair restoration centers, and salesto franchisees as a result of product and equipment to franchisees. Consolidated product revenues were as follows:an increase in franchise locations.

 
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Revenues Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $523,194 $(11,399) (2.1)%

2010

  534,593  (21,612) (3.9)

2009

  556,205  4,919  0.9 

        The $14.2 million decrease in product revenues during fiscal year 2011 was primarily due to the decrease in product sales to the purchaser of Trade Secret from $20.0 million in fiscal year 2010 to zero in fiscal year 2011. Partially offsetting the decrease was same-store product sales increasing 0.40.2 percent, product sales from new and acquired salons, and the weakening of the United States dollar against the Canadian dollar during the twelve months endedfiscal year 2011.

Royalties and Fees

        Total franchised locations open at June 30, 2011.

2013 and 2012 were 2,082 and 2,016, respectively. The decrease$0.8 million increase in product revenuesroyalties and fees was due to the increase in franchised locations during fiscal year 2010 was primarily due to the decrease in product2013 and same-store sales to the purchaser of Trade Secret from $32.2 inincreases at franchise locations.

        Total franchised locations open at June 30, 2012 and 2011 were 2,016 and 1,936, respectively. During fiscal year 2009 to $20.02012, we purchased a 60.0 percent ownership interest in fiscal year


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2010, as well as31 franchised locations. The $1.0 million increase in royalties and fees was also due to same-store product sales decreasing 2.3 percent andincreases at franchise locations, partially offset by the strengtheningCompany purchasing 11 of the United States dollar against the British pound. Partially offsetting the decrease was the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.

        The growth in product revenuesour franchised salons during fiscal year 2009 was primarily due to product sales of $32.2 million to the purchaser of Trade Secret, partially offset by same-store product sales decreasing 5.1 percent. Same-store product sales decreased 5.1 percent during the fiscal year 2009 due to a decline in customer visits and a change in product mix, as a larger percentage of product sales came from promotional items.2012.

        Royalties and Fees.    Consolidated franchise revenues, which include royalties and franchise fees, were as follows:

 
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Revenues Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $39,701 $(3) (0.0)%

2010

  39,704  80  0.2 

2009

  39,624  (27,991) (41.4)

        Total franchisefranchised locations open at June 30, 2011 and 2010 were 1,965 (including 29 franchise hair restoration centers)1,936 and 2,053 (including 33 franchise hair restoration centers),2,020, respectively. The 84 salon decrease in franchisefranchised locations was offset by the impact of the weakening of the United States dollar against the Canadian dollar.

        Total franchise locations open at June 30, 2010 and 2009 were 2,053 (including 33 franchise hair restoration centers) and 2,078 (including 33 franchise hair restoration centers), respectively.Cost of Service

        The 220 basis point increase in consolidated franchise revenues during fiscal year 2010 was primarily due to the weakening of the United States dollar against the Canadian dollar during the twelve months ended June 30, 2010.

        Total franchise locations open at June 30, 2009 and 2008 were 2,078 (including 33 franchise hair restoration centers) and 2,134 (including 35 franchise hair restoration centers), respectively. The decrease in consolidated franchise revenues during fiscal year 2009 was primarily due to the merger of the 1,587 European franchise salon operations with Franck Provost Salon Group on January 31, 2008.

Gross Margin (Excluding Depreciation)

        Our cost of revenues primarily includes labor costs related to salon employees and hair restoration center employees, the cost of product used in providing services and the cost of products sold to customers and franchisees. The resulting gross margin was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Gross
Margin
 Margin as % of
Service and
Product Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $1,023,321  44.8%$(15,806) (1.5)%  

2010

  1,039,127  44.8  (23,279) (2.2) 40 

2009

  1,062,406  44.4  (24,420) (2.2) (60)

(1)
Represents the basis point change in gross marginservice as a percent of service revenues during fiscal year 2013 was primarily due to increased labor costs in our North American salons, a result of the Company's strategy to increase stylist hours in order to reduce guest wait times and product revenues as comparedimprove the overall guest experience, and the negative leverage this created with same-store service sales declines. The Company made slight improvement during the year in optimizing salon schedules to align with guest traffic. Also contributing to the corresponding periodbasis point increase was the Company's decision earlier in the year to compensate stylists on the gross sales amount during certain coupon events and an increase in health insurance expense due to higher claims.

        The 10 basis point decrease in cost of the priorservice as a percent of service revenues during fiscal year.

year 2012 was due to lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims, partially offset by decreased productivity in our North American segment.


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        Service Margin (Excluding Depreciation).    Service margin was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Service
Margin
 Margin as % of
Service Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $750,106  42.5%$(18,311) (2.4)% (60)

2010

  768,417  43.1  (20,822) (2.6) 10 

2009

  789,239  43.0  (10,692) (1.3) 10 

(1)
Represents the        The 50 basis point changeincrease in service margin as a percentcost of service revenues as compared to the corresponding period of the prior fiscal year.

        The basis point decrease in service margins as a percent of service revenues during fiscal year 2011 was primarily due to an unexpected increase in salon health insurance costs due to several unusually large claims and an increase in payroll taxes as a result of states increasing unemployment taxes.

Cost of Product

        The 460 basis point improvementincrease in service margins as a percentcost of service revenues during fiscal year 2010 was primarily due to the benefit of the new leveraged salon pay plans implemented in the 2009 calendar year. Increases in salon health insurance and payroll taxes partially offset the basis point improvement.

        The basis point improvement in service margins as a percent of service revenues during fiscal year 2009 was primarily due to an improvement in labor expenses. Labor expenses improved as a result of cost control initiatives and new leveraged salon pay plans.

        Product Margin (Excluding Depreciation).    Product margin was as follows:

 
  
  
 Increase (Decrease)
Over Prior Fiscal Year
 
Years Ended June 30,
 Product
Margin
 Margin as % of
Product Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $273,215  52.2%$2,505  0.9% 160 

2010

  270,710  50.6  (2,457) (0.9) 150 

2009

  273,167  49.1  (13,728) (4.8) (290)

(1)
Represents the basis point change in product margin as a percent of product revenues as comparedwas mainly attributed to our inventory simplification program, which standardizes retail plan-o-grams, eliminates retail products and consolidates from four to one private label brand. Historically, the corresponding periodCompany has been able to recover its cost on discontinued retail inventory through in-store promotional discounts, and during the fourth quarter of fiscal 2013, the prior fiscal year.

        Trade Secret, Inc. was sold by Regis CorporationCompany clearanced approximately $8 million of product. However, given the change in the Company's strategic direction to standardize plan-o-grams, the scope and size of this simplification program and the negative impact continued clearance sales would have on February 16, 2009. The agreement included a provision that Regis Corporation would supplyfuture product to the purchaser at cost for a transition period. The agreement was substantially completed as of September 30, 2009.

        The following tables breakout product revenues,sales and cost of product and product margin as a percent of product revenues, betweenthe Company immediately liquidated any remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. This resulted in a noncash inventory charge of $12.6 million in the fourth quarter. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product soldas a percent of product sales were Hurricane Sandy product donations, partially offset by reductions to the purchaser of Trade Secret.commissions paid on retail sales.

 
 For the Years Ended June 30, 
Breakout of Product Revenues
 2011 2010 2009 

Product

 $523,194 $514,631 $523,968 

Product sold to purchaser of Trade Secret

    19,962  32,237 
        

Total product revenues

 $523,194 $534,593 $556,205 
        

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 For the Years Ended June 30, 
Breakout of Cost of Product
 2011 2010 2009 

Cost of product

 $249,979 $243,921 $250,801 

Cost of product sold to purchaser of Trade Secret

    19,962  32,237 
        

Total cost of product

 $249,979 $263,883 $283,038 
        


 
 For the Years Ended
June 30,
 
Product Margin as % of Product Revenues
 2011 2010 2009 

Margin on product other than sold to purchaser of Trade Secret

  52.2% 52.6% 52.1%

Margin on product sold to purchaser of Trade Secret

       

Total product margin

  52.2% 50.6% 49.1%

        The 10 basis point decreaseincrease in product margin other than sold to purchasercost of Trade Secretproduct as a percentage of product revenues during fiscal year 20112012 was primarily due to an increaseincreases in sales of slightly lower-profit margin appliances in our International segment and an increase in the cost of hair systems in our Hair Restoration Centers segment,freight costs due to higher fuel prices partially offset by reduceda reduction in commissions paid to new employees on retail product sales in our North American segment.

        The 220 basis point improvementdecrease in product margin other than sold to purchasercost of Trade Secretproduct as a percentage of product revenues during fiscal year 20102011 was primarily due to a planned reduction in retail commissions paidprevious fiscal year including $20.0 million of product sold at cost to new employees on retail product sales.

        The basis point improvement in product margin other than sold tothe purchaser of Trade Secret as a percentage of product revenues during fiscal year 2009 was due to selling higher cost inventories in fiscal year 2008 obtained in conjunction with several acquisitions. In addition, product margins improved due to the deconsolidation of the European franchise salon operations and a write-off of slow moving inventories in fiscal year 2008.Secret. Partially offsetting the improvementbasis point decrease was mix play, as a larger than expected percentagean increase in sales of product sales came from lower-margin promotional items. We are not promoting or discounting atappliances that have a higher rate, but we are continuing to see customers be more value-focused through buying promotional items at a higher rate than prior periods.

Site Operating Expenses

        This expense category includes direct costs incurred by our salons and hair restoration centers, such as on-site advertising, workers' compensation, insurance, utilities and janitorial costs. Site operating expenses were as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Site
Operating
 Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $197,722  8.5%$(1,616) (0.8)%  

2010

  199,338  8.5  8,882  4.7  70 

2009

  190,456  7.8  5,687  3.1  40 

(1)
Represents the basis point change in site operating expensescost as a percent of consolidated revenues as compared to the corresponding period of the prior fiscal year.
in our International segment.

Site operating expenses as a percent of consolidated revenues during fiscal year 2011 was consistent with fiscal year 2010. A reduction in legal claims expense and a favorable sales tax audit


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adjustment were offset by a planned increase in advertising expense within the Company's Promenade concept and an increase in self insurance accruals.

        The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 20102013 was primarily due to higher self insurance expense. The Company recorded a reductionnegative leverage from the decrease in self insurance accruals of $1.7same-store sales. Site operating expenses declined $3.1 million in fiscal year 2010 comparedprimarily within our North American segment due to a $9.9 million reductiondecrease in fiscal year 2009. In additionadvertising costs, utilities and janitorial expense, partially offset by increases in salon connectivity costs to support the Company settled two legal claims related to customerCompany's new POS system and employee matters resulting in a $5.2 million charge during fiscal year 2010.salon workstations and higher salon repairs and maintenance expense.

        The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 20092012 was primarily due to negative leverage from the reclassification of rubbish removal and utilities that we pay our landlords as part of our operating lease agreements from rent into site operating expense. Partially offsetting thedecrease in same-store sales.

        The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2011 was an incremental $3.0 million benefitprimarily due to an increase in advertising expense within the Company's Promenade concept and an increase in self-insurance accruals, partially offset by a reduction in self insurance accruals compared to the fiscal year 2008 reduction in self insurance accruals. The reduction was primarily related to prior years' workers' compensation reserves as a result of successful safety and return-to-work programs implemented over the past few years.legal claims expense.

General and Administrative

        General and administrative (G&A) includesdeclined $22.9 million, or 60 basis points as a percentage of consolidated revenues, during fiscal year 2013. This improvement was primarily due to reductions in salaries and benefits from our corporate reorganization executed last year, certain cost savings


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initiatives in the current year and reduced levels of incentive pay in the current year, partly offset by costs associated with rolling out our field supervision, salon training and promotions, product distribution centers and corporate offices (such as salaries and professional fees), includingnew POS system. The Company remains focused on simplification to drive further costs incurred to support franchise and hair restoration center operations. G&A expenses were as follows:efficiencies.

 
  
  
 Increase (Decrease)
Over Prior Fiscal Year
 
Years Ended June 30,
 G&A Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $339,857  14.6%$47,866  16.4% 220 

2010

  291,991  12.4  330  0.1  40 

2009

  291,661  12.0  (29,902) (9.3) (100)

(1)
Represents the        The 130 basis point changeimprovement in G&A costs as a percentpercentage of consolidated revenues as comparedduring fiscal year 2012 was the result of lapping a $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret in fiscal year 2011. Also contributing to the corresponding periodimprovement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the prior fiscal year.
reduction in salon support workforce that occurred in January 2012. Partially offsetting these improvements were incremental costs associated with the Company's senior management restructuring, severance charges, and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets.

        The 210 basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2011 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, expenditures associated with the Regis salon concept re-imaging project, professional fees incurred related to the exploration of strategic alternatives and information technology projects, legal claims expense and negative leverage on fixed costs within this category due to negative same-store sales.

        The basis point increase in G&A costs as a percentage of consolidated revenues during fiscal year 2010 was primarily due to negative leverage from the decrease in same-store sales, partially offset by the continuation of cost savings initiatives implemented by the Company.

        The basis point improvement in G&A costs as a percentage of consolidated revenues during fiscal year 2009 was primarily due to cost savings initiatives implemented by the Company during the first half of fiscal year 2009 including the reduction of field supervisory staff and the reduction of the fiscal year 2009 marketing budget. The basis point improvement was also related to the deconsolidation of the European franchise salon operations.


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Rent

        Rent expense which includes base and percentage rent, common area maintenance and real estate taxes, was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Rent Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $342,286  14.7%$(1,812) (0.5)% 10 

2010

  344,098  14.6  (3,694) (1.1) 30 

2009

  347,792  14.3  (13,684) (3.8) (30)

(1)
Represents thedecreased by $7.1 million during fiscal year 2013 due to salon closures, primarily within our North American segment. The 50 basis point changeincrease in rent expense as a percent of consolidated revenues as comparedduring fiscal year 2013 was primarily due to the corresponding period of the prior fiscal year.
negative leverage associated with this fixed cost category.

        The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by favorable common area maintenance adjustments from landlords and salon closures.

        The 20 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2011 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partially offset by a favorable reduction to our common area maintenance expenses.

Depreciation and Amortization

        The 40 basis point increasedecrease in rent expensedepreciation and amortization (D&A) as a percent of consolidated revenues during fiscal year 20102013 was primarily due to our lapping $16.2 million of accelerated amortization associated with the adjustment to the useful life of the Company's previously internally developed POS system. Partially offsetting the 40 basis point improvement was $1.9 million of accelerated depreciation expense in the current year associated with a leased building in conjunction with consolidating the Company's headquarters and negative leverage from the decrease in this fixed cost category, partially offset by a reduction in our percentage rent payments, both due to negative same-store sales.

        The 70 basis point improvementincrease in rent expenseD&A as a percent of consolidated revenues during fiscal year 20092012 was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated amortization expense in the reclassificationcurrent year resulting from the useful life adjustment of rubbish removalthe Company's internally developed POS system and utilities that we pay our landlords as part of our operating lease agreements to site operating expensenegative leverage from rent expense.the decrease in same-store sales. Partially offsetting the basis point improvementincrease was negative leverage in this fixed cost category due to negative same-store sales.

Depreciation and Amortization

        Depreciation and amortization expense (D&A) was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 D&A Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $105,109  4.5%$(3,655) (3.4)% (10)

2010

  108,764  4.6  (6,891) (6.0) (20)

2009

  115,655  4.8  2,362  2.1  20 

(1)
Represents the basis point changecontinuation of a decrease in depreciation and amortization as a percent of consolidated revenuesexpense from the reduction in salon construction beginning in fiscal year 2009 as compared to the corresponding periodhistorical levels prior to fiscal year 2009.


Table of the prior fiscal year.

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        The 20 basis point decrease in D&A as a percent of consolidated revenues during fiscal year 2011 was primarily due to a decrease in depreciation expense from a reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. The basis point decrease was partially offset by negative leverage from the decrease in same-store sales.

Goodwill Impairment

        The basis point improvementCompany did not record a goodwill impairment charge in D&A as a percent of consolidated revenues during fiscal year 2010 was primarily due to a reduction in the impairment of property and equipment at underperforming locations as compared to fiscal year 2009.2013.

        The Company recorded a goodwill impairment chargescharge of $6.4 and $10.2 million during fiscal years 2010 and 2009, respectively. Partially offsetting the improvements was a decline due to negative leverage from the decrease in same-store sales.


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        The basis point increase in D&A as a percent of consolidated revenues during fiscal year 2009 was primarily due to the decrease in same-store sales. In addition, the Company recorded impairment charges of $10.2$67.7 million related to the impairment of property and equipment at underperforming locations, including those salons under the Company approved plan to close up to 80 underperforming United Kingdom company-owned salons.

Goodwill Impairment

        Goodwill impairment was as follows:

 
  
  
 Increase (Decrease)
Over Prior Fiscal Year
 
Years Ended June 30,
 Goodwill
Impairment
 Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $74,100  3.2%$38,823  110.1% 170 

2010

  35,277  1.5  (6,384) (15.3) (20)

2009

  41,661  1.7  41,661  100.0  170 

(1)
Represents the basis point change in goodwill impairment as a percent of consolidated revenues as comparedRegis salon concept during fiscal year 2012. Due to the corresponding periodcontinuation of decreased same-store sales, the estimated fair value of the prior fiscal year.
Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept.

        The Company recorded a $74.1 million goodwill impairment charge related to the Promenade salon concept during fiscal year 2011. Due to lower than expected earnings and same-store sales, the estimated fair value of the Promenade salon operations was less than the carrying value of this concept's net assets, including goodwill. The $74.1 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon operations.

        The Company recorded a $35.3 million goodwill impairment charge related to the Regis salon concept during fiscal year 2010. Due to the current economic conditions, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $35.3 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon operations.

        The Company recorded a $41.7 million goodwill impairment charge related to the salon concepts in the United Kingdom during fiscal year 2009. The recent performance challenges of the international salon operations indicated that the estimated fair value of the international salon operations was less than the current carrying value of the reporting unit's net assets, including goodwill. There is no remaining goodwill recorded within the salon concepts in the United Kingdom.concept.

Lease Termination Costs

        Lease termination costs were as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Lease
Termination
Costs
 Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $  %$(2,145) (100.0)% (10)

2010

  2,145  0.1  (3,587) (62.6) (10)

2009

  5,732  0.2  5,732  100.0  20 

(1)
Represents the basis point change in lease termination costs as a percent of consolidated revenues as compared to the corresponding periods of the prior fiscal year.

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        As the Company's July 2008 and June 2009 plans to close underperforming company-owned salons were substantially complete as of June 30, 2010, the Company did not incur lease termination costs during the twelve months ended June 30, 2011.

        The fiscal year 2010 lease termination costs are associated with the Company's June 2009 plan to close underperforming United Kingdom company-owned salons in fiscal year 2010. During fiscal year 2010 we closed 29 salons under the June 2009 plan.

        The fiscal year 2009 lease termination costs are primarily associated with the Company's July 2008 plan to close underperforming company-owned salons in fiscal year 2009. The planned closures in fiscal year 2009 included salons in North America and the United Kingdom. During fiscal year 2009 we closed 64 salons under the July 2008 plan.

        See further discussion within Note 11 of the Consolidated Financial Statements.

Interest Expense

        Interest expense was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Interest Expense as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $34,388  1.5%$(20,026) (36.8)% (80)

2010

  54,414  2.3  14,646  36.8  70 

2009

  39,768  1.6  (4,511) (10.2) (20)

(1)
Representsincreased by $9.3 million during fiscal year 2013 primarily due to a $10.6 million make-whole payment associated with the basis point changeprepayment of private placement debt in interest expense as a percent of consolidated revenuesJune 2013, partially offset by decreased debt levels as compared to the corresponding period of the prior fiscal year.
year 2012.

        The 30 basis point improvement in interest as a percent of consolidated revenues during the twelve months ended June 30,fiscal year 2012 was primarily due to decreased debt levels as compared to fiscal year 2011.

        The 90 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2011 was primarily due to a reduction in interest expense due to the twelve months ended June 30,fiscal year 2010 including $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt, and decreased debt levels during fiscal year 2011.

        The basis point increase in interest as a percent of consolidated revenues during the twelve months ended June 30, 2010 was primarily due to $18.0 million of make-whole payments and other fees associated with the repayment of private placement debt. The increase due to the make-whole payments and other fees was partially offset by a reduction in interest expense due to decreased debt levels.

        The basis point improvement in interest as a percent of consolidated revenues during the twelve months ended June 30, 2009 was primarily due to lower average interest rates on variable rate debt and decreased debt levels as a result of the Company's commitment to reduce debt levels.


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Interest Income and Other, net

        Interest income and other, net was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Interest Income as %
of Consolidated
Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $4,811  0.2%$(5,599) (53.8)% (20)

2010

  10,410  0.4  949  10.0   

2009

  9,461  0.4  1,288  15.8  10 

(1)
Represents theThe 160 basis point changeincrease in interest income and other, net as a percent of consolidated revenues as comparedduring fiscal year 2013 was primarily due to the correspondingrecognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance, partially offset by fiscal year 2012 including a favorable legal settlement and the foreign currency impact on the Company's investment in MY Style.

        Interest income and other, net as a percent of consolidated revenues during fiscal year 2012, was consistent with the comparable prior period ofas there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior fiscal year.

year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret.

        The 30 basis point decrease in the interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30,fiscal year 2011 was primarily due to the foreign currency impact of the Company's investment in MY Style, $1.9 million received from the purchaser of Trade Secret in the comparable prior period for administrative services, and $1.9 million in interest income recorded in the comparable prior period on the outstanding note receivable due from the purchaser of Trade Secret.


        Interest income and other, net as a percentTable of consolidated revenues during the twelve months ended June 30, 2010 was consistent with the twelve months ended June 30, 2009. Interest income increased as a result of higher cash balances available to earn interest, partially offset by a decline in rates.Contents

Income Taxes

        The basis point improvement in interest income and other, net as a percent of consolidated revenues during the twelve months ended June 30, 2009 was primarily due toDuring fiscal year 2013, the Company receiving $2.9 million for administrative services from the purchaser of Trade Secret and foreign currency transaction gains. Partially offsetting the basis point improvement was a decrease in interest income due to a decline in interest rates.

Income Taxes

        Our reported effective tax rate was as follows:

Years Ended June 30,
 Effective
Rate
 Basis Point
(Decrease) Increase
 

2011

  (37.1)% (8,520)

2010

  48.1  (520)

2009

  53.3  1,380 

(1)
Represents the basis point change inrecognized an income tax expense as a percentbenefit of (loss)$10.0 million on $10.1 million of income from continuing operations before income taxes and equity in income (loss)loss of affiliated companies, as compared tofor an effective tax rate of (99.3)%. The larger than expected effective tax rate benefit was because the corresponding periods$33.8 million foreign currency translation gain recognized at the time of the priorsale of Provalliance was primarily non-taxable, and the Company benefitted from Work Opportunity Tax Credits.

        During fiscal year.

year 2012, the Company recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 17.5%. The smaller than expected effective tax rate was primarily because the $67.7 million Regis salon concept impairment charge was partially nondeductible for tax purposes.

        ForDuring fiscal year 2011, the Company reported a $25.6recognized an income tax benefit of $16.3 million on $43.9 million of loss from continuing operations before income taxes as compared toand equity in income from continuing operations before income taxes of $53.2 and $78.8 million in fiscal years 2010 and 2009, respectively. The rate reconciliation items have a greater impact on the annual effective income tax rate in fiscal year 2011 as the magnitude of the loss from continuing operations before income taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annualaffiliated companies, for an effective tax rate of 37.2%. Significant items impacting the effective tax rate were the $74.1 million Promenade salon concept impairment charge which was favorably impacted bypartially nondeductible for tax purposes and the employment credits related to the Small Business andCompany benefited from Work Opportunity Tax Act of 2007. Based upon current legislation, these credits are scheduled to expire on December 31, 2011. Partially


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offsetting the favorable impact of the employment credits was the adverse impact of the pre-tax non-cash goodwill impairment charge of $74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items.

        The basis point improvement in our overall effective income tax rate for the fiscal year ended June 30, 2010 was primarily due to a decrease in the impact of the non-cash goodwill impairment charge recorded during the year ended June 30, 2010 compared to the impact of the non-cash goodwill impairment charge recorded during the year ended June 30, 2009 and an increase in the employment credits received. In addition, a 0.9 percent decrease in the tax rate was due to adjustments to the income tax balances, which had a smaller impact than the charge recorded in the prior year related to the adjustment of prior year deferred income taxes.

        The basis point increase in our overall effective income tax rate for the fiscal year ended June 30, 2009 was primarily the result of the pre-tax non-cash goodwill impairment charge of $41.7 million recorded during the three months ended December 31, 2008 which caused an increase in the tax rate of 14.5 percent. The majority of the impairment charge was not deductible for tax purposes. In addition, a 4.8 percent increase in the tax rate was due to an adjustment of prior year deferred income taxes. Offsetting the unfavorable shifts in the income tax rate was a 7.3 percent decrease in the tax rate due to the release of reserves for unrecognized tax benefits upon the expiration of the statute of limitation in federal, state and international jurisdictions.Credits.

Equity in (Loss) Income (Loss) of Affiliated Companies, Net of Income Taxes

        The loss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partially offset by the Company's share of EEG's net income and a $0.6 million gain on the Provalliance equity put that automatically terminated as a result of the sale of the Company's investment in Provalliance. See Note 5 to the Consolidated Financial Statements for further discussion of each respective affiliated company.

        The loss in affiliated companies, net of taxes for fiscal year 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. In conjunction with entering into a purchase agreement to sell Provalliance, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in income (loss)a net impairment charge of affiliates, representing$17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the income or loss generatedexcess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partially offset by our equity investmentshare of earnings of $9.7 and $4.7 million recorded for our investments in Empire Education Group, Inc., Provalliance and other equity method investments was as follows:EEG, respectively.

 
  
 (Decrease) Increase
Over Prior Fiscal Year
 
 
 Equity
Income
(Loss)
 
Years Ended June 30,
 Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $7,228 $(4,714) (39.5)%

2010

  11,942  41,788  140.0 

2009

  (29,846) (30,695) (3,615.4)

        Equity in income of affiliated companies, net of taxes for thefiscal year ended June 30, 2011 was due to equity in income of $7.8 $5.5 and $0.6$5.5 million recorded for our investments in Provalliance EEG and Hair Club for Men, Ltd.,EEG, respectively. In addition, the Company recorded a $9.0 million impairment loss related to the Company's investment in MY Style. The impairment charge was based on the decline in equity value of MY Style as a result of changes in projected revenue growth after the natural disasters that occurred in Japan during March 2011. The Company also recorded a $2.4 million net gain related to the settlement of a portion of the Company's equity put liability and additional ownership of the Frank Provost Group in Provalliance.

        Equity inIncome from Discontinued Operations, net of Taxes

        During fiscal year 2013, the Company recognized $25.0 million of income, of affiliated companies, net of taxes forfrom discontinued operations, primarily from an after-tax gain of $17.8 million realized upon the year ended June 30, 2010 was due to equity in incomesale of $4.1, $6.4 and $0.9 million recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd., respectively.

        The increase in lossesand $12.6 million of affiliated companies,income from Hair Club operations, net of taxes, for the year ended June 30, 2009 was primarily due to the impairment losses of $25.7 and $4.8 million, on our investment in Provalliance and investment in and loans to Intelligent Nutrients, LLC, respectively. Primarily the result of the weakened economy across continental Europe, Provalliance had recorded income at levels much less thanpartially offset by


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expected by Regis management during the Company's fiscal year ended June 30, 2009. In addition, Provalliance significantly increased its debt levels resulting from acquisitions since January 31, 2008 but had significantly reduced future income expectations as a result$5.4 million of current economic conditions. The Company calculated the estimated fair value of Provalliance based on discounted future cash flows that utilize estimates in annual revenue growth, gross margins, capital expenditures, income taxes and long-term growth for determining terminal value. The discounted cash flow model utilizes projected financial results based on Provalliance's business plans and historical trends. The increased debt and reduced earnings expectations reduced the fair value of Provalliance as of June 30, 2009. Accordingly, the Company could no longer justify the carrying amount of its investment in Provalliance and recorded a $25.7 million other than temporary impairment charge in its fourth quarter ended June 30, 2009. The $4.8 million impairment charge was based on Intelligent Nutrients, LLC's inability to develop a professional organic brand of shampoo and conditioner with broad consumer appeal. The Company determined the losses in value to be other than temporary. Partially offsetting the impairment losses was equity in income recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd. See Note 6 to the Consolidated Financial Statements for further discussion of each respective affiliated company.

Income (Loss) from Discontinued Operations,expense, net of Taxes

        Income (loss) from discontinued operations was as follows:

 
  
 (Decrease) Increase
Over Prior Fiscal Year
 
 
 Income (Loss)
from Discontinued
Operations,
Net of Taxes
 
Years Ended June 30,
 Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $ $(3,161) (100.0)%

2010

  3,161  134,597  102.4 

2009

  (131,436) (132,739) (10,187.2)

        During fiscal year 2010, the Company recorded a $3.0 million tax benefit in discontinued operations to correct the prior year calculation of the income tax benefit related to the disposition of the Trade Secret Salon concept.

        During the quarter ended December 31, 2008, we concluded that our Trade Secret concept was held for saletaxes associated with professional and presented it as discontinued operations for all comparable prior periods. The loss from discontinued operations during fiscal year 2009 represents operating losses and non-cash impairment charges of $183.3 million. The decrease in income from discontinued operations during fiscal year 2008 was primarily due to same-store sales decreasing 7.9 percent and reduced retail product margins, largely the result of recent salon acquisitions which have lower product margins. The decrease in income from discontinued operations during fiscal year 2008 was also due to long-lived asset impairment charges of $4.4 million in fiscal year 2008 as compared to $1.7 million during fiscal year 2007.transaction fees. See Note 2 to the Consolidated Financial Statements for further discussion.discussion on discontinued operations.

        During fiscal year 2012, the Company recognized $62.4 million of loss, net of taxes from discontinued operations, primarily from a $61.9 million loss, net of taxes from Hair Club operations, as a result of the $78.4 million goodwill impairment charge, and $1.6 million of expense, net of taxes associated with professional and transaction fees, partially offset by $1.1 million tax benefit related to the release of tax reserves associated with the disposition of our Trade Secret salon concept.

        During fiscal year 2011, the Company recognized $12.0 of income, net of taxes, from Hair Club operations.

Recent Developments

First Quarter-to-Date Fiscal 2014 Sales Trends

        As of August 25, 2013, first quarter-to-date same store service sales and product sales were down 3.4% and 14.9%, respectively. The Company believes these declines are short-term in nature, and we have seen improvement in August same-store service sales which are down 2.4%, a 180 basis point improvement since July. We expect these trends to further improve as our new field teams transition from reorganizing and hiring activities to focusing on their salons, and as we become more comfortable with and optimize our use of the new POS system. The Company has taken a number of steps to reverse this short-term trend, including providing an incentive for stylists to gain traction on our first quarter promotion and accelerating by two weeks the delivery of items within our new product assortment so that salon shelves could be reset sooner. Since salon resets were just completed several weeks ago, product sales trends have yet to show improvement.

Field Reorganization—Financial Statement Expense Classification

        Beginning in the first quarter of fiscal year 2014, the field reorganization, excluding salons within the mass premium category, will result in a change in expense classifications on our Statement of Operations. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders will spend most of their time on the salon floor leading, mentoring and serving guests. Accordingly, field leader costs, including their labor and travel costs, will directly arise from the management of salon operations. As a result, district and senior district leader labor costs will be reported within Cost of Service rather than General and Administrative expenses, and their travel costs will be reported within Site Operating expenses rather than General and Administrative expenses. This expense classification will have no financial impact on the Company's reported operating income (loss), reported net income (loss) or cash flows from operations.

Recent Accounting Pronouncements

        Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.

Effects of Inflation

        We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on the results of our operations.


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Constant Currency Presentation

        The presentation below demonstrates the effect of foreign currency exchange rate fluctuations from year to year. To present this information, current period results for entities reporting in currencies other than United States dollars are converted into United States dollars at the average exchange rates in effect during the corresponding period of the prior fiscal year, rather than the actual average exchange rates in effect during the current fiscal year. Therefore, the foreign currency impact is equal to current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.

        During the fiscal year ended June 30, 2011, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar and British Pound against the United States dollar.

        During the fiscal year ended June 30, 2010, foreign currency translation had a favorable impact on consolidated revenues due to the strengthening of the Canadian dollar against the United States dollar, partially offset by the weakening of the British pound and Euro against the United States dollar.

        During the fiscal year ended June 30, 2009, foreign currency translation had an unfavorable impact on consolidated revenues due to the weakening of the Canadian dollar, British pound, and Euro against the United States dollar.

 
 Favorable (Unfavorable) Impact of Foreign Currency Exchange Rate Fluctuations 
 
  
  
  
 Impact on Income Before Income Taxes 
 
 Impact on Revenues 
 
 Fiscal 2011 Fiscal 2010  
 
Currency
 Fiscal 2011 Fiscal 2010 Fiscal 2009 Fiscal 2009 
 
 (Dollars in thousands)
 

Canadian dollar

 $9,736 $10,422 $(18,509)$937 $1,761 $(3,009)

British pound

  653  (4,928) (36,624) 15  (184) 7,248 

Euro

  (137) (34) (496) 39  (5) (252)
              

Total

 $10,252 $5,460 $(55,629)$991 $1,572 $3,987 
              

Results of Operations by Segment

        Based on our internal management structure, we report three segments: North American salons, International salons and Hair Restoration Centers. Significant results of operations are discussed below with respect to each of these segments.

North American Salons

        North American Salon Revenues.    Total North American salon revenues were as follows:

 
  
 (Decrease) Increase
Over Prior Fiscal Year
  
 
 
  
 Same-Store Sales
Decrease
 
Years Ended June 30,
 Revenues Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $2,029,944 $(30,619) (1.5)% (1.8)%

2010

  2,060,563  (57,135) (2.7) (3.3)

2009

  2,117,698  27,952  1.3  (2.9)

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        The percentage (decreases) increases during the years ended June 30, 2011, 2010, and 2009 were due to the following factors:

 
 Percentage
(Decrease) Increase in
Revenues For the
Years Ended June 30,
 
Factor
 2011 2010 2009 

Acquisitions (previous twelve months)

  1.2% 0.8% 3.7%

Organic

  (1.7) (3.6) (0.9)

Foreign currency

  0.5  0.5  (0.9)

Franchise revenues

  0.0    (0.1)

Closed salons

  (1.5) (0.4) (0.5)
        

  (1.5)% (2.7)% 1.3%
        

        We acquired 105 North American salons during the twelve months ended June 30, 2011, including 78 franchise buybacks. The decline in organic sales was the result of a same-store sales decrease of 1.8 percent due to a decline in same-store customer visits, partially offset by an increase in average ticket. Contributing to the organic sales decline during the twelve months ended June 30, 2011 was the completion of an agreement to supply the purchaser of Trade Secret product at cost. The Company generated revenues of $20.0 million for product sold to the purchaser of Trade Secret during the twelve months ended June 30, 2010. The foreign currency impact during fiscal year 2011 resulted primarily from the weakening of the United States dollar against the Canadian dollar.

        We acquired 26 North American salons during the twelve months ended June 30, 2010, including 23 franchise buybacks. The decline in organic sales was the result of a same-store sales decrease of 3.3 percent due to a decline in same-store customer visits, partially offset by an increase in average ticket. Contributing to the organic sales decline during the twelve months ended June 30, 2010 was the completion of an agreement to supply the purchaser of Trade Secret product at cost. The Company generated revenues of $20.0 and $32.2 million for product sold to the purchaser of Trade Secret during the twelve months ended June 30, 2010 and 2009, respectively. The foreign currency impact during fiscal year 2010 resulted from the weakening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2009.

        We acquired 177 North American salons during the twelve months ended June 30, 2009, including 83 franchise buybacks. The organic decrease was due primarily to same-store sales decrease of 2.9 percent, partially offset by the construction of 168 company-owned salons in North America and $32.2 million of product sales to the purchaser of Trade Secret during the twelve months ended June 30, 2009. The foreign currency impact during fiscal year 2009 resulted from the strengthening of the United States dollar against the Canadian dollar as compared to the exchange rate for fiscal year 2008.


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        North American Salon Operating Income.    Operating income for the North American salons was as follows:

 
  
  
 Decrease Over Prior Fiscal Year 
Years Ended June 30,
 Operating
Income
 Operating
Income as % of
Total Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $166,683  8.2%$(53,172) (24.2)% (250)

2010

  219,855  10.7  (55,773) (20.2) (230)

2009

  275,628  13.0  (10,227) (3.6) (70)

(1)
Represents the basis point change in North American salon operating income as a percent of total North American salon revenues as compared to the corresponding period of the prior fiscal year.

        The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2011 was primarily due to the $74.1 million goodwill impairment of the Company's Promenade salon concept and negative leverage in fixed cost categories due to negative same-store sales. Partially offsetting the basis point decrease was lower depreciation expense due to a reduction in salon construction.

        The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2010 was primarily due to the $35.3 million goodwill impairment of the Company's Regis salon concept and negative leverage in fixed cost categories due to negative same-store sales. In addition, the basis point decrease was due to the settlement of two legal claims regarding customer and employee matters totaling $5.2 million, higher self insurance expense (the Company recorded reduction in self insurance accruals of $1.7 million in the twelve months ended June 30, 2010 compared to a $9.9 million reduction in the twelve months ended June 30, 2009), partially offset by the Company's cost saving initiatives and gross margin improvement.

        The basis point decrease in North American salon operating income as a percent of North American salon revenues during fiscal year 2009 was primarily due to negative leverage in fixed cost categories due to negative same-store sales and lease termination costs associated with the Company's plan to close underperforming company-owned salons. In addition, the basis point decrease was due to an increase in North American revenues of $32.2 million related to product sales to the purchaser of Trade Secret at cost.

International Salons

        International Salon Revenues.    Total International salon revenues were as follows:

 
  
 Decrease
Over Prior Fiscal Year
  
 
 
  
 Same-Store Sales
Decrease
 
Years Ended June 30,
 Revenues Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $150,237 $(5,848) (3.7)% (3.1)%

2010

  156,085  (15,484) (9.0) (3.8)

2009

  171,569  (84,494) (33.0) (7.2)

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        The percentage (decreases) increases during the years ended June 30, 2011, 2010, and 2009 were due to the following factors:

 
 Percentage (Decrease)
Increase in Revenues For
the Years Ended June 30,
 
 
 2011 2010 2009 

Acquisitions (previous twelve months)

  % % %

Organic

  (0.3) 1.5  (4.8)

Foreign currency

  0.3  (2.9) (14.5)

Franchise revenues

      (9.2)

Closed salons

  (3.7) (7.6) (4.5)
        

  (3.7)% (9.0)% (33.0)%
        

        We did not acquire any International salons during the twelve months ended June 30, 2011. The organic sales decrease was primarily due to a decrease in same-store sales of 3.1 percent for the twelve months ended June 30, 2011, partially offset by the rebranding of certain salons that had previously been operating under a different salon concept. The foreign currency impact during fiscal year 2011 resulted from the weakening of the United States dollar against the British Pound. We closed 15 company-owned salons during the twelve months ended June 30, 2011.

        We did not acquire any International salons during the twelve months ended June 30, 2010. The organic sales increase was primarily due to the rebranding of certain salons that had previously been operating under a different salon concept, partially offset by a decrease in same-store sales of 3.8 percent for the twelve months ended June 30, 2010. The foreign currency impact during fiscal year 2010 resulted from the weakening of the United States dollar against the British Pound and Euro as compared to the exchange rates for fiscal year 2009. We closed 42 company-owned salons during the twelve months ended June 30, 2010, of which 29 related to the June 2009 plan to close underperforming salons in the United Kingdom.

        We did not acquire any International salons during the twelve months ended June 30, 2009. The organic sales decline was primarily due to a decrease of same-store sales of 7.2 percent for the twelve months ended June 30, 2009, partially offset by the four company-owned international salons constructed. The foreign currency impact during fiscal year 2009 resulted from the strengthening of the United States dollar against the British Pound and Euro as compared to the exchange rates for fiscal year 2008. Franchise revenues decreased primarily due to the merger of our continental Europe franchise salon operations with Franck Provost Salon Group on January 31, 2008.

        International Salon Operating Income (Loss).    Operating income (loss) for the International salons was as follows:

 
  
  
 (Decrease) Increase
Over Prior Fiscal Year
 
Years Ended June 30,
 Operating
Income (Loss)
 Operating Income
(Loss) as % of
Total Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $6,738  4.5%$(41) (0.6)% 20 

2010

  6,779  4.3  52,260  114.9  3,080 

2009

  (45,481) (26.5) (57,132) (490.4) (3,110)

(1)
Represents the basis point change in International salon operating income (loss) as a percent of total International salon revenues as compared to the corresponding period of the prior fiscal year.

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        The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2011 was primarily due to $2.1 million of lease termination costs recognized during fiscal year 2010 associated with the Company's planned closure of underperforming salons. Partially offsetting the basis point improvement was a decline on product margins from mix play, as a larger than expected percentage of our product sales came from lower-margin products.

        The basis point improvement in International salon operating income as a percent of International salon revenues during fiscal year 2010 was primarily due to the comparable prior period including a $41.7 million goodwill impairment of the United Kingdom reporting unit and higher impairment charges related to the impairment of property and equipment at underperforming locations. In addition the Company's planned closure of underperforming United Kingdom salons and the continuation of the Company's expense control and payroll management contributed to the basis point improvement during fiscal year 2010.

        The basis point decrease in International salon operating income as a percent of International salon revenues during fiscal year 2009 was primarily due to negative same-store sales and the $41.7 million goodwill impairment of the United Kingdom reporting unit during the fiscal year 2009.

Hair Restoration Centers

        Hair Restoration Center Revenues.    Total Hair Restoration Centers revenues were as follows:

 
  
 Increase Over
Prior Fiscal Year
  
 
 
  
 Same-Store Sales
Increase
(Decrease)
 
Years Ended June 30,
 Revenues Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $145,688 $3,902  2.8% 1.2%

2010

  141,786  1,266  0.9  0.4 

2009

  140,520  4,938  3.6  (0.8)

        The percentage increases (decreases) during the years ended June 30, 2011, 2010, and 2009 were due to the following factors:

 
 Percentage Increase
(Decrease) in Revenues
For the Years Ended
June 30,
 
 
 2011 2010 2009 

Acquisitions (previous twelve months)

  1.1% 0.2% 5.9%

Organic

  1.0  1.0  (0.9)

Franchise revenues

  0.7  (0.3) (1.4)
        

  2.8% 0.9% 3.6%
        

        We acquired four hair restoration centers during the twelve months ended June 30, 2011, all of which were franchise buybacks, and constructed three hair restoration centers during the twelve months ended June 30, 2011. The increase in organic Hair Restoration Centers revenues during fiscal year 2011 was due to the increase in same-store sales of 1.2 percent.

        We constructed four hair restoration centers during the twelve months ended June 30, 2010. The increase in organic Hair Restoration Centers revenues during fiscal year 2010 was due to the increase in same-store sales of 0.4 percent.

        We acquired two hair restoration centers during the twelve months ended June 30, 2009, both of which were franchise buybacks, and constructed eight hair restoration centers during the twelve months


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ended June 30, 2009. The decrease in organic Hair Restoration Centers revenues during fiscal year 2009 was due to the decrease in same-store sales of 0.8 percent.

        Hair Restoration Center Operating Income.    Operating income for our Hair Restoration Centers was as follows:

 
  
  
 Decrease Over Prior Fiscal Year 
Years Ended June 30,
 Operating
Income
 Operating Income
as % of
Total Revenues
 Dollar Percentage Basis Point(1) 
 
 (Dollars in thousands)
 

2011

 $18,230  12.5%$(2,107) (10.4)% (180)

2010

  20,337  14.3  (3,534) (14.8) (270)

2009

  23,871  17.0  (4,310) (15.3) (380)

(1)
Represents the basis point change in Hair Restoration Centers operating income as a percent of total Hair Restoration Centers revenues as compared to the corresponding period of the prior fiscal year.

        The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during the twelve months ended June 30, 2011 was primarily due to an increase in the cost of hair systems and expenses associated with a legal claim. Partially offsetting the basis point decrease was a benefit related to a favorable ruling on a state sales tax issue.

        The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during the twelve months ended June 30, 2010 was primarily due to an increase in advertising spend and the settlement of a vendor dispute totaling $0.6 million.

        The basis point decrease in Hair Restoration Centers operating income as a percent of Hair Restoration Centers revenues during fiscal year 2009 was primarily due to lower operating margins on newly constructed and acquired centers and negative leverage in fixed cost categories due to negative same-store sales.

Unallocated Corporate

        Unallocated Corporate Operating Loss.    Unallocated corporate operating expenses include salaries, stock-based compensation, professional fees, rent, depreciation and other expenses that are not allocated. Unallocated corporate operating losses were as follows:

 
  
 Increase (Decrease)
Over Prior Fiscal Year
 
 
 Operating
Loss
 
Years Ended June 30,
 Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $(187,703)$37,950  25.3%

2010

  (149,753) 4,808  3.3 

2009

  (144,945) (7,402) (4.9)

        The increase in unallocated corporate operating loss during the twelve months ended June 30, 2011 as compared to the twelve months ended June 30, 2010 was primarily due to the $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret, incremental costs associated with the Company's senior management restructure, professional fees incurred related to the exploration of strategic alternatives and information technology projects and legal claims expense.

        The increase in unallocated corporate operating loss during the twelve months ended June 30, 2010 as compared to the twelve months ended June 30, 2009 was primarily due to an increase in professional fees and distribution costs from an agreement with the purchaser of Trade Secret.


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        The decrease in unallocated corporate operating loss during the twelve months ended June 30, 2009 as compared to the twelve months ended June 30, 2008 was primarily due to the cost savings initiatives implemented during the first half of fiscal year 2009 and a reduction in professional fees.

LIQUIDITY AND CAPITAL RESOURCES

OverviewSources of Liquidity

        We continue to maintain a strong balance sheet to support system growthFunds generated by operating activities, available cash and financial flexibility. Our debt to capitalization ratio, calculated as total debt as a percentage of total debtcash equivalents, and shareholders' equity at fiscal year end, was as follows:

As of June 30,
 Debt to
Capitalization
 Basis Point
(Decrease) Increase(1)
 

2011

  23.3% (700)

2010

  30.3  (1,380)

2009

  44.1  20 

(1)
Represents the basis point change in debt to capitalization as compared to prior fiscal year end (June 30).

        The basis point improvement in the debt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 was primarily due to the repayment of an $85.0 million term loan during fiscal year 2011 and foreign currency translation adjustments due to the weakening of the United States dollar against the Canadian dollar and British Pound.

        The basis point improvement in the debt to capitalization ratio as of June 30, 2010 compared to June 30, 2009 was primarily due to the July 2009 common stock offering and decreased debt levels stemming from the repayment of private placement debt during fiscal year 2010. Our principal on-going cash requirements are to finance construction of new stores, remodel certain existing stores, acquire salons and purchase inventory. Customers pay for salon services and merchandise in cash at the time of sale, which reduces our working capital requirements.

        The basis point increase in the debt to capitalization ratio as of June 30, 2009 compared to June 30, 2008 was primarily due to a decrease in shareholders' equity from the non-cash goodwill impairment within the United Kingdom salon division, the loss from discontinued operations related to the sale of Trade Secret, the non-cash impairment of our investment in Provalliance and foreign currency due to the strengthening of the United States dollar against the Canadian dollar, Euro and British Pound. The impact of the decrease in shareholders' equity on the debt to capitalization ratio was partially offset by a decrease in debt from June 30, 2008 to June 30, 2009. As of June 30, 2009 and 2008, approximately $55.5 and $230.2 million, respectively, of our debt outstanding is classified as a current liability. As of June 30, 2009 and 2008 we had borrowings on our revolving credit facility are our most significant sources of $5.0liquidity. We believe our sources of liquidity will be sufficient to sustain operations and $139.1 million, respectively.

        Total assetsto finance strategic initiatives. We also anticipate having access to long-term financing. However, in the event our liquidity is insufficient and we are not able to access long-term financing, we may be required to limit or delay our strategic initiatives. There can be no assurance that we will continue to generate cash flows at June 30, 2011, 2010, and 2009 were as follows:or above current levels.

 
  
 (Decrease) Increase
Over Prior Fiscal Year
 
 
 Total
Assets
 
As of June 30,
 Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $1,805,753 $(113,819) (5.9)%

2010

  1,919,572  27,086  1.4 

2009

  1,892,486  (343,385) (15.4)

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        The $74.1 million goodwill impairment charge related to the Promenade salon concept, a $31.2 million valuation reserve on the note receivable due from the purchaser of Trade Secret, and a $9.2 million impairment on the Company's investment in MY Style, partially offset by cash flows from operations, were the primary factors for the decrease in total assets asAs of June 30, 2011 compared to June 30, 2010.

        Cash flows from operations, partially offset by2013, cash and cash equivalents were $200.5 million, with $176.4, $11.7 and $12.4 million in the $35.3 million goodwill impairment charge related to the Regis salon concept were the primary factors for the increase in total assets asUnited States, Canada, and Europe, respectively. As of June 30, 2010 compared2013, the Company has a $33.3 million income tax receivable of which approximately $11 million is expected to June 30, 2009.be collected during the first quarter of fiscal year 2014.

        The non-cash goodwill impairment within the United Kingdom salon division, non-cash impairmentWe have a $400.0 million five-year senior unsecured revolving credit facility with a syndicate of our investmentbanks that expires in Provalliance, non-cash impairment related to the sale of Trade Secret salon concept, and a planned reduction in inventory were the primary factors for the decrease in total assets asJune 2018. As of June 30, 2009 compared2013, the Company had no outstanding borrowings under the facility, and had outstanding standby letters of credit under the facility of $2.2 million, primarily related to June 30, 2008.

        Total shareholders' equityits self-insurance program. Accordingly, unused available credit under the facility at June 30, 2011, 2010,2013 was $397.8 million. The credit under this facility could be used to fund the convertible senior term notes should the Company choose to settle these notes in cash. Refer to additional discussion under financing arrangements.

        Our ability to access our revolving credit facility is subject to our compliance with the terms and 2009 was as follows:

 
  
 Increase (Decrease)
Over Prior Fiscal Year
 
 
 Shareholders'
Equity
 
As of June 30,
 Dollar Percentage 
 
 (Dollars in thousands)
 

2011

 $1,032,619 $19,326  1.9%

2010

  1,013,293  210,433  26.2 

2009

  802,860  (173,326) (17.8)

        During the twelve months endedconditions of such facility, including a maximum leverage ratio, a minimum fixed charge ratio and other covenants and requirements. At June 30, 2011, equity increased primarily as a result of $30.4 million of foreign currency translation2013, we were in compliance with all covenants and $9.6 million of stock based compensation, partially offset by $11.5 million of dividends and $8.9 million of net loss.

        During the twelve months ended June 30, 2010, equity increased primarily as a result of the issuance of the $163.6 million in common stock, the $24.7 million ($15.2 million net of tax) equity component of the convertible debt, stock based compensation of $9.3 million and the $42.7 million of earnings during fiscal year 2010. Partially offsetting the increase was $9.1 million of dividends, $8.2 million in equity issuance costs and $5.4 million of foreign currency translation adjustments.

        During the twelve months ended June 30, 2009, equity decreased primarily as a result of the non-cash goodwill impairment within the United Kingdom salon division, the non-cash impairmentother requirements of our investment in Provalliance, the non-cash impairment related to the sale of Trade Secretcredit agreement and foreign currency due to the strengthening of the United States dollar against the Canadian dollar, Euro, and British Pound.senior notes.


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Cash Flows

Cash Flows from Operating Activities

        NetFiscal year 2013 cash provided by operating activities duringof $69.1 million declined by $84.6 million compared to the twelve months ended June 30,previous fiscal year. Despite higher earnings in the current year, the decrease is attributable to decreases in revenues and increased cost of service and product resulting in changes in working capital. Cash payments of deferred compensation and income taxes also contributed to declines in cash provided by operating activities.

        Fiscal year 2012 cash provided by operating activities of $153.7 million declined by $75.5 million compared to the previous fiscal year, $51.8 million of this decrease related to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 2010 andincluded a tax refund related to the fiscal year 2009 wereloss on discontinued operations. Cash provided by operating activities was also lower due to a resultdecrease of the following:$6.0 million in dividends received from affiliated companies.

 
 Operating Cash Flows
For the Years Ended June 30,
 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Net (loss) income

 $(8,905)$42,740 $(124,466)

Depreciation and amortization

  98,428  102,336  115,016 

Equity in (income) loss of affiliated companies

  (7,228) (11,942) 28,940 

Dividends received from affiliated companies

  10,023  2,404  906 

Deferred income taxes

  (14,711) 5,115  (3,843)

Impairment on discontinued operations

    (154) 183,289 

Goodwill and asset impairments

  80,781  41,705  51,862 

Note receivable bad debt expense

  31,227     

Receivables

  (2,358) 1,192  (12,104)

Inventories

  4,629  4,823  7,128 

Income tax receivable

  23,855  957  (34,652)

Other current assets

  4,725  2,657  (52)

Other assets

  (11,050) (14,951) (1,327)

Accounts payable and accrued expenses

  368  1,040  (26,977)

Other noncurrent liabilities

  1,818  1,954  387 

Other

  17,576  12,347  3,957 
        

 $229,178 $192,223 $188,064 
        

        Fiscal year 2011 cash provided by operating activities was greater than fiscal year 2010 cash providedof $229.2 million increased by operating activities$37.0 million mainly due to an increase of $7.6 million in dividends received from affiliated companies and a $23.9 million reduction in income tax receivables.

        Fiscal year 2010 cash provided by operating activities was consistent with fiscal year 2009 cash provided by operating activities.

        During fiscal year 2009, cash provided by operating activities was lower than in the twelve months ended June 30, 2008 primarily due to a decrease in working capital cash flow, primarily related to a current year receivableCash Flows from the purchaser of Trade Secret and a decrease in accrued payroll.


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Investing Activities

        Net cash used inCash provided by investing activities during fiscal year 2013 of $165.1 million was greater than the twelve months ended June 30, 2011, 2010$90.9 million use of cash in fiscal year 2012. In fiscal year 2013, we received $266.2 million from the sales of Hair Club and 2009 wasProvalliance and $26.4 million from EEG related to principal payments on the resultoutstanding note receivable and revolving line of credit. These were partially offset by the following:Company placing $24.5 million into restricted cash to collateralize its self-insurance program, enabling the Company to reduce fees associated with previously utilized standby letters of credit, and increased capital expenditures primarily related to the Company's POS system implementation.

 
 Investing Cash Flows
For the Years Ended June 30,
 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Business and salon acquisitions

 $(17,990)$(3,664)$(40,051)

Capital expenditures for remodels or other additions

  (44,855) (40,561) (35,081)

Capital expenditures for the corporate office (including all technology-related expenditures)

  (13,826) (7,828) (13,113)

Capital expenditures for new salon construction

  (12,788) (9,432) (25,380)

Proceeds from loans and investments

  16,804  16,099  19,008 

Disbursements for loans and investments

  (72,301)   (20,971)

Freestanding derivative settlement

    736   

Proceeds from sale of assets

  626  70  77 
        

 $(144,330)$(44,580)$(115,511)
        

        Cash used by investing activities of $90.9 million during fiscal year 2012 was greaterless than fiscal year 2011 of $144.3 million due to the comparable prior period including the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partially offset by an increase in capital expenditures during fiscal year 2012 for a POS system and new salon construction.


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        Cash used by investing activities of $144.3 million during fiscal year 2011 was greater compared to fiscal year 2010 of $44.6 million due to the acquisition of approximately 17 percent additional equity interest in Provalliance for $57.3 million, (€ 40.4 million), a disbursement of $15.0 million on the revolving credit facility with EEG and the planned increaseincreases in acquisitions and capital expenditures. The Company completed 271 major remodeling projects during fiscal year 2011, compared to 333 and 280 during fiscal years 2010 and 2009, respectively. During fiscal year 2011, we constructed 146 company-owned salons and three hair restoration centers, and acquired 105 company-owned salons (78 of which were franchise buybacks) and four hair restoration centers (all of which were franchise buybacks).

        Cash used by investing activities was lower during fiscal year 2010 compared to fiscal year 2009 due to the planned reduction in acquisitions and capital expenditures and the receipt of $15.0 million on the revolving credit facility with EEG of which there was $0.0 and $15.0 million outstanding as of June 30, 2010 and 2009, respectively. The Company completed 333 major remodeling projects during fiscal year 2010, compared to 280 and 186 during fiscal years 2009 and 2008, respectively. We constructed 139 company-owned salons, four hair restoration centers and acquired 26 company-owned salons (23 of which were franchise buybacks) and zero hair restoration centers.

        Cash used by investing activities was lower during fiscal year 2009 compared to fiscal year 2008 due to the planned reduction in acquisitions and capital expenditures. Acquisitions during fiscal year 2009 were primarily funded by a combination of operating cash flows and debt. Additionally, the Company completed 280 major remodeling projects during fiscal year 2009, compared to 186 during fiscal year 2008. We constructed 182 company-owned salons, eight hair restoration centers and acquired 177 company-owned salons (83 of which were franchise buybacks) and two hair restoration centers, all of which were franchise buybacks. In addition during fiscal year 2008, there was a $36.4 million loan to Empire Education Group, Inc. and a transfer of $10.9 million in cash related to the deconsolidation of our schools and European franchise salon business.


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        The company-owned constructed and acquired locations (excluding franchise buybacks) consisted of the following number of locations in each concept:

 
 Years Ended June 30, 
 
 2011 2010 2009 
 
 Constructed Acquired Constructed Acquired Constructed Acquired 

Regis

  12  9  14  3  20  23 

MasterCuts

  6    15    14   

Trade Secret(1)

          10   

SmartStyle

  65    80    71   

Supercuts

  24    10    27   

Promenade

  26  18  18    36  71 

International

  13    2    4   

Hair restoration centers

  3    4    8   
              

  149  27  143  3  190  94 
              

(1)
Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as discounted operations. All comparable periods will reflect Trade Secret as discontinued operations.

Cash Flows from Financing Activities

        Net cash used in financing activities during the twelve months ended June 30, 2011, 2010 and 2009 was the result of the following:

 
 Financing Cash Flows
For the Years Ended June 30,
 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Net repayments on revolving credit facilities

 $ $(5,000)$(134,100)

Net repayments of long-term debt

  (137,671) (181,850) (7,504)

Proceeds from the issuance of common stock

  682  159,498  3,894 

Excess tax benefit from stock-based compensation plans

  67  243  163 

Dividend payments

  (11,509) (9,146) (6,912)

Other

    (2,878) (3,848)
        

 $(148,431)$(39,133)$(148,307)
        

During fiscal yearyears 2013, 2012 and 2011, the primary use of cash within financing activities was for repayments of long-term debt of $118.2, $29.7 and dividends.

$137.7 million, respectively and dividends of $13.7, $13.9 and $11.5 million, respectively. During fiscal year 2010, the primary use of cash within financing activities was for net repayments of long-term debt, partially offset by the issuance of common stock.

        During fiscal year 2009, the primary use of cash within financing activities was for net repayments on revolving credit facilities as reducing debt levels was one step2013 the Company tookused $14.9 million to help maintainrepurchase common stock under its compliance with debt covenants. The Company utilized intercompany borrowings on a short-term basis as allowed by a recently expanded IRS ruling to reduceshare repurchase program and prepaid $89.3 million in private placement debt.


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New Financing Arrangements

Fiscal Year 2011        Financing activities are discussed in Note 7 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."

        OnManagement believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. As of June 30, 2011,2013, we have $397.8 million available under our existing revolving credit facility.

        The Company's financing arrangements consists of the following:

 
  
 Interest rate %  
  
 
 
  
 Fiscal Years June 30, 
 
 Maturity Dates 2013 2012 2013 2012 
 
 (fiscal year)
  
  
 (Dollars in thousands)
 

Senior term notes

 2013 6.69 - 8.50% 6.69 - 8.50% $ $111,429 

Convertible senior notes(1)

 2015 5.00 5.00  166,454  161,134 

Revolving credit facility

 2018       

Equipment and leasehold notes payable

 2015 - 2016 4.90 - 8.75 4.90 - 8.75  8,316  14,780 

Other notes payable

 2013 5.75 - 8.00 5.75 - 8.00    331 
            

        174,770  287,674 

Less current portion(1)

        (173,515) (28,937)
            

Long-term portion

       $1,255 $258,737 
            

(1)
On or after April 15, 2014, holders may convert each of their senior convertible notes at their option at any time prior to the July 10, 2014 maturity date. As a result, the Company has included the convertible senior notes within long-term debt, current portion on the Consolidated Balance Sheet.

        In June 2013, the Company entered into a FifthSixth Amended and Restated Credit Agreement (Credit Agreement), which amended and restated in its entirety, the Company's existing FourthFifth Amended and Restated Credit Agreement.Agreement that was entered into during fiscal year 2011. The Fifth Amended and Restated Credit Agreement provides for a $400.0 million senior unsecured five-year revolving credit facility.facility that expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, liquidity and other indebtedness. The amendments included increasing the Company's minimum net worth covenant from $800.0 to $850.0 million, and amending or adding certain definitions, including Change in Law, Defaulting Lender, EBITDA, Fronting Exposure, Replacement Lender, and Accounting Principles. In addition, under the Fifth Amended and Restated Credit Agreement, the Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under


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certain circumstances. Under the new agreement, indebtedness related to Capital Leases is limited to $50.0 million, and Restricted Payments are tiered based on Debt to EBITDA. Events of default under the Credit Agreement include a change of control of the Company and the Company's default of other debt exceeding $10.0 million.Company. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2011.

Fiscal Year 20102013.

        On July 8, 2009,During June 2013, the Company entered into an agreement to sell to underwriters $150prepaid $89.3 million aggregate principal amount of 5.0 percentunsecured, fixed rate, senior term notes outstanding under a private shelf agreement.

        Beginning in April 2014, the holders of our convertible senior term notes due 2014, and 11,500,000 shares of its common stockmay convert their notes at $12.37 per share, which was the closing price per share on July 8, 2009.their option. The Company completedhas the agreement on July 14, 2009. In addition, underchoice of net-cash settlement, settlement in its own shares or a combination of both. As of June 30, 2013, the July 8, 2009 agreement, the Company granted the underwriters an over-allotment option to purchase up to an additional $22.5 million aggregate principal amount of notes, and up to an additional 1,725,000 shares of common stock, on the same terms and conditions. The underwriters exercised such options in their entirety and, on July 21, 2009, the Company completed the issuance of the additional shares and notes for the exercise by the underwriters of the over-allotment option of $22.5 million aggregate principal amount of notes and an additional 1,725,000 shares of common stock.

        The notes are unsecured, senior obligations of the Company and interest will be payable semi-annuallyconvertible at a rate of 5.0 percent per year. The notes will mature on July 15, 2014. The notes will be convertible subject to certain conditions at an initial conversion rate of 64.672665.4357 shares of the Company's common stock per $1,000 principal amount of notes, (representing an initialrepresenting a conversion price of approximately $15.46$15.28 per share of the Company's common stock), subjectstock.

        Our debt to adjustmentcapitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was as follows:

As of June 30,
 Debt to
Capitalization
 Basis Point
(Decrease)
Increase(1)
 

2013

  16.9% (750)

2012

  24.4  110 

2011

  23.3  (700)

(1)
Represents the basis point change in certain circumstances, see further discussion within Note 8debt to capitalization as compared to prior fiscal year end (June 30).

        The basis point improvement in the debt to capitalization ratio as of June 30, 2013 compared to June 30, 2012 was primarily due to the Consolidated Financial Statements.prepayment of $89.3 million in private placement debt.

        The net proceedsbasis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the Company from the offerings of convertible senior notes and common stock were approximately $323.8 million after deducting underwriting discounts and before estimated offering expenses. The Company utilized the proceeds to repay $267.0 million of private placement senior term notes of varying maturities and $30.0 million of senior term notes under the Private Shelf Agreement. Asdecrease in shareholders' equity as a result of the repayment ofnon-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit and a portion$36.6 million net impairment charge associated with our investments in Provalliance and EEG. Partially offsetting the impact of the senior term notes duringdecrease in shareholders' equity was a decrease in debt levels.

        The basis point improvement in the twelve months endeddebt to capitalization ratio as of June 30, 2011 compared to June 30, 2010 the Company incurred $12.8 million in make-whole payments and other fees along with $5.2 million in interest rate swap settlements, as discussed in Note 9was primarily due to the Consolidated Financial Statements, totaling $18.0 million that was recorded as interest expense within the Consolidated Statement of Operations. The remaining proceeds were used for general corporate purposes including the repayment of bank debt.

        In connection with the offerings above, on July 14, 2009, the Company amended the Fourth Amendedan $85.0 million term loan during fiscal year 2011 and Restated Credit Agreement, the Term Loan Agreement and the Amended and Restated Private Shelf Agreement, all subjectforeign currency translation adjustments due to the completionweakening of the issuances ofUnited States dollar against the convertible senior notesCanadian dollar and common stock discussed above. The amendments included increasing the Company's minimum net worth covenant from $675 to $800 million, lowering the fixed charge coverage ratio requirementBritish Pound.


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from 1.5x to 1.3x, amending certain definitions, including EBITDA and Fixed Charges, and limiting the Company's Restricted Payments to $20 million if the Company's Leverage Ratio is greater than 2.0x. In addition, the amendments to the Fourth Amended and Restated Credit Agreement reduced the borrowing capacity of the revolving credit facility from $350.0 to $300.0 million and the amendments to the Restated Private Shelf Agreement incorporated a risk based capital fee calculated on the daily average outstanding principal amount equal to an annual rate of 1.0 percent which commences one year after the effective date of the amendment.

Fiscal Year 2009

        During fiscal year 2009, we completed a $85 million term loan that matures in July 2012. The monthly interest payments are based on a one-month LIBOR plus a 1.75 percent spread. The term loan includes customary financial covenants including a leverage ratio, fixed charge ratio and minimum net equity test. We used the proceeds from the term loan to pay down our revolving line of credit facility.

Other Financing Arrangements

Private Shelf Agreement

        At June 30, 2011 and 2010, we had $133.6 and $174.1 million, respectively, in unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement. The notes require quarterly payments, and final maturity dates range from June 2013 through December 2017. The interest rates on the notes range from 6.69 to 8.50 percent as of June 30, 2011, and range from 5.65 to 8.39 percent as of June 30, 2010.

        The Private Shelf Agreement includes financial covenants including debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various Events of Default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.

        In July 2009, the Company amended the Restated Private Shelf Agreement. The amendments included increasing the Company's minimum net worth covenant from $675 to $800 million, lowering the fixed charge coverage ratio requirement from 1.5x to 1.3x, amending certain definitions, including EBITDA and Fixed Charges, limiting the Company's Restricted Payments to $20 million if the Company's Leverage Ratio is greater than 2.0x and the addition of a risk based capital fee calculated on the daily average outstanding principal amount equal to an annual rate of 1.0 percent that commences one year after the amendment date. During fiscal year 2010, the net proceeds from the convertible senior notes and common stock issuances in July 2009 were utilized in part to repay $30.0 million of senior term notes under the Private Shelf Agreement.

Private Placement Senior Term Notes

        On June 29, 2009, the Company entered into a prepayment amendment on the private placement senior term notes whereby the Company negotiated to prepay the notes with a premium over the principal amount that was less than the make-whole premium that would otherwise be payable upon redemption. During fiscal year 2010, the net proceeds from the convertible senior notes and common stock issuances in July 2009 were utilized to repay the remaining outstanding private placement senior term notes totaling $267.0 million.


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        As a result of the repayment of a portion of the senior term notes during the twelve months ended June 30, 2010, the Company incurred $12.8 million in make-whole payments and other fees along with $5.2 million in interest rate swap settlements, as discussed in Note 9 to the Consolidated Financial Statements, totaling $18.0 million that was recorded as interest expense within the Consolidated Statement of Operations.

Acquisitions

        Acquisitions are discussed throughout Management's Discussion and Analysis in this Item 7, as well as in Note 4 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. The acquisitions were funded primarily from operating cash flow, debt and the issuance of common stock.

Contractual Obligations and Commercial Commitments

        The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2011:2013:

 
 Payments due by period  
 
Contractual Obligations
 Within
1 years
 1 - 3 years 3 - 5 years More than
5 years
 Total 
 
 (Dollars in thousands)
 

On-balance sheet:

                

Debt obligations

 $166,454 $ $ $ $166,454 

Capital lease obligations

  7,061  1,255      8,316 

Other long-term liabilities

  4,651  4,958  3,266  7,870  20,745 
            

Total on-balance sheet

  178,166  6,213  3,266  7,870  195,515 
            

Off-balance sheet(a):

                

Operating lease obligations

  297,328  412,332  181,277  65,992  956,929 

Interest on long-term debt and capital lease obligations

  9,035  422      9,457 
            

Total off-balance sheet

  306,363  412,754  181,277  65,992  966,386 
            

Total

 $484,529 $418,967 $184,543 $73,862 $1,161,901 
            

 
 Payments due by period  
 
Contractual Obligations
 Within 1
years
 1 - 3
years
 3 - 5
years
 More than
5 years
 Total 
 
 (Dollars in thousands)
 

On-balance sheet:

                
 

Long-term debt obligations

 $23,130 $196,580 $35,714 $35,714 $291,138 
 

Capital lease obligations

  9,122  10,711  2,440    22,273 
 

Other long-term liabilities

  4,657  3,546  2,990  18,545  29,738 
            

Total on-balance sheet

  36,909  210,837  41,144  54,259  343,149 
            

Off-balance sheet(a):

                
 

Operating lease obligations

  312,038  444,678  212,607  95,546  1,064,869 
 

Interest on long-term debt and capital lease obligations

  21,946  36,056  10,879  4,554  73,435 
            

Total off-balance sheet

  333,984  480,734  223,486  100,100  1,138,304 
            

Total(b)

 $370,893 $691,571 $264,630 $154,359 $1,481,453 
            

(a)
In accordance with accounting principles generally accepted in the United States of America, these obligations are not reflected in the Consolidated Balance Sheet.

(b)
As of June 30, 2011, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 13 to the Consolidated Financial Statements for more information on our uncertain tax positions.

On-Balance Sheet Obligations

        Our long-term obligations are composed primarily of senior term notes, convertible debt and adebt. There were no outstanding borrowings under our revolving credit facility.facility at June 30, 2013. Interest payments on long-term debt and capital lease obligations wereare estimated based on each debt obligation's agreed upon rate as of June 30, 20112013 and scheduled contractual repayments.

        Other long-term liabilities of $20.8 million include a total of $22.6$14.5 million related to the Executive Profit Sharing Plan and a salary deferral program $7.1$6.3 million (including $0.2$0.1 million in interest) related to


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established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees.

        This table excludes the short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations, as defined by long-term obligations guidance.obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled.

        The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their performance within the Company. Because we cannot predict the timing or amount of our future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $5.0$3.5 and $28.6$9.5 million respectively at June 30, 2011, and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet.Sheet at June 30, 2013. Refer to Note 1410 to the Consolidated Financial Statements for additional information. The


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        As of June 30, 2013, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations are funded by insurance contracts.within the next fiscal year. See Note 9 to the Consolidated Financial Statements for more information on our uncertain tax positions.

Off-Balance Sheet Arrangements

        Operating leases primarily represent long-term obligations for the rental of salon and hair restoration center premises,salons, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $141.2$160.2 million, which are reimbursed to the Company by franchisees, and the guarantee of approximately 40operating leases of salons operated by the purchaser of Trade Secret.Secret with future minimum lease payments of less than $3.0 million. Regarding the franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements.

        We have forward foreign currency contracts. See Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," for a detailed discussion of our derivative instruments. Future net settlements under these agreements are not included in the table above.

        We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, credit facility of EEG, agreements to provide services, and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability.

        We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments.

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

        We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2011.2013. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.


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Financing

        Financing activities are discussed under "Liquidity and Capital Resources" in this Item 7 and in Note 8 to the Consolidated Financial Statements in Part II, Item 8. Derivative activities are discussed in Note 9 to the Consolidated Financial Statements in Part II, Item 8 and Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."

        Management believes that cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures, acquisitions and required debt repayments for the foreseeable future. As of June 30, 2011, we have available an unused committed line of credit amount of $374.0 million under our existing revolving credit facility.

Dividends

        We paid dividends of $0.20 during fiscal year 2011 and $0.16$0.24 per share during fiscal years 20102013 and 2009.2012 and $0.20 per share during fiscal year 2011. On August 25, 2011,20, 2013, the Board of Directors of the Company declared a $0.06 per share quarterly dividend payable September 22, 201117, 2013 to shareholders of record on September 8, 2011.3, 2013.

Share Repurchase Program

        In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. The Company repurchased 909,175 shares of common stock through its share repurchase program during fiscal year 2013 for $14.9 million. The Company did not repurchase any shares during fiscal year 2012 or 2011. As of June 30, 2011, 2010, and 2009,2013 a total accumulated 6.87.7 million shares have been repurchased for $226.5$241.3 million. As of June 30, 2011, $73.52013, $58.7 million remains outstanding under the approved stock repurchase program.


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CRITICAL ACCOUNTING POLICIES

        The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be spent on share repurchasesreasonable under this program.

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

        This annual report, 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 behalfcircumstances. Estimates are considered to be critical if they meet both of the Company contains or may contain "forward-looking statements" withinfollowing criteria: (1) the meaning of the federal securities laws, including statements concerning anticipated future events and expectationsestimate requires assumptions about material matters 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 judgmentuncertain at the time theythe accounting estimates are made, but alland (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 Consolidated Financial Statements.

        Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

Investment In and Loans to Affiliates

        The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable.

        During fiscal years 2013 and 2012, we recorded noncash impairments of $17.9 and $19.4 million related to our investment in EEG. Due to economic, regulatory and other factors, we may be required to take additional noncash impairment charges related to our investments and such statements are subjectnoncash impairments could be material to numerous risksour consolidated balance sheet 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," "forecast," "expect," "estimate," "anticipate," and "plan."operations. In addition, our joint venture partners may be required to take noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to our consolidated balance sheet and results of operations. Our share of EEG's goodwill balances as of June 30, 2013 is approximately $16 million.

Goodwill

        Goodwill is tested for impairment annually or at the following factors could affecttime of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.

        The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of 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, price sensitivity; changes in economic conditions; changes in consumer tastes and fashion trends; the ability of the Company to implement its planned spending and cost reduction plan and to continue to maintain compliance with financial covenants in its credit agreements; labor andestimated fair value calculations.


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benefit costs; legal claims; risk inherent to international development (including currency fluctuations);        In situations where a reporting unit's carrying value exceeds its estimated fair value, the continued abilityamount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value.

        No goodwill impairment charges were recorded during fiscal year 2013. We impaired $67.7 and $74.1 million of goodwill associated with our Regis and Promenade salon concepts during fiscal year 2012 and 2011, respectively.

        For the fiscal year 2013 annual impairment testing of goodwill, the estimated fair value of the Regis salon concept exceeded its respective carrying value by approximately 9.0 percent. As it is reasonably likely that there could be impairment of the Regis salon concept's goodwill in future periods along with the sensitivity of the Company's critical assumptions in estimating fair value of this reporting unit, the Company has provided additional information related to this reporting unit.

        A summary of the critical assumptions utilized during the fiscal year 2013 annual impairment test of the Regis salon concept are outlined below:

            Annual revenue growth.    Annual revenue growth is primarily driven by assumed same-store sales rates of approximately negative 2.0 to positive 3.0 percent. Other considerations include anticipated economic conditions and its franchisees to obtain suitable locations and financing formoderate new salon developmentgrowth.

            Gross margin.    Adjusted for anticipated salon closures, new salon construction estimated future gross margins were held constant.

            Fixed expense rates.    Fixed expense rate increases of approximately 1.0 to 2.0 percent based on anticipated inflation. Fixed expenses consisted of rent, site operating, and allocated general and administrative corporate overhead.

            Allocated corporate overhead.    Corporate overhead incurred by the home office based on the number of Regis company-owned salons as a percent of total company-owned salons.

            Long-term growth.    A long-term growth rate of 2.5 percent was applied to maintain satisfactory relationshipsterminal cash flow based on anticipated economic conditions and business plans.

            Discount rate.    A discount rate of 13.5 percent based on the weighted average cost of capital that equals the rate of return on debt capital and equity capital weighted in proportion to the capital structure common to the industry, risk adjusted for the Regis salon concept.

        The following table summarizes the approximate impact that a change in certain critical assumptions would have on the estimated fair value of our Regis salon concept goodwill balance (the approximate impact of the change in the critical assumptions assumes all other assumptions and factors remain constant):

Critical Assumptions
 Increase
(Decrease)
 Approximate
Decrease in
Fair Value
 
 
  
 (In thousands)
 

Discount Rate

  1.0%$4,500 

Same-Store Sales

  (1.0) 500 

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        The respective fair values of the Company's remaining reporting units exceeded fair value by greater than 20.0 percent at June 30, 2013. While the Company has determined the estimated fair values of Regis to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Regis may experience additional impairment in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Regis reporting unit is dependent on many factors and cannot be predicted with landlordscertainty.

        As of June 30, 2013, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.

        A summary of the Company's goodwill balance by reporting unit is as follows:

 
 June 30, 
Reporting Unit
 2013 2012 
 
 (Dollars in thousands)
 

Regis

 $34,953 $34,992 

MasterCuts

  4,652  4,652 

SmartStyle

  49,286  49,476 

Supercuts

  129,610  129,621 

Promenade

  242,384  243,538 
      

Total

 $460,885 $462,279 
      

Long-Lived Assets, Excluding Goodwill

        We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Our impairment analysis on salon property and equipment is performed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. The fair value estimate is based on the best information available, including market data.

        Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize material impairment charges.

        During fiscal years 2013, 2012 and 2011, $8.2, $6.6 and $6.5 million, respectively, of impairments were recorded within depreciation and amortization in the Consolidated Statement of Operations.


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Income Taxes

        Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. In the United States, after excluding certain deferred tax liabilities related to assets with indefinite lives, the Company has net deferred tax assets of approximately $56.3 million. Realization of deferred tax assets is ultimately dependent upon future taxable income. We assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for income taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable. Should the Company's present financial trends continue, it is reasonably possible that the Company could determine that a valuation allowance against the United States deferred tax assets will be required. We recognize a reserve for potential liabilities for anticipated tax audit issues in the United States and other licensorstax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to existing locations; governmental initiativesthe Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.

Contingencies

        We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such as minimum wage rates, taxescontingencies based on our assessment that the occurrence is probable and possible franchise legislation;can be reasonably estimated. Management considers many factors in making these assessments including past history and the abilityspecifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements.

        During fiscal year 2013, the Company to successfully identify, acquire and integrate salons that support its growth objectives;incurred $1.2 million of expense in conjunction with the ability ofderivative shareholder action. During fiscal year 2012, the Company to maintain satisfactory relationshipswas awarded $1.1 million in conjunction with suppliers; or other factors not listed above. The ability ofa class-action lawsuit. During fiscal year 2011, the Company to meet its expected revenue target 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 under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether assettled a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnishedlegal claim with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.former owner of Hair Club for $1.7 million.

Item 7A.    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 ofspecifically the revolving credit facility which bears interest at variable rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related to its net investments in its foreign subsidiaries and, to a lesser extent, changes in the Canadian dollar and British Pound exchange rate.rates. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. 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 in


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short-term interest rates. As part of this policy, the Company has historically maintained a combination of variable and fixed rate debt. Considering the effect of interest rate swaps and including no increases to long-term debt related to fair value swaps at June 30, 2011 and 2010, the Company had the following outstanding debt balances:

 
 As of June 30, 
 
 2011 2010 
 
 (Dollars in thousands)
 

Fixed rate debt

 $313,411 $395,029 

Variable rate debt

    45,000 
      

 $313,411 $440,029 
      

        The Company manages its interest rate risk by continually assessing the amount of fixed and variable 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.

In addition, access to variable rate debt is available through the Company has entered into the following financial instruments:

Interest Rate Swap Contracts:

Company's revolving credit facility. The Company managesreviews its policy and interest rate risk by balancingmanagement quarterly and makes adjustments in accordance with market conditions and the amountCompany's short and long-term borrowing needs. As of fixed andJune 30, 2013, the Company did not have any outstanding variable rate debt. On occasion, the Company uses interest rate swaps to further mitigate the risk associated with


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changing interest rates and to maintain its desired balances of fixed and variable rate debt. Generally, the terms of the interest rate swap agreements contain monthly and quarterly settlement dates baseddebt as there were no amounts outstanding on the notional amounts of the swap contracts.

Pay fixed rates, receive variable rates

        During the three months ended December 31, 2008, therevolving credit facility. The Company entered into two interest rate swap contracts that pay fixed rates of interest and receive variable rates of interest (based on the one-month LIBOR) on notional amounts of indebtedness of $20.0 million each, that had maturation dates in July 2011, respectively. These swaps were designated and were effective as cash flow hedges. These cash flow hedges were recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in deferred income taxes and other comprehensive income within shareholders' equity. These contracts were terminated during fiscal year 2011 in conjunction with the repayment of the $85.0 million term loan. The contracts were settled for an aggregate loss of $0.1 million recorded within interest expense in the Consolidated Statement of Operations during fiscal year 2011. Prior to the termination of the contracts, the Company paid fixed rates of interest of approximately 3.0 percent and 3.4 percent on their respective $20.0 million.

        During the three months ended December 31, 2005, the Company entered into interest rate swap contracts that pay fixed rates of interest and receive variable rates of interest (based on the three-month LIBOR) on notional amounts of indebtedness of $35.0 and $15.0 million, and mature in March 2013 and March 2015, respectively. These swaps were designated and were effective as cash flow hedges. These cash flow hedges were recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet, with a corresponding offset in other comprehensive income within shareholders' equity. These contracts were terminated during fiscal year 2010 in conjunction with the repayment of the private placement senior term notes as discussed in Note 9 to the Consolidated Financial Statements. The contracts were settled for an aggregate loss of $5.2 million recorded within interest expense in the Consolidated Statement of Operations during fiscal year 2010.

Tabular Presentation:

        The following table presents information about the Company's debt obligations and derivative financial instruments that are sensitive to changes in interest rates. Foroutstanding fixed rate debt obligations, the table presents principal amountsbalances of $174.8 and related weighted-average interest rates by fiscal year of maturity. For variable rate obligations, the table presents principal amounts and the weighted-average forward LIBOR interest rates as of$287.7 million at June 30, 2011 through2013 and June 30, 2016. For the Company's derivative financial instruments, the table presents notional amounts and weighted-average interest rates by2012, respectively.


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expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract.

 
  
  
  
  
  
  
 June 30, 2011 
 
 Expected maturity date as of June 30, 2011 
 
  
 Fair
Value
 
 
 2012 2013 2014 2015 2016 Thereafter Total 

Liabilities

                         

(U.S.$ equivalent in thousands)

                         

Long-term debt:

                         
 

Fixed rate (U.S.$)

 $32,252 $29,091 $178,200 $19,959 $18,195 $35,714 $313,411 $335,354 
  

Average interest rate

  8.4% 8.4% 5.5% 8.6% 8.5% 8.5% 6.7%   
 

Variable rate (U.S.$)

                 
  

Average interest rate

                         
                  

Total liabilities

 $32,252 $29,091 $178,200 $19,959 $18,195 $35,714 $313,411 $335,354 
                  

Interest rate derivatives

                         

(U.S.$ equivalent in thousands)

                         

Pay fixed/receive variable (U.S.$)

 $ $ $ $ $ $ $ $ 

Foreign Currency Exchange Risk:

        The majorityOver 85% 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 and British pound and Euro.pound. 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.income (AOCI). 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, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of June 30, 2011,2013, the Company has entered into the following financialdid not have any derivative instruments to manage its foreign currency exchange risk:

Hedge of the Net Investment in Foreign Subsidiaries:risk.

        The Company has numerous investments in foreign subsidiaries,During fiscal years 2013, 2012, and 2011 the net assets of these subsidiaries are exposed to exchange rate volatility. 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, the Company may engagegain (loss) included in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies.

        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 Consolidated Statement of Cash Flows. The related cumulative tax-effected net loss of $7.9 million was recorded in accumulated other comprehensive income (AOCI) in fiscal year 2007. This amount will remain deferred within AOCI indefinitely, as the event which would trigger its release from AOCI and recognition in earnings is the sale or liquidation of the Company's international operations that the cross-currency swap hedged. The Company currently has no intent to sell or liquidate this portion of its business operations.


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Forward Foreign Currency Contracts:

        The Company's exposure to foreign exchange risk includes risks related to fluctuations in the Canadian dollar relative to the U.S. dollar. The exposure to Canadian dollar exchange rates on the Company's fiscal year 2011 cash flows is primarily associated with certain forecasted intercompany transactions.

        The Company seeks to manage exposure to changes in the value of the Canadian dollar. In order to do so, the Company has entered into forward currency contracts from fiscal year 2007 to the first quarter of fiscal year 2012 in order to reduce the risk of significant negative impact on its U.S. dollar cash flows or income. The Company does not hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates on net income was $33.4, $0.4, and cash flows.($1.5) million, respectively. During fiscal year 2011, the2013, Company entered into several forwardrecognized a $33.8 million foreign currency contracts to sell Canadian dollarstranslation gain in connection with the sale of Provalliance and buy an aggregatesubsequent liquidation of $8.7 million U.S. dollars, respectively,all foreign entities with maturation dates between July 2011 and September 2012. The purpose of the forward contracts was to protect against adverse movements in the Canadian dollar exchange rate. The contracts were designated and were effective as cash flow hedges. They were recorded at fair value within other noncurrent liabilities or other current assets in the Consolidated Balance Sheet, with corresponding offsets primarily recorded in other comprehensive income (loss), net of tax. Forward currency contracts to sell Canadian dollars and buy $8.7 million U.S. dollars were outstanding as of June 30, 2011 to hedge intercompany transactions. See Note 9 to the Consolidated Financial Statements for further discussion.

        The Company uses freestanding derivative forward contracts to offset the Company's exposure to the change in fair value of certain foreign currencyEuro denominated intercompany assets and liabilities. These derivatives are not designated as hedges and therefore, changes in the fair value of these forward contracts are recognized currently in earnings thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.operations.

        In June 2011, the Company entered into a freestanding derivative forward contract to sell an aggregate $9.0 million U.S. dollars and buy Canadian dollars, with a maturation date in July 2011.

        The table below provides information about the Company's forecasted transactions in U.S. dollar equivalents. (The information is presented in U.S. dollars because that is the Company's reporting currency.) The table summarizes information on transactions that are sensitive to foreign currency exchange rates and the related foreign currency forward exchange agreements. For the foreign currency forward exchange agreements, the table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts are used to calculate the contractual payments to be exchanged under the contract.

 
 Expected Transaction date June 30,  
 
 
 June 30,
2011
Fair Value
 
 
 2012 2013 2014 2015 Total 

Forecasted Transactions

                   

(U.S.$ equivalent in thousands)

                   
 

Intercompany transactions with Canadian salons (U.S.$)

 $6,875 $1,804 $ $ $8,679 $(599)
 

Foreign currency denominated intercompany assets and liabilities (U.S.$)

  9,000        9,000   
              
 

Total contracts

 $15,875 $1,804 $ $ $17,679 $(599)
              
 

Average contractual exchange rate

  1.0129  0.9978        1.0114    

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Item 8.    Financial Statements and Supplementary Data

Index to Consolidated Financial Statements:

  

Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting

 7744

Report of Independent Registered Public Accounting Firm

 7845

Consolidated Balance Sheet as of June 30, 20112013 and 20102012

 7946

Consolidated Statement of Operations for each of the three years in the period ended June 30, 20112013

 8047

Consolidated Statements of Changes in Shareholders' Equity and Comprehensive (Loss) Income for each of the three years in the period ended June 30, 20112013

 48

Consolidated Statements of Shareholders' Equity for each of the three years in the period ended June 30, 2013

 8149

Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 20112013

 8250

Notes to Consolidated Financial Statements

 8351

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Management's Statement of Responsibility for Financial Statements and
Report on Internal Control over Financial Reporting

Financial Statements

        Management is responsible for preparation of the consolidated financial statements and other related financial information included in this annual report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, incorporating management's reasonable estimates and judgments, where applicable.

Management's Report on Internal Control over Financial Reporting

        This report is provided by management pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder. Management, including the presidentchief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing effectiveness of internal control over financial reporting.

        The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Management has assessed the Company's internal control over financial reporting as of June 30, 2011,2013, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment of the Company's internal control over financial reporting, management has concluded that, as of June 30, 2011,2013, the Company's internal control over financial reporting was effective.

        The Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company's internal control over financial reporting as of June 30, 2011,2013, as stated in their report which follows in Item 8 of this Form 10-K.


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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Regis Corporation:

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes incomprehensive income, shareholders' equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Regis Corporation and its subsidiaries at June 30, 20112013 and June 30, 2010,2012, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 20112013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2011,2013, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 26, 2011
27, 2013


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REGIS CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except per share data)



 June 30,  June 30, 


 2011 2010  2013 2012 

ASSETS

ASSETS

  

Current assets:

Current assets:

  

Cash and cash equivalents

 $200,488 $111,943 

Receivables, net

 33,062 28,954 

Inventories

 139,607 142,276 

Deferred income taxes

 24,145 14,503 

Income tax receivable

 33,346 14,098 

Other current assets

 57,898 55,903 

Current assets held for sale (Note 2)

  17,000 

Cash and cash equivalents

 $96,263 $151,871      

Receivables, net

 27,149 24,312 

Inventories

 150,804 153,380 

Deferred income taxes

 17,887 16,892 

Income tax receivable

 22,341 46,207 

Other current assets

 32,118 36,203 
     
 

Total current assets

 346,562 428,865 

Total current assets

 488,546 384,677 

Property and equipment, net

Property and equipment, net

 347,811 359,250  
313,460
 
305,799
 

Goodwill

Goodwill

 680,512 736,989  460,885 462,279 

Other intangibles, net

Other intangibles, net

 111,328 118,070  21,496 23,395 

Investment in and loans to affiliates

Investment in and loans to affiliates

 261,140 195,786  43,319 160,987 

Other assets

Other assets

 58,400 80,612  62,786 59,488 

Long-term assets held for sale (Note 2)

  175,221 
          
 

Total assets

 $1,805,753 $1,919,572 

Total assets

 $1,390,492 $1,571,846 
          

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES AND SHAREHOLDERS' EQUITY

  

Current liabilities:

Current liabilities:

  

Long-term debt, current portion

 $173,515 $28,937 

Accounts payable

 66,071 47,890 

Accrued expenses

 137,226 157,026 

Current liabilities related to assets held for sale (Note 2)

  18,120 

Long-term debt, current portion

 $32,252 $51,629      

Accounts payable

 55,107 57,683 

Accrued expenses

 167,321 160,797 
     
 

Total current liabilities

 254,680 270,109 

Total current liabilities

 376,812 251,973 

Long-term debt and capital lease obligations

Long-term debt and capital lease obligations

 281,159 388,400  
1,255
 
258,737
 

Other noncurrent liabilities

Other noncurrent liabilities

 237,295 247,770  155,011 143,972 

Long-term liabilities related to assets held for sale (Note 2)

  28,007 
          

Total liabilities

 533,078 682,689 
 

Total liabilities

 773,134 906,279      

Commitments and contingencies (Note 8)

 

Shareholders' equity:

 

Common stock, $0.05 par value; issued and outstanding, 56,630,926 and 57,415,241 common shares at June 30, 2013 and 2012, respectively

 2,832 2,871 

Additional paid-in capital

 334,266 346,943 

Accumulated other comprehensive income

 20,556 55,114 

Retained earnings

 499,760 484,229 
          

Commitments and contingencies (Note 10)

 

Shareholders' equity:

 

Total shareholders' equity

 857,414 889,157 

Common stock, $0.05 par value; issued and outstanding, 57,710,811 and 57,561,180 common shares at June 30, 2011 and 2010, respectively

 2,886 2,878      

Total liabilities and shareholders' equity

 $1,390,492 $1,571,846 

Additional paid-in capital

 341,190 332,372      

Accumulated other comprehensive income

 77,946 47,032 

Retained earnings

 610,597 631,011 
     
 

Total shareholders' equity

 1,032,619 1,013,293 
     
 

Total liabilities and shareholders' equity

 $1,805,753 $1,919,572 
     

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


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REGIS CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

 
 Years Ended June 30, 
 
 2011 2010 2009 

Revenues:

          
  

Service

 $1,762,974 $1,784,137 $1,833,958 
  

Product

  523,194  534,593  556,205 
  

Royalties and fees

  39,701  39,704  39,624 
        

  2,325,869  2,358,434  2,429,787 

Operating expenses:

          
  

Cost of service

  1,012,868  1,015,720  1,044,719 
  

Cost of product

  249,979  263,883  283,038 
  

Site operating expenses

  197,722  199,338  190,456 
  

General and administrative

  339,857  291,991  291,661 
  

Rent

  342,286  344,098  347,792 
  

Depreciation and amortization

  105,109  108,764  115,655 
  

Goodwill impairment

  74,100  35,277  41,661 
  

Lease termination costs

    2,145  5,732 
        
   

Total operating expenses

  2,321,921  2,261,216  2,320,714 
        
   

Operating income

  3,948  97,218  109,073 

Other income (expense):

          
 

Interest expense

  (34,388) (54,414) (39,768)
 

Interest income and other, net

  4,811  10,410  9,461 
        
   

(Loss) income from continuing operations before income taxes and equity in income (loss) of affiliated companies

  (25,629) 53,214  78,766 

Income taxes

  9,496  (25,577) (41,950)

Equity in income (loss) of affiliated companies, net of income taxes

  7,228  11,942  (29,846)
        
    

(Loss) income from continuing operations

  (8,905) 39,579  6,970 
        
    

Income (loss) from discontinued operations, net of taxes (Note 2)

    3,161  (131,436)
        
    

Net (loss) income

 $(8,905)$42,740 $(124,466)
        

Net (loss) income per share:

          
   

Basic:

          
   

(Loss) income from continuing operations

  (0.16) 0.71  0.16 
   

Income (loss) from discontinued operations

    0.06  (3.06)
        
   

Net (loss) income per share, basic(1)

 $(0.16)$0.77 $(2.90)
        
   

Diluted:

          
   

(Loss) income from continuing operations

  (0.16) 0.71  0.16 
   

Income (loss) from discontinued operations

    0.05  (3.05)
        
   

Net (loss) income per share, diluted(1)

 $(0.16)$0.75 $(2.89)
        

Weighted average common and common equivalent shares outstanding:

          
   

Basic

  56,704  55,806  42,897 
        
   

Diluted

  56,704  66,753  43,026 
        

Cash dividends declared per common share

 $0.20 $0.16 $0.16 
        

(1)
Total is a recalculation; line items calculated individually may not sum to total due to rounding.
 
 Fiscal Years 
 
 2013 2012 2011 

Revenues:

          

Service

 $1,563,890 $1,643,891 $1,695,424 

Product

  415,707  440,048  447,465 

Royalties and fees

  39,116  38,288  37,292 
        

  2,018,713  2,122,227  2,180,181 

Operating expenses:

          

Cost of service

  930,687  941,671  972,894 

Cost of product

  228,577  221,635  225,191 

Site operating expenses

  203,912  207,031  211,223 

General and administrative

  226,740  249,634  285,845 

Rent

  324,716  331,769  333,059 

Depreciation and amortization

  91,755  104,970  92,151 

Goodwill impairment

    67,684  74,100 
        

Total operating expenses

  2,006,387  2,124,394  2,194,463 
        

Operating income (loss)

  12,326  (2,167) (14,282)

Other income (expense):

          

Interest expense

  (37,594) (28,245) (34,374)

Interest income and other, net

  35,366  5,098  4,723 
        

Income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies           

  10,098  (25,314) (43,933)

Income taxes

  
10,024
  
4,430
  
16,333
 

Equity in (loss) income of affiliated companies, net of income taxes

  (15,956) (30,859) 6,661 
        

Income (loss) from continuing operations

  4,166  (51,743) (20,939)
        

Income (loss) from discontinued operations, net of taxes (Note 2)

  25,028  (62,350) 12,034 
        

Net income (loss)

 $29,194 $(114,093)$(8,905)
        

Net income (loss) income per share:

          

Basic:

          

Income (loss) from continuing operations

  0.07  (0.91) (0.37)

Income (loss) from discontinued operations

  0.44  (1.09) 0.21 
        

Net income (loss) per share, basic

 $0.51 $(2.00)$(0.16)
        

Diluted:

          

Income (loss) from continuing operations

  0.07  (0.91) (0.37)

Income (loss) from discontinued operations

  0.44  (1.09) 0.21 
        

Net income (loss) per share, diluted

 $0.51 $(2.00)$(0.16)
        

Weighted average common and common equivalent shares outstanding:

          

Basic

  56,704  57,137  56,704 
        

Diluted

  56,846  57,137  56,704 
        

Cash dividends declared per common share

 $0.24 $0.24 $0.20 
        

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


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REGIS CORPORATION

CONSOLIDATED STATEMENT OF CHANGESCOMPREHENSIVE (LOSS) INCOME

IN(Dollars in thousands)

 
 Fiscal Years 
 
 2013 2012 2011 

Net income (loss)

 $29,194 $(114,093)$(8,905)

Other comprehensive loss:

          

Foreign currency translation adjustments:

          

Foreign currency translation adjustments during the period

  (1,349) (24,254) 30,405 

Reclassification adjustments for gains included in net income (loss)          

  (33,842)    
        

Net current period foreign currency translation adjustments

  (35,191) (24,254) 30,405 
        

Recognition of deferred compensation and other, net of tax expense of $411, $644, and $232, respectively

  656  1,029  377 

Change in fair market value of financial instruments designated as cash flow hedges, net of tax (benefit) expense of $(12), $210 and $86, respectively

  (23) 393  132 
        

Other comprehensive (loss) income

  (34,558) (22,832) 30,914 
        

Comprehensive (loss) income

 $(5,364)$(136,925)$22,009 
        

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


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REGIS CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share data)

 
 Common Stock  
 Accumulated
Other
Comprehensive
Income
  
  
  
 
 
 Additional
Paid-In
Capital
 Retained
Earnings
  
 Comprehensive
Income
 
 
 Shares Amount Total 

Balance, June 30, 2008

  43,070,927 $2,153 $143,265 $101,973 $728,795 $976,186 $108,899 

Net loss

              (124,466) (124,466) (124,466)

Foreign currency translation adjustments

           (47,666)    (47,666) (47,666)

Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes

           (2,112)    (2,112) (2,112)

Proceeds from exercise of stock options

  234,523  12  3,882        3,894    

Stock-based compensation

        7,525        7,525    

Shares issued through franchise stock incentive program

  13,808    378        378    

Recognition of deferred compensation and other, net of taxes (Note 14)

           (340)    (340) (340)

Tax benefit realized upon exercise of stock options

        712        712    

Issuance of restricted stock

  617,550  31  (31)           

Restricted stock forfeitures

  (28,119) (1) 1            

Taxes related to restricted stock

  (27,325) (1) (490)       (491)   

Dividends

              (6,912) (6,912)   

Equity issuance costs

        (243)       (243)   

Adjustment to stock option tax benefit

        (3,605)       (3,605)   
                

Balance, June 30, 2009

  43,881,364  2,194  151,394  51,855  597,417  802,860  (174,584)
                      

Net income

              42,740  42,740  42,740 

Foreign currency translation adjustments

           (5,416)    (5,416) (5,416)

Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes

           2,467     2,467  2,467 

Issuance of common stock

  13,225,000  661  162,932        163,593    

Equity component of convertible debt, net of taxes

        15,245        15,245    

Proceeds from exercise of stock options

  202,700  10  3,055        3,065    

Stock-based compensation

        9,337        9,337    

Shares issued through franchise stock incentive program

  16,053  1  290        291    

Recognition of deferred compensation and other, net of taxes (Note 14)

           (1,874)    (1,874) (1,874)

Tax benefit realized upon exercise of stock options

        262        262    

Issuance of restricted stock

  304,200  15  (15)           

Restricted stock forfeitures

  (1,976)               

Taxes related to restricted stock

  (66,161) (3) (1,710)       (1,713)   

Dividends

              (9,146) (9,146)   

Equity issuance costs

        (8,154)       (8,154)   

Adjustment to stock option tax benefit

        (264)       (264)   
                

Balance, June 30, 2010

  57,561,180  2,878  332,372  47,032  631,011  1,013,293  37,917 
                      

Net loss

              (8,905) (8,905) (8,905)

Foreign currency translation adjustments

           30,405     30,405  30,405 

Changes in fair market value of financial instruments designated as cash flow hedges, net of taxes

           132     132  132 

Proceeds from exercise of stock options

  45,933  2  680        682    

Stock-based compensation

        9,596        9,596    

Shares issued through franchise stock incentive program

  24,472  1  397        398    

Recognition of deferred compensation and other, net of taxes (Note 14)

           377     377  377 

Tax benefit realized upon exercise of stock options

        67        67    

Issuance of restricted stock

  277,300  14  (14)           

Restricted stock forfeitures

  (121,343) (6) 6            

Taxes related to restricted stock

  (76,731) (3) (1,787)       (1,790)   

Vested stock option expirations

        (127)       (127)   

Dividends

              (11,509) (11,509)   
                

Balance, June 30, 2011

  57,710,811 $2,886 $341,190 $77,946 $610,597 $1,032,619 $22,009 
                
 
 Common Stock  
 Accumulated
Other
Comprehensive
Income
  
  
 
 
 Additional
Paid-In
Capital
 Retained
Earnings
  
 
 
 Shares Amount Total 

Balance, June 30, 2010

  57,561,180 $2,878 $332,372 $47,032 $631,011 $1,013,293 

Net loss

              (8,905) (8,905)

Foreign currency translation adjustments

           30,405     30,405 

Proceeds from exercise of SARs & stock options

  45,933  2  680        682 

Stock-based compensation

        9,596        9,596 

Shares issued through franchise stock incentive program

  24,472  1  397        398 

Recognition of deferred compensation and other, net of taxes (Note 10)

           509     509 

Tax benefit realized upon exercise of stock options

        67        67 

Net restricted stock activity

  79,226  5  (1,795)       (1,790)

Vested stock option expirations

        (127)       (127)

Dividends

              (11,509) (11,509)
              

Balance, June 30, 2011

  57,710,811  2,886  341,190  77,946  610,597  1,032,619 

Net loss

              (114,093) (114,093)

Foreign currency translation adjustments

           (24,254)    (24,254)

Proceeds from exercise of SARs& stock options

  60             

Stock-based compensation

        7,597        7,597 

Shares issued through franchise stock incentive program

  18,844  1  305        306 

Recognition of deferred compensation and other, net of taxes (Note 10)

           1,422     1,422 

Net restricted stock activity

  (314,474) (16) (1,426)       (1,442)

Vested stock option expirations

        (723)       (723)

Cumulative minority interest (Note 1)

              1,580  1,580 

Dividends

              (13,855) (13,855)
              

Balance, June 30, 2012

  57,415,241  2,871  346,943  55,114  484,229  889,157 

Net income

              29,194  29,194 

Foreign currency translation adjustments

           (35,191)    (35,191)

Stock repurchase plan

  (909,175) (45) (14,823)       (14,868)

Proceeds from exercise of SARs & stock options

  3,051    41        41 

Stock-based compensation

        5,881        5,881 

Shares issued through franchise stock incentive program

  19,583  1  356        357 

Recognition of deferred compensation and other, net of taxes (Note 10)

           633     633 

Net restricted stock activity

  102,226  5  (2,728)       (2,723)

Vested stock option expirations

        (1,404)       (1,404)

Minority interest (Note 1)

              45  45 

Dividends

              (13,708) (13,708)
              

Balance, June 30, 2013

  56,630,926 $2,832 $334,266 $20,556 $499,760 $857,414 
              

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


Table of Contents


REGIS CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(InDollars in thousands)

 
 Fiscal Years 
 
 2013 2012 2011 

Cash flows from operating activities:

          

Net income (loss)

 $29,194 $(114,093)$(8,905)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

  84,018  111,435  98,428 

Equity in loss (income) of affiliated companies

  15,328  30,043  (7,228)

Dividends received from affiliated companies

  1,095  4,047  10,023 

Deferred income taxes

  10,322  (14,171) (14,711)

Accumulated other comprehensive income reclassification adjustments (Note 5)

  (33,842)    

Gain on from sale of discontinued operations

  (17,827)    

Loss on write down of inventories

  12,557     

Goodwill impairment

    146,110  74,100 

Salon asset impairments

  8,224  6,636  6,681 

Note receivable bad debt (recovery) expense

  (333) (805) 31,227 

Stock-based compensation

  5,881  7,597  9,596 

Amortization of debt discount and financing costs

  7,346  6,696  6,469 

Other noncash items affecting earnings

  394  31  1,511 

Changes in operating assets and liabilities(1):

          

Receivables

  (4,332) (4,502) (2,358)

Inventories

  (10,745) 2,644  4,629 

Income tax receivable

  (23,421) 2,809  23,855 

Other current assets

  (8,064) (5,272) 4,725 

Other assets

  239  (841) (11,050)

Accounts payable

  19,086  (4,856) (2,973)

Accrued expenses

  (26,431) (8,657) 3,341 

Other noncurrent liabilities

  459  (11,151) 1,818 
        

Net cash provided by operating activities

  69,148  153,700  229,178 
        

Cash flows from investing activities:

          

Capital expenditures

  (105,857) (85,769) (71,469)

Proceeds from sale of assets

  163,916  502  626 

Asset acquisitions, net of cash acquired

    (2,587) (17,990)

Proceeds from loans and investments

  131,581  11,995  16,804 

Disbursements for loans and investments

    (15,000) (72,301)

Change in restricted cash

  (24,500)    
        

Net cash provided by (used in) investing activities

  165,140  (90,859) (144,330)
        

Cash flows from financing activities:

          

Borrowings on revolving credit facilities

  5,200  471,500   

Payments on revolving credit facilities

  (5,200) (471,500)  

Repayments of long-term debt and capital lease obligations

  (118,223) (29,693) (137,671)

Repurchase of common stock

  (14,868)    

Proceeds from issuance of common stock

      749 

Dividends paid

  (13,708) (13,855) (11,509)
        

Net cash used in financing activities

  (146,799) (43,548) (148,431)
        

Effect of exchange rate changes on cash and cash equivalents

  1,056  (3,613) 7,975 
        

Increase (decrease) in cash and cash equivalents

  88,545  15,680  (55,608)

Cash and cash equivalents:

          

Beginning of year

  111,943  96,263  151,871 
        

End of year

 $200,488 $111,943 $96,263 
        

 
 Years Ended June 30, 
 
 2011 2010 2009 

Cash flows from operating activities:

          
 

Net (loss) income

 $(8,905)$42,740 $(124,466)
 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

          
  

Depreciation

  88,602  92,466  105,145 
  

Amortization

  9,826  9,870  9,871 
  

Equity in (income) loss of affiliated companies

  (7,228) (11,942) 28,940 
  

Dividends received from affiliated companies

  10,023  2,404  906 
  

Deferred income taxes

  (14,711) 5,115  (3,843)
  

Impairment on discontinued operations

    (154) 183,289 
  

Goodwill impairment

  74,100  35,277  41,661 
  

Salon asset impairments

  6,681  6,428  10,201 
  

Note receivable bad debt expense

  31,227     
  

Excess tax benefits from stock-based compensation plans

  (67) (243) (163)
  

Stock-based compensation

  9,596  9,337  7,525 
  

Amortization of debt discount and financing costs

  6,469  6,406   
  

Other noncash items affecting earnings

  1,578  (3,153) (3,405)
  

Changes in operating assets and liabilities(1):

          
    

Receivables

  (2,358) 1,192  (12,104)
    

Inventories

  4,629  4,823  7,128 
    

Income tax receivable

  23,855  957  (34,652)
    

Other current assets

  4,725  2,657  (52)
    

Other assets

  (11,050) (14,951) (1,327)
    

Accounts payable

  (2,973) (4,966) (3,613)
    

Accrued expenses

  3,341  6,006  (23,364)
    

Other noncurrent liabilities

  1,818  1,954  387 
        
   

Net cash provided by operating activities

  229,178  192,223  188,064 
        

Cash flows from investing activities:

          
 

Capital expenditures

  (71,469) (57,821) (73,574)
 

Proceeds from sale of assets

  626  70  77 
 

Asset acquisitions, net of cash acquired and certain obligations assumed

  (17,990) (3,664) (40,051)
 

Proceeds from loans and investments

  16,804  16,099  19,008 
 

Disbursements for loans and investments

  (72,301)   (20,971)
 

Freestanding derivative settlement

    736   
        
   

Net cash used in investing activities

  (144,330) (44,580) (115,511)
        

Cash flows from financing activities:

          
 

Borrowings on revolving credit facilities

    337,000  6,391,100 
 

Payments on revolving credit facilities

    (342,000) (6,525,200)
 

Proceeds from issuance of long-term debt, net of $5.2 million underwriting discount

    167,325  85,000 
 

Repayments of long-term debt and capital lease obligations

  (137,671) (349,175) (92,504)
 

Excess tax benefits from stock-based compensation plans

  67  243  163 
 

Proceeds from issuance of common stock, net of $7.2 million underwriting discount

  682  159,498  3,894 
 

Dividends paid

  (11,509) (9,146) (6,912)
 

Other

    (2,878) (3,848)
        
   

Net cash used in financing activities

  (148,431) (39,133) (148,307)
        

Effect of exchange rate changes on cash and cash equivalents

  7,975  823  (9,335)
        

(Decrease) increase in cash and cash equivalents

  (55,608) 109,333  (85,089)

Cash and cash equivalents:

          
 

Beginning of year

  151,871  42,538  127,627 
        
 

End of year

 $96,263 $151,871 $42,538 
        

(1)
Changes in operating assets and liabilities exclude assets acquired and liabilities assumed through acquisitionsacquisitions.

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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description:

        Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States (U.S.), the United Kingdom (U.K.), Canada and Puerto Rico and several other countries. In addition, the Company owns and operates hair restoration centers in the U.S. and Canada.Rico. Substantially all of the hairstyling and hair care salons owned and operated by the Company in the U.S., Canada and Puerto Rico are located in leased space in enclosed mall shopping centers, strip shopping centers or Walmart Supercenters. FranchiseFranchised salons throughout the U.S. are primarily located in strip shopping centers. The company-ownedCompany-owned salons in the U.K. are owned and operated in malls, leading department stores, mass merchants and high-street locations. The hair restoration centers, including both company-owned

        Based on the way the Company manages its business, it has two reportable segments: North American and franchise locations, are typically located in leased space within office buildings. The Company maintains ownership interest in salons, beauty schools and hair restoration centers through equity-method investments.international salons.

Consolidation:

        The Consolidated Financial Statements include the accounts of the Company and allits subsidiaries after the elimination of its wholly-owned subsidiaries. In consolidation, all intercompany accounts and transactionstransactions. All material subsidiaries are eliminated.wholly owned. The Company consolidated variable interest entities where it has determined it is the primary beneficiary of those entities' operations.

Variable Interest Entities:

        The Company has or has had interests in certain privately held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entity (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders, and the risk and benefits of the VIE.

        As of June 30, 2013, the Company has one VIE, Roosters, where the Company is the primary beneficiary. The Company owns a 60.0% ownership interest in Roosters. As of June 30, 2013, total assets, total liabilities, and total shareholders' equity of Roosters were $6.2, $2.1, and $4.1 million, respectively. Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2013 and 2012. Shareholders' equity attributable to the non-controlling interest in Roosters was $1.6 million as of June 30, 2013 and 2012, and recorded within retained earnings on the Consolidated Balance Sheet.

Reclassifications:

        Beginning in the first quarter of fiscal year 2013, salon marketing and advertising expenses that were presented within cost of service and general and administrative operating expense line items in prior filings were reclassified to site operating expenses within the Consolidated Statement of Operations. Reclassifications were made to better present how management of the Company views the respective salon marketing and advertising expenses. Prior period amounts have been reclassified to


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

conform to the current year presentation. These reclassifications had no impact on operating income, net income or cash flows from operations. The tables below presents the impact of the reclassification:

 
 Fiscal Year 2012 
 
 Prior
Presentation(1)
 Reclassification As Presented 
 
 (Dollars in thousands)
 

Cost of service

 $942,461 $(790)$941,671 

Site operating expenses

  192,246  14,785  207,031 

General and administrative

  263,629  (13,995) 249,634 


 
 Fiscal Year 2011 
 
 Prior Presentation(1) Reclassification As Presented 
 
 (Dollars in thousands)
 

Cost of service

 $973,739 $(845)$972,894 

Site operating expenses

  193,404  17,819  211,223 

General and administrative

  302,819  (16,974) 285,845 

(1)
Excludes amounts related to discontinued operations. See Note 2 to the Consolidated Statement of Operations.

        In addition, expenses associated with our distribution centers were reclassified from Corporate to North America reportable segment. Reclassifications were made to better present how management of the Company views the respective distribution centers expenses. This reclassification had no impact on our Consolidated Statement of Operations and Consolidated Statement of Cash Flows. Prior period amounts have been reclassified to conform to the current year presentation. The table below presents the impact of the reclassification of depreciation and amortization expenses and operating income (loss) between the Company's Corporate and North America reportable segments:

 
 Fiscal Year 2012 
 
 North America Unallocated Corporate 
 
 Prior
Presentation
 Reclassification As
Presented(2)
 Prior
Presentation(1)
 Reclassification As
Presented(2)
 
 
 (Dollars in thousands)
 

Depreciation and amortization

 $68,983 $2,270 $71,253 $30,690 $(2,270)$28,420 

Operating income (loss)

  165,368  (25,394) 139,974  (170,040) 25,394  (144,646)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


 
 Fiscal Year 2011 
 
 North America Unallocated Corporate 
 
 Prior
Presentation
 Reclassification As
Presented(2)
 Prior
Presentation
 Reclassification As
Presented(2)
 
 
 (Dollars in thousands)
 

Depreciation and amortization

 $69,763 $2,444 $72,207 $17,638 $(2,444)$15,194 

Operating income (loss)

  166,683  (26,726) 139,957  (187,703) 26,726  (160,977)

(1)
Excludes amounts related to discontinued operations. See Note 2 to the Consolidated Statement of Operations.

(2)
See Note 14 to the Consolidated Statement of Operations for presentation of segment information.

Use of Estimates:

        The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the U.S.United States of America (GAAP) 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. Actual results could differ from those estimates.

Foreign Currency Translation:

        Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. The different exchange rates from period to period impact the amount of reported income from the Company's international operations.

Cash and Cash Equivalents:

        Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 20112013 and 2010.2012.

        The Company has restricted cash primarily related to contractual obligations to collateralize its self-insurance program. The restricted cash arrangement can be cancelled by the Company at any time if substituted with letters of credit. The restricted cash balance is classified within other current assets on the Consolidated Balance Sheet.

Receivables and Allowance for Doubtful Accounts:

        The receivable balance on the Company's Consolidated Balance Sheet primarily includes credit card receivables and accounts and notes receivable from franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Receivables and Allowance for Doubtful Accounts:

        The receivable balance on the Company's Consolidated Balance Sheet primarily include accounts and notes receivable from franchisees and credit card receivables. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to the receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes its franchisees are unable to make their required payments based on factors such as delinquencies and aging trends.        The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables.

        The following table summarizes the activity in As of June 30, 2013, and 2012 the allowance for doubtful accounts:

 
 For the Years Ended June 30, 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Beginning balance

 $3,170 $2,382 $1,515 

Bad debt expense

  853  1,040  1,089 

Write-offs

  (2,549) (252) (225)

Other (primarily the impact of foreign currency fluctuations)

  8    3 
        

Ending balance

 $1,482 $3,170 $2,382 
        

Note Receivables, Net:

        The note receivable balances within the Company's Consolidated Balance Sheet primarily include a note receivable with the purchaser of Trade Secretaccounts was $0.6 and a note receivable related to the Company's investment in MY Style. The balances are presented net of a valuation reserve for expected losses. The Company monitors the financial condition of its counterparties with an outstanding note receivable and records provisions for estimated losses on receivables when it believes the counterparties are unable to make their required payments. The valuation reserve is the Company's best estimate of the amount of probable credit losses related to existing notes receivable. See discussion of the note receivable with the purchaser of Trade Secret and the note receivable related to the Company's investment in MY Style within Notes 2 and 6, respectively, to the Consolidated Financial Statements.$0.7 million, respectively.

Inventories:

        Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis.

        Physical inventory counts are performed semi-annually.annually. Product and service inventories are adjusted based on the results of the physical inventory counts. Between the physical inventory counts, cost of retail product sold to salon customersguests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor, and the cost of product used in salon services


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


is determined by applying estimated gross profit marginspercentage of total cost of service and product to service revenues. The estimated gross profit marginspercentage related to service inventories are updated semi-annuallyquarterly based on the results of the physical inventorycycle counts and other factors that could impact the Company's margin rate estimates such as mix of service sales, discounting and special promotions. Actual results for the estimated gross margin percentage as compared to the semi-annualquarterly estimates have not historically resulted in material adjustments to our Statement of Operations.

        The Company has inventory valuation reserves for excess, obsolescence or other factors that may render inventories unmarketable at their historical costs. Estimates of the future demand for the Company's inventory and anticipated changes in formulas and packaging are some of the other factors used by management in assessing the net realizable value of inventories. During fiscal year 2013, the Company recorded an inventory reserve of $12.6 million associated with standardizing plan-o-grams and eliminating retail products and consolidating its four private label brands to one.

Property and Equipment:

        Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization of property and equipment areis computed onusing the straight-line method over their estimated useful asset lives (30 to 39 years for buildings, 10 years for improvements and three to ten years for equipment, furniture and software). Depreciation expense was $88.6, $92.5,$81.8, $96.4, and $105.1$83.5 million in fiscal years 2013, 2012, and 2011, 2010, and 2009, respectively. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term, generally ten years. For leases with renewal periods at the Company's option, management may determine at the inception of the lease that renewal is reasonably assured if failure to exercise a renewal option imposes an economic penalty to the Company. In such cases, the Company will include the renewal option period along with the original lease term in the determination of appropriate estimated useful lives.

        The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. At June 30, 2011 and 2010, the net book value of capitalized software costs was $34.1 and $35.2 million, respectively. Amortization expense related to capitalized software was $8.4, $8.5,$6.8, $22.3, and $9.1$8.4 million in fiscal years 2011, 2010,2013, 2012, and 2009,2011, respectively, which has been determined based on an estimated useful life oflives ranging from five orto seven years.

        Historically, because of the Company's large size and scale requirements it has been necessary for the Company to internally develop and support its own proprietary POS information system. The Company has recently identifiedimplemented a third party POS alternative that has a system that meets our current and enhanced functionality requirements and will cost significantly less to implement and support. Due to the Company's plan to replace the POSpoint-of-sale (POS) information system the Company reviewed the capitalized software carrying value for impairment at June 30, 2011. As a result of the Company's long-lived asset impairment testing at June 30, 2011 for this grouping of assets, no impairment charges were recorded.in fiscal year 2013. The Company has reassessed and adjusted the useful liferecorded $16.2 million of the capitalized software as the POS alternative is expected be implementedaccelerated amortization expense in salons during the first half of fiscal year 2012. The Company expects to fully amortize the net balance of the existing POS information system, approximately $20 million at June 30, 2011, during fiscal year 2012 associated with a previously developed POS system that became fully depreciated as locations using the Company's existing POS information system move to a third party POS alternative.of June 30, 2012.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment In and Loans to Affiliates:Long-Lived Asset Impairment Assessments, Excluding Goodwill:

        The Company has equity investmentsassessed the impairment of long-lived assets when events or changes in securities of certain privately held entities. The Company accounts for these investments undercircumstances indicate that the equity method of accounting. The Company also has loans receivable from certain of these entities. Investments accounted for under the equity method are recorded at the amountcarrying value of the Company's investment and adjusted each period for the Company's share of the investee's income or loss. Investments are reviewed for changes in circumstanceassets or the occurrence of events that suggest the Company's investmentasset grouping may not be recoverable. During fiscal year 2011, we recordedThe Company's impairment analysis on salon property and equipment is performed on a salon by salon basis. The Company's test for impairment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Factors considered in deciding when to perform an impairment review include significant under-performance of $9.2 million relatedan individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our investment in MY Style. During fiscal year 2009, we recorded impairments of $25.7 and $7.8 million ($4.8 million net of tax) related to our investment in Provalliance and investment in and loans to Intelligent Nutrients, LLC, respectively.

Self Insurance Accruals:

        The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimateuse of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.

        The workers' compensation, general liability and employment practice liability analysis includes applying loss development factors to the Company's historical claims data (total paid and incurred amounts per claim) for all policy years where the Company has not reached its aggregate limits to project the future development of incurred claims. The workers' compensation analysisassets. Impairment is performed for three models; California, Texas and all other states. A variety of accepted actuarial methodologies are followed to determine these liabilities, including several methods to predict the loss development factors for each policy period. These liabilities are determined by modeling the frequency (number of claims) and severity (cost of claims), fitting statistical distributions to the experience, and then running simulations. A similar analysis is performed for both general liability and employment practices liability; however, it is a single model for all liability claims rather than the three separate models used for workers' compensation.

        The health insurance analysis utilizes trailing twelve months of paid and 24 months of incurred medical and prescription claims to project the amount of incurred but not yet reported claims liability amount. The lag factors are developedevaluated based on the Company's specific claim data utilizing a completion factor methodology.sum of undiscounted estimated future cash flows expected to result from use of the related salon assets that does not recover the carrying value of the salon assets. The developed factor, expressed as a percentage of paid claims,fair value estimate is applied to the trailing twelve months of paid claims to calculate the estimated liability amount. The calculated liability amount is reviewed for reasonableness based on reserve adequacy ranges for historical periodsthe best information available, including market data.

        Judgments made by testing prior reserve levels against actual expenses to date.

        Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self insurance accruals could be affected if future claims experience differs significantly from the historical trends and actuarial assumptions. For fiscal year 2011, the Company recorded an increase in expense from changes in estimates related to prior year open policy periods related to continuing operations of $1.4 million. For fiscal years 2010 and 2009, the Company recorded decreases in expense from changes in estimates related to prior year open policy periods related to continuing operations of $1.7 and $9.9 million, respectively. A 10.0 percent change in the self-insurance reserve would affect (loss) income from continuing operations before income taxes and equity in income (loss) of affiliated companies by $4.6, $4.5, and $4.0 million for the three years ended June 30, 2011, 2010 and 2009,


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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respectively. The Company updates loss projections twice each year and adjusts its recorded liability to reflect the current projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.

        As the workers' compensation accrual is the majority of the self insurance accrual, below is a rollforward of the activity within the Company's workers' compensation self insurance accrual:

 
 For the Years Ended June 30, 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Beginning balance

 $30,082 $31,505 $35,123 

Provision for incurred losses

  13,993  14,739  14,676 

Prior year actuarial loss development

  2,231  35  (7,715)

Claim payments

  (12,584) (14,867) (12,145)

Other, net

  (728) (1,330) 1,566 
        

Ending balance

 $32,994 $30,082 $31,505 
        

        As of June 30, 2011, the Company had $14.7 and $30.9 million recorded in current liabilities and non-current liabilities, respectively,management related to the Company's self insurance accruals which includesexpected useful lives of long-lived assets and the workers' compensation self insurance accrual.ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of June 30, 2010,long-lived assets are assessed, these factors could cause us to realize material impairment charges.

        During fiscal years 2013, 2012 and 2011, $8.2, $6.6 and $6.5 million, respectively, of impairments were recorded within depreciation and amortization in the Company had $18.4 and $26.5 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's self insurance accruals which includes the workers' compensation self insurance accrual.Consolidated Statement of Operations.

Goodwill:

        Goodwill is tested for impairment annually or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons.

        The Company calculates the estimated fair value of the reporting units based on discounted future cash flows that utilize estimates in annual revenue, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. The Company's estimated future cash flows also take into consideration acquisition integrationvalue, and maturation.a discount rate based on the weighted average cost of capital. Where available and as appropriate, comparative market multiples are used to corroboratein conjunction with the results of the discounted cash flow.flows. The Company considers its various concepts to be reporting units when testing for goodwill impairment because that is where the Company believes the goodwill resides. The Company periodically engages third-party valuation consultants to assist in evaluation of the Company's estimated fair value calculations.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        In the situations where a reporting unit's carrying value exceeds its estimated fair value, the amount of the impairment loss must be measured. The measurement of impairment is calculated by determining the implied fair value of a reporting unit's goodwill. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all other assets and liabilities of that unit


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


based on the relative fair values under the assumption of a taxable transaction. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The goodwill impairment is measured as the excess of the carrying value of goodwill over its implied fair value.

        As a result ofFor the Company'sfiscal year 2013 annual impairment testing of goodwill, during the third quarter of fiscal year 2011, a $74.1 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of the goodwill for the Promenade salon concept. The Promenade salon concept reported same-store sales results of negative 3.3 percent for the three months ended March 31, 2011, which was unfavorable compared to the Company's budgeted same-store sales. As visitation patterns have not been rebounding as quickly as the Company had originally projected for fiscal year 2011, the Company reduced the budgeted financial projections for fiscal year 2012. The projections assume that the Promenade salon concept remains a strong viable business but will have a slow recovery. As a result of the lowered projections, the estimated fair value of the Promenade salon concept decreased to a level below the Promenade salon concept's carrying value.

        The estimated fair values of the Hair Restoration Centers reporting unit and Regis salon concept reporting unit exceeded the respective carrying valuesvalue by approximately 9.0 and 18.0 percent, respectively.percent. The respective fair values of the Company's remaining reporting units exceeded faircarrying value by greater than 20.0 percent.percent at June 30, 2013. While the Company has determined the estimated fair valuesvalue of Promenade, Hair Restoration Centers, and Regis to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade, Hair Restoration Centers, and Regis may become impairedexperience additional impairment in future periods. The term "reasonably likely" refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of the reportable segment are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Promenade and Regis salon concepts and Hair Restoration Centers goodwillconcept reporting unit is dependent on many factors and cannot be predicted with certainty.

        Historically, goodwill was tested annually for impairment during the third quarter, as of February 28, of each fiscal year. Effective in the fourth quarter of fiscal year 2011, the Company adopted a new accounting policy whereby the annual impairment review of goodwill will be performed during the fourth quarter, as of April 30 instead of the third quarter of each fiscal year. The change in the annual goodwill impairment testing date was made to better align the annual goodwill impairment test with the timing of the Company's annual budgeting process. The change in accounting principle does not delay, accelerate or avoid an impairment charge. Accordingly, the Company believes that the accounting change described above is preferable under the circumstances. As a result of the Company's annual impairment testing of goodwill during the fourth quarter of fiscal year 2011, no impairment charges were recorded.

As of June 30, 2011,2013, the Company's estimated fair value, as determined by the sum of our reporting units' fair value reconciled to within a reasonable range of our market capitalization which included an assumed control premium.

        A summary of the Company's goodwill balance by reporting unit is as follows:

 
 June 30, 
Reporting Unit
 2013 2012 
 
 (Dollars in thousands)
 

Regis

 $34,953 $34,992 

MasterCuts

  4,652  4,652 

SmartStyle

  49,286  49,476 

Supercuts

  129,610  129,621 

Promenade

  242,384  243,538 
      

Total

 $460,885 $462,279 
      

        No goodwill impairment charges were recorded during fiscal year 2013. As a result of the goodwill impairment analyses performed in fiscal years 2012 and 2011, the Company recorded $67.7 and $74.1 million, respectively, of impairment charges within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept in fiscal year 2012 and the Promenade salon concept in fiscal year 2011.


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        A summary of the Company's goodwill balance as of June 30, 2011Investment In and 2010 by reporting unit is as follows:

Reporting Unit
 As of June 30,
2011
 As of June 30,
2010
 
 
 (Dollars in thousands)
 

Regis

 $103,761 $102,180 

MasterCuts

  4,652  4,652 

SmartStyle

  48,916  48,280 

Supercuts

  129,477  121,693 

Promenade

  240,910  309,804 
      

Total North America Salons

  527,716  586,609 

Hair Restoration Centers

  152,796  150,380 
      

Consolidated Goodwill

 $680,512 $736,989 
      

        As a result of the Company's annual impairment analysis of goodwill during the third quarter of fiscal year 2010, a $35.3 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept.

        As a result of the Company's interim impairment test of goodwill during the three months ended December 31, 2008, a $41.7 million impairment charge for the full carrying amount of goodwill within the salon concepts in the United Kingdom was recorded within continuing operations. The recent performance challenges of the international salon operations indicated that the estimated fair value was less than the current carrying of this reporting unit's net assets, including goodwill.

Long-Lived Asset Impairment Assessments, Excluding Goodwill:Loans to Affiliates:

        The Company reviews long-lived assetshas equity investments in securities of certain privately held entities. The Company accounts for impairmentthese investments under the equity or cost method of accounting. Investments accounted for under the equity method are recorded at the salon level annuallyamount of the Company's investment and adjusted each period for the Company's share of the investee's income or ifloss. Investments are reviewed for changes in circumstance or the occurrence of events or circumstances indicate that suggest the carrying value of such assetsCompany's investment may not be recoverable. See further discussion within Note 5 to the Consolidated Financial Statements.

Self-Insurance Accruals:

The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's test for impairment of property and equipment is performed at a salon level as this is the lowest level for which identifiable cash flows are largely independentestimate of the cash flowsundiscounted ultimate cost of other groupsuninsured claims incurred as of assets and liabilities. Impairment is evaluatedthe balance sheet date.

        The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors, and severity factors.

        Although the sum of undiscounted estimated future cash flows expected to result from use of the assets thatCompany does not recoverexpect the carrying valueamounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2013, 2012 and 2011, the Company recorded (decreases) increases in expense from changes in estimates related to prior year open policy periods of ($1.1), $0.9 and $1.4 million, respectively. A 10.0% change in the related salon assets. Whenself-insurance reserve would affect income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies by $4.7, $4.8 and $4.6 million for fiscal years 2013, 2012 and 2011, respectively. The Company updates loss projections twice each year and adjusts its recorded liability to reflect the sum of a salon's undiscounted estimated future cash flow is zero or negative, impairment is measured ascurrent projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the full carrying value of the related salon's equipment and leasehold improvements. When the sum of a salon's undiscounted cash flows is greater than zero but less than the carrying value of the related salon's equipment and leasehold improvements, a discounted cash flow analysis is performed to estimate the fair value of the salon assets and impairment is measured as the difference between the carrying value of the salon assets and the estimated fair value. The fair value estimate is based on the best information available, including market data.


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1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)Company has multiple policy periods open at any point in time.

        As a result of June 30, 2013, the Company's annual impairment analysis of long-lived assets, the following impairment charges were recognized during fiscal years 2011, 2010,Company had $14.8 and 2009,$32.4 million recorded in current liabilities and noncurrent liabilities, respectively, related primarily to the carrying value of certain salons' property and equipment within our North American, International, and Hair Restoration Centers segments:

 
 For the Years Ended June 30, 
 
 2011 2010 2009 
 
 (Dollars in thousands
 

North American salons

 $6,115 $6,253 $4,309 

International salons

  394  175  5,892 

Hair restoration centers

  172     
        

Total

 $6,681 $6,428 $10,201 
        

        The International impairment charges in fiscal year 2009 included charges related to the Company's self-insurance accruals. As of June 2009 plan to close up to 80 underperforming company-owned salons30, 2012, the Company had $15.5 and $32.5 million recorded in the United Kingdom in fiscal year 2010. The Company also evaluated the appropriateness of the remaining useful lives of its non-impaired propertycurrent liabilities and equipment and whether a changenoncurrent liabilities, respectively, related to the depreciation charge was warranted. Impairment charges for continuing operations are included in depreciation related to company-owned salons in the Consolidated Statement of Operations.Company's self-insurance accruals.

Deferred Rent and Rent Expense:

        The Company leases most salon and hair restoration center locations under operating leases. Rent expense is recognized on a straight-line basis over the lease term. Tenant improvement allowances funded by landlord incentives, rent holidays, and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal option period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated periods of the lease compared to that of the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet.


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        For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the lease terms, of the leases, the Company uses the date that it obtains the legal right to use and control the leased space to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use of the leased space.

        Certain leases provide for contingent rents, which are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

Revenue Recognition and Deferred Revenue:

        Company-owned salon revenues and related cost of sales are recognized at the time of sale, as this is when the services have been provided or, inprovided. Product revenues are recognized when the case of product revenues, delivery has occurred,guest receives and


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pays for the salon receives the customer's payment.merchandise. Revenues from purchases made with gift cards are also recorded when the customerguest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) until they are redeemed.

        Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is shipped to franchise locations. The related cost of product sold to franchisees is included within cost of product in the Consolidated Statement of Operations.

        Company-owned hair restoration center revenues stem primarily from servicing hair systems and surgical procedures, as well as through product and hair system sales. The Company records deferred revenue for contracts related to the servicing of hair systems and recognizes the revenue ratably over the term of the service contract. Revenues are recognized related to surgical procedures when the procedure is performed. Product revenues, including sales of hair systems, are recognized at the time of application, as this is when delivery occurs and payment is probable.

        Franchise revenues primarily include royalties, initial franchise fees and net rental income (see Note 10)8). Royalties are recognized as revenue in the month in which franchisee services are rendered. The Company recognizes revenue from initial franchise fees at the time franchise locations are opened, as this is generally when the Company has performed all initial services required under the franchise agreement.

Classification of Expenses:

        The following discussion provides the primary costs classified in each major expense category:

            Cost of service—labor costs related to salon employees and the cost of product used in providing service.

            Cost of product—cost of product sold to guests, labor costs related to selling retail product and the cost of product sold to franchisees.

            Site Operating—direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities, and janitorial costs.

            General and administrative—costs associated with our field supervision, salon training and promotions, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations.


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Consideration Received from Vendors:

        The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. Promotion and advertising reimbursements are discussed under Advertising within this note.Note 1 to the Consolidated Financial Statements.

        With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction ofto the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A periodicquarterly analysis is performed at least quarterly, in order to ensure that the estimated rebate accrued is reasonable, and any necessary adjustments are recorded.

Shipping and Handling Costs:

        Shipping and handling costs are incurred to store, move and ship product from the Company's distribution centers to company-owned and franchise locations, and include an allocation of internal overhead. Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handling costs related to shipping product to franchise locations totaled $3.5, $2.9,$3.6, $3.8, and $2.7$3.5 million during fiscal years 2011, 2010,2013, 2012, and 2009,2011, respectively, and are included within general and administrative expenses.expenses on the Consolidated Statement of Operations. Any amounts billed to the franchiseefranchisees for shipping and handling are included in product revenues within the Consolidated Statement of Operations.


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Advertising:

        Advertising costs, including salon collateral material, are expensed as incurred. The following table breaks out advertisingAdvertising costs expensed and included in continuing operations and advertising costs expensed and included in discontinued operations in fiscal years 2013, 2012 and 2011 2010was $39.2, $42.1, and 2009:$45.1 million, respectively.

 
 For the Years Ended June 30, 
Breakout of Advertising Costs
 2011 2010 2009 

Advertising costs included in continuing operations

 $63,275 $54,850 $56,926 

Advertising costs included in discontinued operations

      4,451 
        

Total advertising costs

 $63,275 $54,850 $61,377 
        

        The Company participates in cooperative advertising programs under which the vendor reimbursesvendors reimburse the Company for costs related to advertising for its products. The Company records such reimbursements as a reduction of advertising expense when the expense is incurred. During fiscal years 2011, 2010,2013, 2012, and 2009,2011, no amounts were received in excess of the Company's related expense.

Advertising Funds:

        The Company has various franchising programs supporting certain of its franchise salon concepts consisting of Supercuts, Cost Cutters, First Choice Haircutters, Magicuts, Pro-Cuts, Beauty Supply Outlet and Hair Club.concepts. Most of the concepts maintain advertising funds that provide comprehensive advertising and sales promotion support.

The SupercutsCompany is required to participate in the advertising fund isfunds for company-owned locations under the Company's largestsame salon concept. The Company assists in the administration of the advertising fund. The Supercuts advertising fund is administered byfunds. However, a councilgroup of individuals consisting primarily of franchisee representatives. The councilrepresentatives has overall control ofover all of the fund's expenditures and operates the funds in accordance with terms of the franchise operating and other agreements.

        Each Supercuts salon contributes 5.0 percent of service revenues to the fund (contributions for other concepts range between 1.5 and 5.0 percent). The majority of the advertising funds are spent to support media placement and local marketing activities. The remainder is allocated for the creation of national advertising campaigns and system wide activities. None of the Supercuts advertising funds collected may be used by the Company as reimbursement for the cost of administering the advertising fund. Advertising funds can only be used as directed by the fund's council and are considered to be restricted.

        The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 2011 and 2010, approximately $16.7 and $18.0 million, respectively, of the advertising funds' assets and liabilities were recorded within total assets and total liabilities, respectively, in the Company's Consolidated Balance Sheet.

        The Company records advertising expense in the period the company-owned salon makes contributions to the respective advertising fund. During fiscal years 2011, 2010,2013, 2012, and 20092011, total contributions to the franchise brand advertising funds totaled $41.9, $39.8,$19.0, $19.2, and $39.4$18.3, million, respectively.


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        The Company acts as an agent for the franchisees with regard to these contributions to the advertising funds. Thus, in accordance with guidance for accounting for franchise fee revenue, the Company does not reflect contributions to theserecords all advertising funds by its franchisees in its Consolidated Statement of Operations or Consolidated Statement of Cash Flows but reflects the relatedas assets and liabilities in itswithin the Company's Consolidated Balance Sheet. As of June 30, 2013 and 2012, approximately $20.8 and $15.3 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet.

Stock-Based Employee Compensation Plans:

        The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses option pricing methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield, and risk-free interest rate.

        The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs.

Preopening Expenses:

        Non-capital expenditures such as payroll, training costs and promotion incurred prior to the opening of a new location are expensed as incurred.

Sales Taxes:

        Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations.

Income Taxes:

        In determining income for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets which arise from temporary differences between the tax and financial statement recognition of revenue and expense.

        Management must assess the likelihood that deferred tax assets will be recovered. If recovery is not likely, we must increase our provision for income taxes by recording a reserve, in the form of a valuation allowance, for the deferred tax assets that will not ultimately be recoverable.

        In addition, the calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. Management recognizes a reserve for potential liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns.


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Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. Realization of deferred tax assets is ultimately dependent upon future taxable income. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.

Net Income (Loss) Per Share:

        The Company's basic earnings per share is calculated as net income (loss) divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company's dilutive earnings per share is calculated as net income (loss) divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan, and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share. The Company's diluted earnings per share will also reflect the assumed conversion under the Company's convertible debt if the impact is dilutive, along with the exclusion of related interest expense, net of taxes. The impact of the convertible debt is excluded from the computation of diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basic earnings per share.

Comprehensive (Loss) Income:

        Components of comprehensive (loss) income for the Company include net income (loss), foreign currency translation adjustments, changes in fair value of financialderivative instruments, designated as hedges of interest rate or foreign currency exposure, recognition of deferred compensation, and reclassification adjustments, net of tax within shareholders' equity.

Foreign Currency Translation:

        Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. During fiscal years 2013, 2012, and 2011, the foreign currency gain (loss) recorded within interest income and other, net in the Consolidated Statement of Operations was $33.4, $0.4, and ($1.5) million, respectively. During fiscal year 2013, Company recognized a $33.8 million foreign currency translation charged or credited togain in connection with the cumulativesale of Provalliance and subsequent liquidation of all foreign entities with Euro denominated operations within interest income and other, net in the Consolidated Statement of Operations.


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translation account within shareholders' equity. These amounts are presented in the Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income.

 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Accumulated Other Comprehensive Income, balance at July 1

 $47,032 $51,855 $101,973 

Cumulative translation adjustment:

          

Balance at July 1

  57,991  63,407  111,073 

Pre-tax amount

  30,405  (5,416) (47,666)

Tax effect

       
        

Net of tax amount

  30,405  (5,416) (47,666)
        

Balance at June 30

  88,396  57,991  63,407 
        

Changes in fair market value of financial instruments designated as cash flow hedges:

          

Balance at July 1

  (8,436) (10,903) (8,791)

Pre-tax amount

  218  3,949  (3,421)

Tax effect

  (86) (1,482) 1,309 
        

Net of tax amount

  132  2,467  (2,112)
        

Balance at June 30

  (8,304) (8,436) (10,903)
        

Recognition of deferred compensation:

          

Balance at July 1

  (2,523) (649) (309)

Pre-tax amount

  609  3,184  (514)

Tax effect

  (232) (1,310) 174 
        

Net of tax amount

  377  (1,874) (340)
        

Balance at June 30

  (2,146) (2,523) (649)
        

Accumulated Other Comprehensive Income, balance at June 30

 $77,946 $47,032 $51,855 
        

Derivative Instruments:

        TheAs of June 30, 2013, the Company may manage its exposure to interest rate and foreign currency risk withindid not have any outstanding derivative instruments. As of June 30, 2012, the Consolidated Financial Statements throughfair value of the use ofCompany's derivative financial instruments according to its hedging policy. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures to be hedged and does not hold or issue derivatives for trading or speculative purposes. The Company currently has or has had interest rate swaps designated as botha cash flow and fair value hedges, treasury locks designated as cash flow hedges, a hedge of its net investment in its European operations and forward foreign currency contracts designated as cash flow hedges of forecasted transactions denominated in a foreign currency. Refer to Note 9 to the Consolidated Financial Statements for further discussion.was less than $0.1 million.

        TheDuring fiscal years 2012 and 2011, the Company follows guidance for accounting for derivative instruments and hedging activities, as amended and interpreted, which requires that all derivatives be recordedreclassified less than $0.1 million of gain on the balance sheet at fair value. This guidance also requires companies to designate all derivatives that qualify as hedgingCompany's derivative instruments as fair value hedges, cash flow hedges or hedges of net investments in foreign operations.


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This designation is based upon the exposure being hedged. Cash flow and fair value hedges are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. At inception, as dictated by the facts and circumstances, all hedges are expected to be highly effective, as the critical terms of these instruments are generally the same as those of the underlying risks being hedged. All derivatives designated as hedging instruments are assessed for effectiveness on an on-going basis. For purposes offrom AOCI into the Consolidated Statement of Cash Flows, cash flows associated with all derivatives (designated as hedges or freestanding economic hedges) are classified in the same category as the related cash flows subject to the hedging relationship.

Stock-Based Employee Compensation Plans:respective fiscal year's earnings.

        Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan). Additionally,During fiscal years 2012 and 2011, the Company has outstanding stock options under its 2000 Stock Option Plan (2000 Plan), although the Plan terminated in 2010. On October 28, 2010 our stockholders approved an amendment to the 2004 Plan to increase the maximum numberrecorded (loss) gain of shares of the Company's common stock authorized for issuance from 2,500,000 to 6,750,000. Under these plans, four types of stock-based compensation awards are granted: stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs)($0.1) and restricted stock units (RSUs). The stock options$0.6 million, respectively, on derivative instruments not designated as hedging instruments within interest income and SARs have a maximum term of ten years. The stock-based awards, other, than the RSUs, generally vest at a rate of 20.0 percent annually on each of the first five anniversaries of the date of grant. The RSUs cliff vest after five years, and payment of the RSUs is deferred until January 31 of the year following vesting. Unvested awards are subject to forfeiture in the event of termination of employment. The Company utilizes an option-pricing model to estimate the fair value of options and SARs at their grant date. Stock options and SARs are granted at not less than fair market value on the date of grant. The Company generally recognizes compensation expense for its stock-based compensation awards on a straight-line basis over a five-year vesting period. Awards granted do not contain acceleration of vesting terms for retirement eligible recipients. The Company's primary employee stock-based compensation grant occurs during the fourth fiscal quarter.

        Total compensation cost for stock-based payment arrangements totaled $9.6, $9.3, and $7.5 million for the fiscal years ended June 30, 2011, 2010 and 2009, respectively. Guidance adopted by the Company for share-based payments requires that the cash retained as a result of the tax deductibility of increases in the value of stock-based arrangements be presented as a cash inflow from financing activitynet in the Consolidated Statement of Cash Flows. The amount presented as a financing activity for fiscal years 2011, 2010 and 2009 was $0.1, $0.2, and $0.2 million, respectively.Operations.

Recent Accounting Standards Adopted by the Company:

Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

        In July 2010, the Financial Accounting Standards Board (FASB) issued guidance to amend the disclosure requirements related to the credit quality of financing receivables and the allowance for credit losses. The guidance requires disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The guidance amends existing disclosures to require an entity to provide the following disclosures on a disaggregated basis: rollforward schedule of the allowance for credit losses from the beginning to the end of the reporting period on a portfolio segment basis, the related recorded investment in financing receivables for each disaggregated ending


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balance, the nonaccrual status of financing receivables by class of financing receivables, and impaired financing receivables by class of financing receivables. Additionally, the guidance requires, among other things, new disclosures on the credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables and the aging of past due financing receivables at the end of the reporting period by class of financing receivables. The Company is in compliance with the new disclosure requirements.

Disclosures about Fair Value of Financial Instruments

        In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (unadjusted quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).

        The Company adopted the new disclosure guidance on January 1, 2010 and the disclosure on the roll forward activities for Level 3 fair value measurements will be adopted by the Company on July 1, 2011.

Multiple-Deliverable Revenue Arrangements

        In October 2009, the FASB issued guidance on the accounting for multiple-deliverable revenue arrangements. The guidance removes the criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables and provides entities with a hierarchy of evidence that must be considered when allocating arrangement consideration. The new guidance also requires entities to allocate arrangement consideration to the separate units of accounting based on the deliverables' relative selling price. The adoption of the new guidance on July 1, 2010, for multiple-deliverable revenue arrangements, did not have a material effect on the Company's financial position, results of operations, or cash flows.

Amendments to Accounting for Variable Interest Entities

        In June 2009, the FASB issued guidance on the accounting for variable interest entities (VIE). The guidance requires a qualitative approach to identifying a controlling financial interest in a VIE and requires ongoing assessment of whether an entity is a VIE and whether an entity is a primary beneficiary of a VIE. This guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise's involvement in a VIE. The adoption of the new guidance on July 1, 2010, for variable interest entities, did not have a material effect on the Company's financial position, results of operations, and cash flows.

Accounting Standards Recently Issued But Not Yet Adopted by the Company:

Comprehensive Income

        In June 2011, and as subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Specifically,Under this guidance, net income and comprehensive income may only be presented either as one continuous statement or in two separate, but consecutive statements. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2013, with comprehensive income shown as a separate statement immediately following the Consolidated Statements of Operations. Since the new guidance allowsrelates only to presentation, its adoption did not impact the Company's balance sheet, results of operations or cash flows.

Reclassifications Out of Accumulated Other Comprehensive Income

        In February 2013, the FASB issued guidance on the reporting of reclassifications out of accumulated other comprehensive income. The updated accounting guidance requires an entity to presentprovide information about the amounts reclassified out of accumulated comprehensive income by component. The Company adopted this guidance in the third quarter of fiscal year 2013 by disclosing the components reclassified out of netaccumulated comprehensive income on the Consolidated Statement of Comprehensive (Loss) Income.

Accounting Standards Recently Issued But Not Yet Adopted by the Company:

Testing Indefinite-Lived Intangible Assets for Impairment

        In July 2012, the FASB updated the accounting guidance related to annual and otherinterim indefinite-lived intangible asset impairment testing. The updated accounting guidance allows entities to first assess qualitative factors before performing a quantitative assessment of the fair value of indefinite-lived intangible assets. If it is determined on the basis of qualitative factors that the fair value of indefinite-lived intangible assets is more likely than not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2014. The Company does not expect the adoption of this update to have a material impact on the Company's consolidated financial statements.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


comprehensive income in one continuous statement, referred to asAccounting for Cumulative Translation Adjustment upon Derecognition of Foreign Entities

        In March 2013, the statement of comprehensive income, or in two separate, but consecutive statements. The newFASB updated the accounting guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changesrelated to the components that are recognizedrelease of cumulative translation adjustments (CTA) recorded in AOCI associated with a foreign entity. The updated accounting guidance clarified when to release cumulative translation adjustments into net income or other comprehensive income under current accounting guidance. This newincome. The updated guidance is effective for the Company beginning in the first quarter of fiscal years and interim periods beginning after December 15, 2011.year 2015 with early adoption permitted. The Company does not expect the adoption of the guidance on July 1, 2012 will notthis update to have an impact on the Company's financial position, results of operations or cash flows.

Fair Value Measurement

        In April 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of the guidance on July 1, 2012 will not have ana material impact on the Company's consolidated financial position, results of operations or cash flows.statements.

2. DISCONTINUED OPERATIONS

Hair Restoration Centers

        On February 16, 2009,April 9, 2013, the Company sold its Trade Secret salon concept (Trade Secret).Hair Club for Men and Women business (Hair Club), a provider of hair restoration services. The sale included the Company's 50.0 percent interest in Hair Club for Men, Ltd., which was previously accounted for under the equity method. The Company concluded, afterreceived $162.8 million, which represented the purchase price of $163.5 million adjusted for the preliminary working capital provision. The Company has since recorded a comprehensive reviewreceivable of strategic and financial options,$2.0 million as of June 30, 2013 based upon the final working capital provision that increased the purchase price to divest Trade Secret.approximately $165 million. The Company recorded an after-tax gain of $17.8 million upon the sale of Trade Secret included 655 company-owned salonsHair Club and 57 franchise salons,incurred $5.4 million in professional and transaction fees during fiscal year 2013 associated with the sale.

        Hair Club has been presented as discontinued operations for all periods presented in the Consolidated Statement of which had historicallyOperations. The assets and liabilities have been aggregated and reported withinas current assets held for sale, long-term assets held for sale, current liabilities related to assets held for sale and long-term liabilities related to assets held for sale in the Company's North America reportable segment. The sale of Trade Secret included Cameron Capital I, Inc. (CCI). CCI owned and operated PureBeauty and BeautyFirst salons which were acquired by the Company on February 20, 2008.

        The Company concluded that Trade Secret qualified asConsolidated Balance Sheet for all periods presented. Long-term assets held for sale as of December 31, 2008, under accounting for the impairment or disposalJune 30, 2012, included $74.4 million of long-lived asset guidance, and is presented as discontinued operations in the Consolidated Statements of Operations for all periods presented. The operations and cash flows of Trade Secret have been eliminated from ongoing operations of the Company andgoodwill related to Hair Club. In addition, there will be no significant continuing involvement by the Company in the operations of Hair Club after disposal pursuant to guidancethe disposal.

        The Company also reclassified professional fees of $2.5 million in determining whether to report discontinued operations. The agreement included a provision that the Company would supply product to the purchaser of Trade Secret and provide certain administrative services for a transition period. Under this agreement, the Company recognized $20.0 and $32.2 million of product revenues on the supply of product sold to the purchaser of Trade Secret and $1.9 and $2.9 million of other incomefiscal year 2012 related to the administrative services during the years ended June 30, 2010 and 2009, respectively. The agreement was substantially complete assale of September 30, 2009.

        Beginning within the second quarter of fiscal year 2010, the Company has an agreementHair Club, which were previously included in which the Company provides warehouse servicesunallocated corporate costs, to the purchaser of Trade Secret. Under the warehouse services agreement, the Company recognized $2.7 and $3.0 million of other income related to warehouse services during the twelve months ended June 30, 2011 and 2010, respectively.discontinued operations.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. DISCONTINUED OPERATIONS (Continued)

        The following table providessummarizes the amounts due toresults of operations of our discontinued Hair Club operations for the Company from the purchaser of Trade Secret:periods presented:

 
 Classification June 30,
2011
 June 30,
2010
 
 
  
 (Dollars in thousands)
 

Carrying value:

         

Warehouse services

 Receivables, net $320 $359 

Note receivable, current

 Other current assets  2,607  2,838 

Note receivable, current valuation allowance

 Other current assets  (2,607) (611)

Note receivable, long-term

 Other assets  31,086  29,000 

Note receivable, long-term valuation allowance

 Other assets  (31,086)  
        

Total note receivable, net

   $320 $31,586 
        
 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

Revenues

 $115,734 $151,552 $145,688 

Income (loss) from discontinued operations, before income taxes

  28,643  (65,114) 18,304 

Income tax (provision) benefit on discontinued operations

  (4,242) 849  (6,837)

Equity in income of affiliated companies, net of tax

  627  816  567 
        

Income (loss) from discontinued operations, net of income taxes

 $25,028 $(63,449)$12,034 
        

        DuringIncome taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance. Depreciation and amortization ceased during fiscal year 2010,2013 in accordance with accounting for discontinued operations. Hair Club depreciation and amortization expense for fiscal years 2012 and 2011 was $13.1 and $12.8 million, respectively. During the three months ended December 31, 2011, the Company entered intoperformed an interim impairment test of goodwill related to Hair Club and recorded a formal$78.4 million impairment charge for the excess of the carrying value of goodwill over the implied fair value.

Trade Secret

        On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret). The Company reported Trade Secret as a discontinued operation. During the fiscal year 2012, the Company recorded a $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret.

        The Company has a note receivable agreement with the purchaser of Trade Secret. On July 6, 2010, the purchaser of Trade Secret filed for Chapter 11 bankruptcy. The purchaser of Trade Secret emerged from bankruptcy in October 2010 and in conjunction, the note receivable agreement was amended. The note receivable agreement accrues interest at 8.0 percent which is payable quarterly beginning in December 2010. Principal payments of $0.5 million are due quarterly beginning in December 2011 with the remainder of the principal due in September 2015.

        During the third quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret, the fair value of the collateral decreased to a level below the carrying value of the outstanding note receivable, and the purchaser of Trade Secret provided the Company with a new five year business plan that was well below the purchaser of Trade Secret's original projections. Due to these factors that occurred during the third quarter of fiscal year 2011, the Company evaluated the note receivable for realizability based on a probability weighted expected future cash flow analysis. During the third quarter of fiscal year 2011, the Company recorded a $9.0 million valuation reserve for the excess of $31.2 million during fiscal year 2011. As of June 30, 2013 the carrying value of the note receivable over the present value of expected future cash flows.

        During the fourth quarter of fiscal year 2011, the Company did not receive a scheduled interest payment related to the outstanding note receivable with the purchaser of Trade Secret and the fair value of the collateral continued to decrease and was at a level significantly below the carrying value of the outstanding note receivable. In addition, the Company received updated financial projections that were below the projections received during the third quarter of fiscal year 2011. Due to these negative financial events in the fourth quarter of fiscal year 2011, the Company performed an extensive evaluation on the Company's option to realize the collateral under the note receivable and recorded an additional $22.2 million valuation reserve that fully reserved the carrying value of the note receivable as of June 30, 2011.

        The Company has determined the collectibility of accrued interest on the note receivablecontinues to be less than probable. The Company suspended recognition of interest income effective April 2010, has recorded a valuation allowance of $2.5 million as of June 30, 2011 related to the accrued interest, and will use the cash basis method for recognizing future interest income. During fiscal year 2011, the Company received interest payments from the purchaser of Trade Secret totaling $0.8 million.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. DISCONTINUED OPERATIONS (Continued)

        The following table summarizes the activity in the valuation allowance related to the note receivable with the purchaser of Trade Secret:

Valuation Allowance
 For the Twelve Months
Ended June 30, 2011
 
 
 (Dollars in thousands)
 

Balance at July 1, 2010

 $(611)
 

Provision associated with nonaccrual status of interest income

  (688)
    

Balance at September 30, 2010

 $(1,299)
    
 

Provision associated with nonaccrual status of interest income

  (670)
 

Cash payments

  670 
    

Balance at December 31, 2010

 $(1,299)
    
 

Provision associated with nonaccrual status of interest income

  (655)
 

Valuation allowance

  (9,000)
    

Balance at March 31, 2011

 $(10,954)
    
 

Provision associated with nonaccrual status of interest income

  (662)
 

Valuation allowance

  (22,227)
 

Cash payments

  150 
    

Balance at June 30, 2011

 $(33,693)
    

        The Company utilized the consolidation of variable interest entities guidance to determine whether or not Trade Secret was a VIE, and if so, whether the Company was the primary beneficiary of Trade Secret. The Company concluded that Trade Secret is a VIE based on the fact that the equity investment at risk in Trade Secret is insufficient. The Company determined that the purchaser of Trade Secret has met the power criterion due to the purchaser of Trade Secret having the authority to direct the activities that most significantly impact Trade Secret's economic performance. The Company concluded based on the consideration above that the primary beneficiary of Trade Secret is the purchaser of Trade Secret. The exposure to loss related to the Company's involvement with Trade Secret is the carrying value of the amount due from the purchaser of Trade Secret and the guarantee of approximately 40 operating leases. The Company has determined the exposure to the risk of loss on the guarantee of the operating leases to be reasonably possible. See Note 10 to the Consolidated Financial Statements for further information on the guaranteed leases.

        The income (loss) from discontinued operations is summarized below:

 
 For the Years Ended June 30, 
 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Revenues

 $ $ $163,436 

Income (loss) from discontinued operations, before income taxes

    154  (190,433)

Income tax benefit on discontinued operations

    3,007  58,997 
        

Income (loss) from discontinued operations, net of income taxes

 $ $3,161 $(131,436)
        

        During the first quarter of fiscal year 2010, the Company recorded a $3.0 million tax benefit in discontinued operations to correct the prior year calculation of the income tax benefit related to the disposition of the Trade Secret salon concept. The Company does not believe the adjustment is material to its results of operations for the twelve months ended June 30, 2010 or its financial position or results of operations of any prior periods.fully reserved.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. OTHER FINANCIAL STATEMENT DATA

        The following provides additional information concerning selected balance sheet accounts as of June 30, 2011 and 2010:accounts:


 2011 2010 

 (Dollars in thousands)
 

Accounts receivable

 $28,631 $27,482 

Less allowance for doubtful accounts

 (1,482) (3,170)
      June 30, 

 $27,149 $24,312  2013 2012 
      (Dollars in thousands)
 

Other current assets:

Other current assets:

  

Prepaids

 $29,705 $31,760 

Notes receivable, primarily affiliates

 2,413 4,443 

Prepaids

 $29,629 $22,360 

Restricted cash

 27,500 4,500 

Notes receivable

 769 29,043 
          

 $32,118 $36,203  $57,898 $55,903 
          

Property and equipment:

Property and equipment:

  

Land

 $3,864 $3,864 

Buildings and improvements

 47,842 48,017 

Equipment, furniture and leasehold improvements

 789,737 756,051 

Internal use software

 118,093 106,264 

Equipment, furniture and leasehold improvements under capital leases

 81,489 84,757 

Land

 $3,864 $3,864      

Buildings and improvements

 47,907 48,837  1,041,025 998,953 

Equipment, furniture and leasehold improvements

 775,527 736,469 

Internal use software

 94,507 87,286 

Equipment, furniture and leasehold improvements under capital leases

 88,297 88,534 
     

 1,010,102 964,990 

Less accumulated depreciation and amortization

 (611,669) (561,174)

Less amortization of equipment, furniture and leasehold improvements under capital leases

 (50,622) (44,566)

Less accumulated depreciation and amortization

 (665,924) (635,471)

Less amortization of equipment, furniture and leasehold improvements under capital leases

 (61,641) (57,683)
          

 $347,811 $359,250  $313,460 $305,799 
          

Investment in and loans to affiliates:

Investment in and loans to affiliates:

  

Equity-method investments

 $258,930 $183,670 

Noncurrent loans to affiliates

 2,210 12,116 

Equity-method investments

 $43,098 $160,987 

Cost method investment

 221  
          

 $261,140 $195,786  $43,319 $160,987 
          

Other assets:

Other assets:

  

Notes receivable, net

 $1,072 $30,200 

Other noncurrent assets

 57,328 50,412 

Notes receivable, net

 $2,107 $1,584 

Other noncurrent assets

 60,679 57,904 
          

 $58,400 $80,612  $62,786 $59,488 
          

Accrued expenses:

Accrued expenses:

  

Payroll and payroll related costs

 $89,788 $87,831 

Insurance

 19,127 22,323 

Deferred revenues

 8,313 8,455 

Taxes payable

 8,113 9,206 

Other

 41,980 32,982 

Payroll and payroll related costs

 $74,940 $75,615 

Insurance

 19,035 19,410 

Deferred compensation

 4,881 26,055 

Deferred revenues

 2,147 2,503 

Taxes payable

 4,895 5,406 

Other

 31,328 28,037 
          

 $167,321 $160,797  $137,226 $157,026 
          

Other noncurrent liabilities:

Other noncurrent liabilities:

  

Deferred income taxes

 $36,399 $13,497 

Deferred rent

 39,389 49,537 

Deferred benefits

 29,378 39,064 

Insurance

 32,435 32,459 

Other

 17,410 9,415 

Deferred income taxes

 $55,208 $68,059      

Deferred rent

 53,102 53,914  $155,011 $143,972 

Deferred benefits

 58,150 55,706      

Insurance

 30,925 26,455 

Equity put option

 22,700 22,009 

Other

 17,210 21,627 
     

 $237,295 $247,770 
     

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. OTHER FINANCIAL STATEMENT DATA (Continued)

        The following provides additional information concerning the other intangibles, net, balance sheet account as of June 30, 2011 and 2010:net:

 
 June 30, 2011 June 30, 2010 
 
 Cost Accumulated
Amortization
 Net Cost Accumulated
Amortization
 Net 
 
 (Dollars in thousands)
 

Amortized intangible assets:

                   
 

Brand assets and trade names

 $80,310 $(14,329)$65,981 $79,596 $(12,139)$67,457 
 

Customer lists

  53,188  (34,096) 19,092  52,045  (28,652) 23,393 
 

Franchise agreements

  22,221  (8,909) 13,312  21,245  (7,543) 13,702 
 

Lease intangibles

  14,948  (5,168) 9,780  14,674  (4,360) 10,314 
 

Non-compete agreements

  353  (232) 121  320  (146) 174 
 

Other

  4,429  (1,387) 3,042  6,755  (3,725) 3,030 
              

 $175,449 $(64,121)$111,328 $174,635 $(56,565)$118,070 
              
 
 June 30, 
 
 2013 2012 
 
 Cost Accumulated
Amortization
 Net Cost Accumulated
Amortization
 Net 
 
 (Dollars in thousands)
 

Amortized intangible assets:

                   

Brand assets and trade names

 $9,310 $(3,226)$6,084 $9,494 $(2,960)$6,534 

Franchise agreements

  11,187  (6,839) 4,348  11,398  (6,494) 4,904 

Lease intangibles

  14,754  (6,582) 8,172  14,796  (5,862) 8,934 

Non-compete agreements

  201  (147) 54  207  (117) 90 

Other

  4,614  (1,776) 2,838  4,533  (1,600) 2,933 
              

 $40,066 $(18,570)$21,496 $40,428 $(17,033)$23,395 
              

        All intangible assets have been assigned an estimated finite useful life, and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from one to 40 years). The cost of intangible assets is amortized to earnings in proportion to the amount of economic benefits obtained by the Company in that reporting period. The weighted average amortization periods, in total and by major intangible asset class, are as follows:

 June 30, 


 Weighted
Average
Amortization
Period
(In years)
June 30,
  2013 2012 


 2011 2010  (In years)
 

Amortized intangible assets:

Amortized intangible assets:

  

Brand assets and trade names

 39 39 

Customer lists

 10 10 

Franchise agreements

 22 22 

Lease intangibles

 20 20 

Non-compete agreements

 5 5 

Other

 25 18 

Brand assets and trade names

 32 33 

Franchise agreements

 19 19 

Lease intangibles

 20 20 

Non-compete agreements

 6 6 

Other

 20 21 
          

Total

Total

 26 26  22 23 
          

        Total amortization expense related to amortizable intangible assets during thefiscal years ended June 30,2013, 2012, and 2011 2010, and 2009 was approximately $9.8, $9.9,$1.8, $1.9, and $9.9$2.1 million, respectively. As of June 30, 2011,2013, future estimated amortization expense related to amortizable intangible assets is estimated to be:

Fiscal Year
 (Dollars in thousands)  (Dollars in
thousands)
 

2012

 $9,702 

2013

 9,395 

2014

 9,177  $1,714 

2015

 6,152  1,703 

2016

 4,011  1,640 

2017

 1,589 

2018

 1,577 

Thereafter

 13,273 
   

Total

 $21,496 
   

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. OTHER FINANCIAL STATEMENT DATA (Continued)

        The following provides supplemental disclosures of cash flow activity:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

Cash paid (received) during the year for:

          

Interest

 $38,990(1)$28,448 $33,493 

Income taxes, net

  1,088  14,754  (15,083)

 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Cash paid (received) during the year for:

          
 

Interest

 $33,493 $53,547 $40,992 
 

Income taxes, net of refunds

  (15,083) 17,058  21,878 
(1)
Includes $10.6 million of cash paid for make-whole associated with prepayment of senior notes.

        Significant non-cash investing and financing activities include the following:

        The Company did not finance capital expenditures through capital leases during fiscal years 2013 and 2012. In fiscal yearsyear 2011, 2010, and 2009, the Company financed capital expenditures totaling $6.0 $7.9, and $7.5 million respectively, through capital leases.

4. ACQUISITIONSGOODWILL

        During fiscal years 2011, 2010, and 2009, the Company made 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. These acquisitions individually and in the aggregate are not materialThe table below contains details related to the Company's operations. Operations ofrecorded goodwill:

 
 June 30, 
 
 2013 2012 
 
 Gross
Carrying
Value
 Accumulated
Impairment(1)
 Net Gross
Carrying
Value
 Accumulated
Impairment(1)
 Net 
 
 (Dollars in thousands)
 

Goodwill

 $679,607 $(218,722)$460,885 $681,001 $(218,722)$462,279 

(1)
The table below contains additional information regarding the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

        Based upon purchase price allocations, the components of the aggregate purchase prices of the acquisitions made during fiscal years 2011, 2010, and 2009 and the allocation of the purchase prices were as follows:

Company's $218.7 million accumulated impairment losses:

 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Components of aggregate purchase prices:

          
 

Cash

 $17,990 $3,664 $40,051 
 

Liabilities assumed or payable

  561    75 
        

 $18,551 $3,664 $40,126 
        

Allocation of the purchase prices:

          
 

Current assets

 $641 $178 $1,337 
 

Property and equipment

  4,232  873  5,989 
 

Deferred income tax asset

      1,787 
 

Goodwill

  12,489  2,581  30,812 
 

Identifiable intangible assets

  1,964  134  1,322 
 

Accounts payable and accrued expenses

  (534) (102) (818)
 

Other noncurrent liabilities

  (241)   (303)
        

 $18,551 $3,664 $40,126 
        
Fiscal Year
 Impairment Charge Reporting Unit
 
 (Dollars in thousands)
  

2009

 $41,661 International

2010

  35,277 Regis

2011

  74,100 Promenade

2012

  67,684 Regis

2013

   N/A
     

Total

 $218,722  
     

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONSGOODWILL (Continued)

        The value and related weighted average amortization periods for the intangibles acquired during fiscal years 2011 and 2010 business acquisitions, in total and by major intangible asset class, are as follows:

 
 Purchase Price
Allocation
  
  
 
 
 Weighted
Average
Amortization
Period

 
 
 Year Ended
June 30,
 
 
 (in years) 
 
 2011 2010 2011 2010 
 
 (Dollars in
thousands)

  
  
 

Amortized intangible assets:

             
 

Brand assets and trade names

 $159 $61  10  20 
 

Customer lists

  1,207    7   
 

Franchise agreements

  269    40   
 

Lease intangibles

  151  15  20  20 
 

Non-compete agreements

         
 

Other

  178  58  20  20 
          

Total

 $1,964 $134  14  20 
          

        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, service quality and price point competitiveness. These attributes represent the "going concern" value of the salon.

        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 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 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 the acquisition of hair restoration centers, is not deductible for tax purposes due to the acquisition structure of the transaction.

        During fiscal years 2011, 2010, and 2009, the Company purchased salon operations from its franchisees. The Company evaluated the effective settlement of the pre-existing franchise contracts and associated rights afforded by those contracts. The Company determined that the effective settlement of the pre-existing 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 pre-existing contracts. Therefore, no settlement gain or loss was recognized with respect to the Company's franchise buybacks.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. GOODWILL

        The table below contains details related to the Company's recorded goodwill for the years ended June 30, 2011 and 2010:goodwill:

 
 Consolidated(1) 
 
 (Dollars in thousands)
 

Goodwill, net at June 30, 2011

 $527,716 

Goodwill acquired

  4,978 

Translation rate adjustments

  (2,731)

Goodwill impairment

  (67,684)
    

Goodwill, net at June 30, 2012

  462,279 
    

Translation rate adjustments

  (1,394)
    

Goodwill, net at June 30, 2013

 $460,885 
    

 
 Salons  
  
 
 
 Hair Restoration
Centers
  
 
 
 North America International Consolidated 
 
 (Dollars in thousands)
 

Gross goodwill at June 30, 2009

 $693,181 $41,661 $149,367 $884,209 

Accumulated impairment losses

  (78,126) (41,661)   (119,787)
          

Net goodwill at June 30, 2009

  615,055    149,367  764,422 
          

Goodwill acquired(1)

  2,581      2,581 

Translation rate adjustments

  4,250    13  4,263 

Resolution to pre-acquisition income tax contingency

      1,000  1,000 

Goodwill impairment(2)

  (35,277)     (35,277)
          

Gross goodwill at June 30, 2010

  700,012  41,661  150,380  892,053 

Accumulated impairment losses

  (113,403) (41,661)   (155,064)
          

Net goodwill at June 30, 2010

  586,609    150,380  736,989 
          

Goodwill acquired(1)

  10,070    2,419  12,489 

Translation rate adjustments

  5,137    (3) 5,134 

Goodwill impairment(3)

  (74,100)     (74,100)
          

Gross goodwill at June 30, 2011

  715,219  41,661  152,796  909,676 

Accumulated impairment losses

  (187,503) (41,661)   (229,164)
          

Net goodwill at June 30, 2011

 $527,716 $ $152,796 $680,512 
          

(1)
See Note 4All goodwill relates to the Consolidated Financial Statements.

(2)
As a result of the Company's annual impairment testing of goodwill, a $35.3 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept.

(3)
As a result of the Company's annual impairment testing of goodwill, a $74.1 million impairment charge was recorded within continuing operations for the excess of the carrying value of goodwill over the implied fair value of goodwill for the Promenade salon concept.North American salons.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.5. INVESTMENTS IN AND LOANS TO AFFILIATES

        The table below presents the carrying amount of investments in and loans to affiliates as of June 30, 2011 and 2010:affiliates:

 
 Provalliance Empire
Education
Group, Inc.
 MY Style Hair Club
for
Men, Ltd.
 Total 
 
 (Dollars in thousands)
 

Balance at June 30, 2009

 $82,135 $111,451 $12,718 $5,096 $211,400 

Payment of loans by affiliates

    (15,000)     (15,000)

Equity in income of affiliated companies, net of income taxes(1)

  4,134  6,431    909  11,474 

Cash dividends received

  (1,141)     (1,263) (2,404)

Other, primarily translation adjustments

  (9,647)   (602) 565  (9,684)
            

Balance at June 30, 2010

 $75,481 $102,882 $12,116 $5,307 $195,786 

Acquisition of additional interest(3)

  57,301        57,301 

Payment of loans by affiliates

    (15,000)     (15,000)

Loans to affiliates

    15,000      15,000 

Equity in income of affiliated companies, net of income taxes(2)

  7,752  5,463    567  13,782 

Other than temporary impairment(4)

      (9,173)   (9,173)

Cash dividends received

  (4,814) (4,129)   (1,080) (10,023)

Other, primarily translation adjustments

  13,525  324  (733) 351  13,467 
            

Balance at June 30, 2011

 $149,245 $104,540 $2,210 $5,145 $261,140 
            

Percentage ownership at June 30, 2011

  46.7% 55.1%   50.0%   
 
 June 30, 
 
 2013 2012 
 
 (Dollars in thousands)
 

Empire Education Group, Inc. 

 $43,098 $59,683 

Provalliance

    101,304 

MY Style

  221   
      

 $43,319 $160,987 
      

(1)
Equity in income of affiliated companies, net of income taxes per

        The table below presents the notes receivable from affiliates recorded within other current assets on the Consolidated Statement of Operations includes $4.1 million in equity income of Provalliance and $0.5 million for the increase in the Provalliance equity put valuation.

(2)
Equity in income of affiliated companies, net of income taxes per the Consolidated Statement of Operations includes $7.8 million in equity income of Provalliance and a $2.4 million gain for the decrease in the Provalliance equity put valuation.

(3)
In March of 2011, the Company elected to honor and settle a portion of the equity put option and acquired approximately 17 percent additional equity interest in Provalliance for $57.3 million (€ 40.4 million), bringing the Company's total equity interest to approximately 47 percent.

(4)
Due to the natural disasters in Japan that occurred in March 2011, the Company was required to assess the preferred shares and premium for other than temporary impairment. As a result, the Company recorded an other than temporary impairment during the twelve months ended June 30, 2011 for the carrying value of the preferred shares and premium of $3.9 million (326,700,000 Yen) and $5.3 million (435,000,000 Yen), respectively. Of the total impairment, $9.0 million was recorded through the equity in income of affiliated companies and $0.2 million was recorded through the interest income and other, net, line items in the Consolidated Statement of Operations.
Balance Sheet:

 
 June 30, 
 
 2013 2012 
 
 (Dollars in thousands)
 

Empire Education Group, Inc. 

 $ $26,412 

MY Style

    2,251 
      

 $ $28,663 
      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.5. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)

        The table below presents the summarized financial information of the equity method investees based on audited results.

 
 Greater Than 50 Percent Owned Less Than 50 Percent Owned 
 
 2013 2012 2011 2013 2012 2011 
 
 (Dollars in thousands)
 

Summarized Balance Sheet Information:

                   

Current assets

 $35,900 $56,516 $34,715 $ $84,700 $93,072 

Noncurrent assets

  91,847  96,639  113,249    316,282  313,508 

Current liabilities

  25,317  61,074  29,340    106,995  108,708 

Noncurrent liabilities

  21,560  13,947  33,658    78,815  98,269 

Summarized Statement of Operations Information:

                   

Gross revenue

 $170,964 $182,326 $192,864 $ $305,515 $271,747 

Gross profit

  58,457  67,201  73,068    132,647  116,354 

Operating (loss) income

  4,981  (1,335) 18,994    35,569  30,084 

Net (loss) income

  2,359  (7,211) 11,023    24,067  21,154 

Investment in Empire Education Group, Inc.

        As of June 30, 2013 and 2012, the Company's ownership interest in Empire Education Group, Inc. (EEG) was 55.1 percent. EEG operates accredited cosmetology schools and is overseen by the Empire Beauty School management team. The Company accounts for EEG as an equity investment under the voting interest model.

        During fiscal years 2013 and 2012, the company recorded other than temporary impairment charges on its investment in EEG of $17.9 and $19.4 million, respectively, to reflect the negative business impacts associated with regulatory changes including declines in enrollment, revenue and profitability in the for-profit secondary educational market. The Company did not receive a tax benefit on these impairment charges. The Company did not record an impairment charge during the fiscal year 2011. In addition, during fiscal years 2013 and 2012 the Company recorded its share, $2.1 and $8.7 million, respectively, of fixed and intangible asset impairments recorded directly by EEG.

        Due to economic, regulatory and other factors, the Company may be required to record additional noncash impairment charges related to its investment in EEG and such noncash impairments could be material to the Company's consolidated balance sheet and results of operations. In addition, EEG may be required to record noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to the Company's consolidated balance sheet and results of operations. The Company's share of EEG's goodwill balances as of June 30, 2011 and 2010. The financial information2013 is approximately $16 million. Based on the Company's work associated with the investment impairment recorded during the fiscal year 2013, the Company's estimate of EEG's fair value exceeds carrying value by approximately 5 percent. Any meaningful underperformance against plan or reduced outlook by EEG, changes to the carrying value of EEG or further erosion in valuations of the for-profit secondary educational market could lead to a goodwill impairment charge recorded by EEG for which the Company would record 55.1 percent of the impairment given the Company's present ownership.

        During fiscal years 2013, 2012, and 2011, the Company recorded $1.3, $(4.0), and $5.5 million, respectively, of equity investeesearnings (loss) related to its investment in EEG.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)

        The Company previously provided EEG with a $15.0 million revolving credit facility and outstanding loan, both of which matured during fiscal year 2013. At June 30, 2012, there was based$15.0 and $11.4 million outstanding on results asthe revolving credit facility and loan outstanding, respectively. The Company received $15.0 million in payments on the revolving credit facility during the fiscal year 2013. The Company received $11.4 and $10.0 million in principal payments on the loan during the fiscal years 2013 and 2012, respectively. During fiscal years 2013, 2012, and 2011, the Company recorded less than $0.1, $0.5, and $0.7 million, respectively, of interest income related to the loan and for the twelve months ended June 30.revolving credit facility.

 
 Equity Method
Investee Greater
Than 50 Percent Owned
 Equity Method
Investees Less
Than 50 Percent Owned
 
 
 2011 2010 2009 2011 2010 2009 
 
 (Dollars in thousands)
 

Summarized Balance Sheet Information:

                   

Current assets

 $34,715 $35,070 $34,990 $93,280 $74,040 $109,700 

Noncurrent assets

  113,249  105,469  99,858  314,127  263,472  313,763 

Current liabilities

  29,340  27,458  25,583  109,416  91,077  137,169 

Noncurrent liabilities

  33,658  32,017  39,661  98,269  93,055  115,067 

Summarized Statement of Operations Information:

                   

Gross revenue

 $192,864 $176,535 $153,693 $283,442 $299,188 $290,978 

Gross profit

  73,068  64,661  48,173  120,992  123,210  124,361 

Operating income

  18,994  19,752  7,656  30,084  21,227  19,047 

Net income

  11,023  11,082  3,611  21,154  14,763  13,295 

Investment in Provalliance

        On January 31, 2008,September 27, 2012, the Company mergedsold its continental European franchise salon operations with the operations of the Franck Provost Salon Group in exchange for a 30.046.7 percent equity interest in the newly formed Provalliance entity (Provalliance).for $103.4 million. The merger with the operations of the Franck Provost Salon Group, which are also located in continental Europe, created Europe's largest salon operator with approximately 2,600 company-owned and franchise salons as of June 30, 2011.

        The merger agreement containsCompany previously had a right (Equity(Provalliance Equity Put) to, if exercised, would require the Company to purchase an additional ownership interest in Provalliance between specified dates in 2010 to 2018. The acquisition price is determined based on a multiple ofDuring fiscal year 2013, the earnings before interest, taxes, depreciation and amortization of Provalliance for a trailing twelve month period adjusted for certain items as defined in the agreement which is intended to approximate fair value. The initial estimated fair value of the Equity Put as of January 31, 2008, approximately $24.8 million, has been included as a component of the Company's investment in Provalliance. A corresponding liability for the same amount as the Equity Put was recorded in other noncurrent liabilities. Any changes in the estimated fair value of the Equity Put are recorded in the Company's consolidated statement of operations. The Company recorded a $2.4$0.6 million decrease in the fair value of the Provalliance Equity Put that automatically terminated upon the sale.

        In connection with the sale of Provalliance, the Company recorded a $37.4 million other than temporary impairment charge during fiscal year 2011, see further discussion below and within Note 7 to2012. In addition, the Consolidated Financial Statements. Any changes related to foreign currency translation are recorded in accumulated other comprehensive income. The Company recorded a $3.8 million increase infair value of the Provalliance Equity Put relateddecreased by $20.2 million to foreign currency translation during fiscal year 2011, see further discussion within Note 7 to the Consolidated Financial Statements. If the Equity Put is exercised,$0.6 million as of June 30, 2012. The other than temporary impairment charge and the Company fails to complete the purchase, the parties exercising the Equity Put will be entitled to exercise various remedies against the Company, including the right to purchase the Company's interest in Provalliance for a purchase price determined based on a discounted multiple of the earnings before interest and taxes of Provalliance for a trailing twelve month period. The merger


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)


agreement also contains an option (Equity Call) whereby the Company can acquire additional ownership interest in Provalliance between specific dates in 2018 to 2020 at an acquisition price determined consistent with the Equity Put.

        In December 2010, a portion of the Equity Put was exercised. In March of 2011, the Company elected to honor and settle a portion of the Equity Put and acquired approximately 17 percent additional equity interest in Provalliance for $57.3 million (approximately € 40.4 million), bringing the Company's total equity interest to 46.7 percent. Upon the acquisition of the additional ownership interest, the Company recognized a net gain of approximately $2.4 million representing the reversal of the Equity Put liability that was extinguished upon settlement, partially offset by an increasereduction in the fair value of the remaining Equity Put. The Company's liability under theProvalliance Equity Put to purchase the remainderresulted in a net impairment charge of $17.2 million that is recorded within the equity interest in Provalliance continues to exist through 2018 and is valued at $22.7 million as(loss) income of June 30, 2011.

        The Company utilized the consolidation of variable interest entities guidance to determine whether oraffiliated companies during fiscal year 2012. Regis did not its investment in Provalliance wasreceive a VIE, and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that Provalliance is a VIE basedtax benefit on the fact that the holders of the equity investment at risk, as a group, lack the obligation to absorb the expected losses of the entity. The Equity Put is based on a formula that may or may not be at market when exercised, therefore, it could provide the Company with the characteristic of a controlling financial interest or could prevent the Franck Provost Salon Group from absorbing its share of expected losses by transferring such obligation to the Company. Under certain circumstances, including a decline in the fair value of Provalliance, the Equity Put could be exercised and the Franck Provost Group could be protected from absorbing the downside of the equity interest. As the Equity Put absorbs a large amount of variability this characteristic results in Provalliance being a VIE.

        Regis determined that the Franck Provost Group has met the power criterion due to the Franck Provost Group having the authority to direct the activities that most significantly impact Provalliance's economic performance. The Company concluded based on the considerations above that the primary beneficiary of Provalliance is the Franck Provost Group. The Company has accounted for its interest in Provalliance as an equity method investment. The exposure to loss related to the Company's involvement with Provalliance is the carrying value of the investment and future changes in fair value of the Equity Put that is unable to be quantified as of this date.

        In connection with the purchase of the additional equity interest, the Company reassessed the consolidation of variable interest entities guidance to determine whether the Company will now be considered the primary beneficiary of the VIE. Consistent with the previous assessment, the Company has determined the Frank Provost Group continues to meet the power criterion and is considered the primary beneficiary of Provalliance.net impairment charge.

        During fiscal years 2011, 2010,2012 and 2009,2011, the Company recorded $7.8$9.8, and $4.1, and $2.0$7.8 million, respectively, of equity in income related to its investment in Provalliance.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)

        The tables below contain details related to the Company's investment in Provalliance for the twelve months ended June 30, 2011, 2010, and 2009:

Impact on Consolidated Balance Sheet

 
  
 Carrying Value at
June 30,
 
 
 Classification 2011 2010 
 
  
 (Dollars in thousands)
 

Investment in Provalliance

 Investment in and loans to affiliates $149,245 $75,481 

Equity Put Option

 Other noncurrent liabilities  22,700  22,009 

Impact on Consolidated Statement of Operations

 
  
 For the Twelve Months
Ended June 30,
 
 
 Classification 2011 2010 2009 
 
  
 (Dollars in thousands)
 

Other than temporary impairment(1)

 Equity in income (loss) of affiliated companies, net of income taxes $ $ $(25,732)

Equity in income, net of income taxes

 Equity in income (loss) of affiliated companies, net of income taxes  7,752  4,134  1,979 

Impact on Consolidated Statement of Cash Flows

 
  
 For the Twelve Months
Ended June 30,
 
 
 Classification 2011 2010 2009 
 
  
 (Dollars in thousands)
 

Equity in income, net of income taxes

 Equity in income of affiliated companies $(7,752)$(4,134)$(1,979)

Cash dividends received

 Dividends received from affiliated companies  4,814  1,141   

(1)
Due to increased debt and reduced earnings expectations, the Company could no longer justify the carrying amount of its investment in Provalliance and recorded a $25.7 million other than temporary impairment charge in its fourth quarter ended June 30, 2009. The exposure to loss related to the Company's involvement with Provalliance is the carrying value of the investment and future changes in fair value of the Equity Put.

Investment in Empire Education Group, Inc.

        On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc. (EEG) in exchange for a 49.0 percent equity interest in EEG. In January 2008, the Company's effective ownership interest increased to 55.1 percent related to the


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)


buyout of EEG's minority interest shareholder. EEG operates 102 accredited cosmetology schools, has revenues of approximately $193 million annually and is overseen by the Empire Beauty School management team.

        At June 30, 2011 and 2010, the Company had a $21.4 million outstanding loan receivable with EEG that is due in January 2013. The Company has also provided EEG with a $15.0 million revolving credit facility, against which there no outstanding borrowings as of June 30, 2011 and 2010. During fiscal year 2011, 2010, and 2009, the Company recorded $0.7, $0.7, and $0.9 million, respectively, of interest income related to the loan and revolving credit facility. The Company has also guaranteed a credit facility of EEG. The exposure to loss related to the Company's involvement with EEG is the carrying value of the investment, the outstanding loan and the guarantee of the credit facility.

        The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in EEG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that EEG was not a VIE based on the fact that EEG had sufficient equity at risk. As the substantive voting control relates to the voting rights of the Board of Directors, the Company granted the other shareholder a proxy to vote such number of the Company's shares such that the other shareholder would have voting control of 51.0 percent of the common stock of EEG. The Company accounts for EEG as an equity investment under the voting interest model. During fiscal years ended June 30, 2011, 2010, and 2009, the Company recorded $5.5, $6.4, and $2.1 million of equity earnings related to its investment in EEG.Provalliance. During the twelve months ended June 30,fiscal years 2012 and 2011, EEG declared and distributed a dividend in which the Company received $4.1$2.8 and $4.8 million, of cash dividends.

        Due to the sale of the Company's investment in Provalliance, the Company liquidated its foreign entities with Euro denominated operations. Amounts previously classified within accumulated other comprehensive income that were recognized in earnings were foreign currency translation rate gain adjustments of $43.4 million, a cumulative tax-effected net loss of $7.9 million associated with a cross-currency swap that was settled in fiscal year 2007 that hedged the Company's European operations, and a $1.7 million net loss associated with cash repatriation, which netted to $33.8 million for fiscal year 2013, recorded within interest income and recorded tax expenseother, net on the Consolidated Statement of $0.3 million.Operations.

Investment in MY Style

        In April 2007,The Company accounts for the Company purchased exchangeable notes issued by Yamano Holding Corporation (Exchangeable Note) and a loan obligation of a Yamano Holdings subsidiary,27.1 percent ownership interest in MY Style formally known as Beauty Plaza Co. Ltd., (MY Style Note) fora cost method investment. The Company previously had an aggregate amount of $11.3 million (1.3 billion Yen as of April 2007). The Exchangeable Note contains an option for the Company to exchange a portion of the Exchangeable Note for shares of common stock of MY Style. In connectionoutstanding note with the issuance of the Exchangeable Note, the Company paid a premium of approximately $5.5 million (573,000,000 Yen as of April 2007).

        Exchangeable Note.    In September 2008, the Company advanced an additional $3.0 million (300,000,000 Yen as of September 2008) to Yamano Holding Corporation (Yamano). In connection with the 300,000,000 Yen advance, the exchangeable portion of the Exchangeable Note increased from approximately 14.8 percent to 27.1 percent of the 800 outstanding shares of MY Style, for 21,700,000 Yen. This exchange feature is akin to a deep-in-the-money option permittingwhich matured during the Company to purchase shares of common stock of MY Style. The option is embedded in the Exchangeable Note and does not meet the criteria for separate accounting under accounting for derivative instruments and hedging activities.

        The Company determined that the September 2008 modifications to the Exchangeable Note were more than minor and the loan modification should be treated as an extinguishment.fiscal year 2013. The Company recorded a $2.1less than $0.1 million (224,000,000 Yen as of September 2008) gainin interest income related to the modificationnote during fiscal years 2013, 2012, and 2011, respectively.

6. FAIR VALUE MEASUREMENTS

        Fair value measurements are categorized into one of the Exchangeable Note. However,three levels based upon the overall fair value of the Exchangeable Note on the datelowest level of modification,significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the Company recorded anmeasurement date, other than temporary impairment loss of $3.4 million (370,000,000 Yen as of September 2008). The $1.3 million net amount of the gainquoted prices included in Level 1); and other thanLevel 3 (unobservable inputs that cannot be corroborated by observable market data).


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)


temporary impairment was recorded within equity in loss of affiliates within the Consolidated Statement of Operations during the fourth quarter of fiscal year 2009.

        On March 28, 2010, the Company entered into an amendment agreement with Yamano in connection with the Exchangeable Note. The amendment revised the redemptions schedule for the 100,000,000 Yen and 211,131,284 Yen payments due September 30, 2013 and 2014, respectively, to March 28, 2010. The amendment was entered into in connection with a preferred share subscription agreement dated March 29, 2010 between the Company and Yamano. Under the preferred share subscription agreement, Yamano issued and the Company purchased one share of Yamano Class A Preferred Stock with a subscription amount of $1.1 million (100,000,000 Yen) and one share of Yamano Class B Preferred Stock with a subscription amount of $2.3 million (211,131,284 Yen), collectively the "Preferred Shares". The portions of the Exchangeable Note that became due as of March 28, 2010 were contributed in-kind as payment for the Preferred Shares. The Preferred Shares have the same terms and rights, yield a 5.0 percent dividend that accrues if not paid and have no voting rights.

        The Company determined that the March 2010 modifications were minor and the loan modification should not be treated as an extinguishment. The preferred shares will be accounted for as an available for sale debt security.

        Due to the natural disasters in Japan that occurred in March 2011, the Company was required to assess the preferred shares and premium for other than temporary impairment. The fair value of the collateral which is the equity value of MY Style, declined due to changes in projected revenue growth rates after the natural disasters. As MY Style is highly leveraged, any change in growth rates has a significant impact on fair value. The estimated fair value was negligible as of March 31, 2011. The Company recorded an other than temporary impairment during the third quarter of fiscal year 2011 for the carrying value of the preferred shares and premium of $3.9 million (326,700,000 Yen) and $5.3 million (435,000,000 Yen), respectively.

        As of June 30, 2011, the principal amount outstanding under the Exchangeable Note is $2.5 million (200,000,000 Yen). Principal payments of 100,000,000 Yen are due annually on September 30 through September 30, 2012. The Company reviews the Exchangeable Note with Yamano for changes in circumstances or the occurrence of events that suggest the Company's note may not be recoverable. The $2.5 million outstanding Exchangeable Note with Yamano as of June 30, 2011 is in good standing with no associated valuation allowance. The Company has determined the future cash flows of Yamano support the ability to make payments on the Exchangeable Note. The Exchangeable Note accrues interest at 1.845 percent and interest is payable on September 30, 2012 with the final principal payment. The Company recorded approximately $0.1 million in interest income related to the Exchangeable Note during fiscal years 2011, 2010, and 2009.

        MY Style Note.    As of June 30, 2011, the principal amount outstanding under the MY Style Note is $1.3 million (104,328,000 Yen). Principal payments of 52,164,000 Yen along with accrued interest are due annually on May 31 through May 31, 2013. The Company reviews the outstanding note with MY Style for changes in circumstances or the occurrence of events that suggest the Company's note may not be recoverable. The $1.3 million outstanding note with MY Style as of June 30, 2011 is in good standing with no associated valuation allowance. The Company has determined the future cash flows of MY Style support the ability to make payments on the outstanding note. The MY Style Note accrues interest at 3.0 percent. The Company recorded less than $0.1 million in interest income related to the MY Style Note during fiscal years 2011, 2010, and 2009.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)

        As of June 30, 2011, $1.9 and $2.2 million are recorded in the Consolidated Balance Sheet as current assets and investment in and loans to affiliates, respectively, representing the Company's Exchangeable Note and outstanding note with MY Style. The exposure to loss related to the Company's involvement with MY Style is the carrying value of the outstanding notes.

        All foreign currency transaction gains and losses on the Exchangeable Note and MY Style Note are recorded through other income within the Consolidated Statement of Operations. The foreign currency transaction (loss) gain was $(1.1), $3.1, and $2.1 million during fiscal years 2011, 2010, and 2009, respectively.

Investment in Hair Club for Men, Ltd.

        The Company acquired a 50.0 percent interest in Hair Club for Men, Ltd. through its acquisition of Hair Club in fiscal year 2005. The Company accounts for its investment in Hair Club for Men, Ltd. under the equity method of accounting. Hair Club for Men, Ltd. operates Hair Club centers in Illinois and Wisconsin. During fiscal years 2011, 2010, and 2009, the Company recorded income and received dividends of $0.6 and $1.1 million, $0.9 and $1.3 million, and $0.6 and $0.9 million, respectively. The exposure to loss related to the Company's involvement with Hair Club for Men, Ltd. is the carrying value of the investment.

7. FAIR VALUE MEASUREMENTS

        The fair value measurement guidance for financial and nonfinancial assets and liabilities defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by this guidance contains three levels as follows:

    Level 1—Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

    Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

      Quoted prices for similar assets or liabilities in active markets;

      Quoted prices for identical or similar assets in non-active markets;

      Inputs other than quoted prices that are observable for the asset or liability; and

      Inputs that are derived principally from or corroborated by other observable market data.

    Level 3—Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

        The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE MEASUREMENTS (Continued)


value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following tables sets forth by level within the fair value hierarchy, the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2011 and June 30, 2010, according to the valuation techniques the Company used to determine their fair values.

 
  
 Fair Value Measurements
Using Inputs Considered as
 
 
 Fair Value at
June 30, 2011
 
 
 Level 1 Level 2 Level 3 
 
  
 (Dollars in thousands)
 

ASSETS

             

Non-current assets

             
 

Derivative instruments

 $212 $ $212 $ 

LIABILITIES

             

Current liabilities

             
 

Derivative instruments

 $599 $ $599 $ 

Non-current liabilities

             
 

Equity put option

 $22,700 $ $ $22,700 


 
  
 Fair Value Measurements
Using Inputs Considered as
 
 
 Fair Value at
June 30, 2010
 
 
 Level 1 Level 2 Level 3 
 
  
 (Dollars in thousands)
 

ASSETS

             

Non-current assets

             
 

Derivative instruments

 $274 $ $274 $ 
 

Preferred shares

  3,502      3,502 

LIABILITIES

             

Current liabilities

             
 

Derivative instruments

 $401 $ $401 $ 

Non-current liabilities

             
 

Derivative instruments

 $1,039 $ $1,039 $ 
 

Equity put option

  22,009      22,009 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. FAIR VALUE MEASUREMENTS (Continued)

Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

        The following tables present the changes during the twelve ended June 30, 2011 and 2010 in our Level 3 financial instruments that are measured at fair value on a recurring basis.

 
 Changes in Financial Instruments
Measured at Level 3 Fair Value
Classified as
 
 
 Preferred Shares Equity Put Option 
 
 (Dollars in thousands)
 

Balance at July 1, 2010

 $3,502 $22,009 
 

Total realized and unrealized gains (losses):

       
  

Included in other comprehensive income (loss)

  433  3,847 
  

Included in equity in income (loss) of affiliated companies

    (2,442)
  

Transfer out of Level 3

    (714)
  

Other than temporary impairment

  (3,935)  
      

Balance at June 30, 2011

 $ $22,700 
      


 
 Changes in Financial Instruments
Measured at Level 3 Fair Value
Classified as
 
 
 Preferred Shares Equity Put Option 
 
 (Dollars in thousands)
 

Balance at July 1, 2009

 $ $24,161 
 

Total realized and unrealized gains (losses):

       
  

Additions to Level 3

  3,362   
  

Included in other comprehensive income (loss)

  140  (2,620)
  

Included in equity in income (loss) of affiliated companies

    468 
      

Balance at June 30, 2010

 $3,502 $22,009 
      

        The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

        Derivative instruments.    The Company's derivative instrument assets and liabilities consist of cash flow hedges represented by interest rate swaps and forward foreign currency contracts. The instruments are classified as Level 2 as the fair value is obtained using observable inputs available for similar liabilities in active markets at the measurement date that are reviewed by the Company. See breakout by type of contract and reconciliation to the balance sheet line item that each contract is classified within Note 9 of the Consolidated Financial Statements.

            Equity put option.option—Provalliance.    The Company's merger of the European franchise salon operations with the operations of the Franck Provost Salon Group on January 31, 2008 contained an equity put and an equity call. In March 2011, a portion of the equity put option$0.6 million Provalliance Equity Put was settled. See further discussion within Note 6 to the Consolidated Financial Statements. The equity put option is valued using binomial lattice models that incorporate assumptions including the business enterprise value at that date and future estimates of volatility and earnings before interest, taxes, and depreciation and amortization multiples.


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    7. FAIR VALUE MEASUREMENTS (Continued)


    At June 30, 2011, the fair value of the equity put option was $22.7 million and is classified within other noncurrent liabilities on the balance sheet.

            Preferred Shares.    The Company has preferred shares in Yamano Holding Corporation. The preferred shares are classified as Level 3 as there are no quoted market prices and minimal market participant data for preferred shares of similar rating. The preferred shares are classified within investment in and loans to affiliates on the Consolidated Balance Sheet. The fair value was determined based on unobservable inputs that could not be corroborated by observable market data. On September 27, 2012 the Company sold its interest in Provalliance and the Provalliance Equity Put automatically terminated upon closing of the preferred shares is based on the financial health of Yamano Holding Corporation and terms within the preferred share agreement which allow the Company to convert the subscription amount of the preferred shares into equity of MY Style, a wholly owned subsidiary of Yamano Holding Corporation. The Company recorded an other than temporary impairment for the full carrying value of the preferred shares during the twelve months ended June 30, 2011. See further discussion within Note 6 to the Consolidated Financial Statements.sale.

            Financial Instruments.In addition to the financial instruments listed above, the Company's financial instruments also include cash, cash equivalents, receivables, accounts payable and debt.

    The fair value of cash and cash equivalents, receivables, and accounts payable, and debt approximated the carrying values as of June 30, 2011 and 2010. At June 30, 2011, the estimated fair values and carrying amounts of debt were $335.4 and $313.4 million, respectively. At June 30, 2010, the estimated fair values and carrying amounts of debt were $458.6 and $440.0 million, respectively. The estimated fair value of debt was determined based on internal valuation models, which utilize quoted market prices and interest rates for the same or similar instruments.2013.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

        We measure certain assets, including the Company's equity method investments, tangible fixed assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of our investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

        The following tables present the fair value invalues of our assets measured at fair value on a nonrecurring basis during the twelve months ended June 30, 2011 and 2010, respectively:basis:

 
 Fiscal Year
2013
 Level 1 Level 2 Level 3 Total Losses 
 
 (Dollars in thousands)
 

Assets

                

Investment in affiliates—EEG(1)

 $41,997 $ $ $41,997 $(17,899)
            

Total

 $41,997 $ $ $41,997 $(17,899)
            

 
 June 30,
2011
 Level 1 Level 2 Level 3 Total Losses 
 
 (Dollars in thousands)
 

Assets

                
 

Goodwill—Promenade(1)

 $240,910 $ $ $240,910 $(74,100)
            

Total

 $240,910 $ $ $240,910 $(74,100)
            
(1)
The Company's investment in EEG with a carrying value of $59.9 million was written down to its implied fair value of $42.0 million, resulting in an impairment charge of $17.9 million. See Note 5 to the Consolidated Financial Statements for further information.

 
 Fiscal Year
2012
 Level 1 Level 2 Level 3 Total Losses 
 
 (Dollars in thousands)
 

Assets

                

Goodwill—Regis(1)

 $35,083 $ $ $35,083 $(67,684)

Investment in affiliates—EEG(2)

  59,683      59,683  (19,426)

Investment in affiliates—Provalliance(3)

  101,304      101,304  (37,383)
            

Total

 $196,070 $ $ $196,070 $(124,493)
            

(1)
Goodwill of the PromenadeRegis salon concept with a carrying value of $315.0$102.8 million was written down to its implied fair value, resulting in an impairment charge of $74.1 million, which was recorded during fiscal year 2011. The Company recorded $0.3 million of$67.7 million. See Note 4 to the Consolidated Financial Statements for further information.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7.6. FAIR VALUE MEASUREMENTS (Continued)

    translation rate adjustments during the fourth quarter of fiscal year 2011 on the Promenade salon concept goodwill balance.

 
 June 30,
2010
 Level 1 Level 2 Level 3 Total Losses 
 
 (Dollars in thousands)
 

Assets

                
 

Goodwill—Regis(1)

 $102,180 $ $ $102,180 $(35,277)
            

Total

 $102,180 $ $ $102,180 $(35,277)
            

(1)(2)
Goodwill of the Regis salon conceptThe Company's investment in EEG with a carrying value of $136.6$79.1 million was written down to its implied fair value of $59.7 million, resulting in an impairment charge of $19.4 million. See Note 5 to the Consolidated Financial Statements for further information.

(3)
The Company's investment in Provalliance was written down to its implied fair value, resulting in an impairment charge of $35.3 million, which was recorded during fiscal year 2010. The Company recorded $0.8 million of translation rate adjustments during$37.4 million. See Note 5 to the fourth quarter of fiscal year 2010 on the Regis salon concept goodwill balance.Consolidated Financial Statements for further information.

8.7. FINANCING ARRANGEMENTS

        The Company's long-term debt as of June 30, 2011 and 2010 consists of the following:

 
  
 Interest rate %  
  
 
 
  
 Fiscal Years June 30, 
 
 Maturity Dates 2013 2012 2013 2012 
 
 (fiscal year)
  
  
 (Dollars in thousands)
 

Senior term notes

 2013 6.69 - 8.50% 6.69 - 8.50% $ $111,429 

Convertible senior notes(1)

 2015 5.00 5.00  166,454  161,134 

Revolving credit facility

 2018       

Equipment and leasehold notes payable

 2015 - 2016 4.90 - 8.75 4.90 - 8.75  8,316  14,780 

Other notes payable

 2013 5.75 - 8.00 5.75 - 8.00    331 
            

        174,770  287,674 

Less current portion(1)

        (173,515) (28,937)
            

Long-term portion

       $1,255 $258,737 
            

 
  
 Interest rate % Amounts outstanding 
 
 Maturity
Dates
(fiscal year)
 
 
 2011 2010 2011 2010 
 
  
  
  
 (Dollars in thousands)
 

Senior term notes

  2013 - 2018  6.69 - 8.50% 5.65 - 8.39%$133,571 $174,107 

Convertible senior notes

  2015  5.00  5.00  156,248  151,760 

Term loan

  2011    2.86    85,000 

Revolving credit facility

  2016         

Equipment and leasehold notes payable

  2015 - 2016  8.80 - 9.14  8.93 - 9.35  22,273  27,473 

Other notes payable

  2012 - 2013  5.75 - 8.00  3.00 - 8.00  1,319  1,689 
               

           313,411  440,029 

Less current portion

           (32,252) (51,629)
               

Long-term portion

          $281,159 $388,400 
               
(1)
On or after April 15, 2014, holders may convert each of their senior convertible notes at their option at any time prior to the July 10, 2014 maturity date. As a result, the Company has included the convertible senior notes within long-term debt, current portion on the Consolidated Balance Sheet.

        The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, and transactions with affiliates. In addition, the Company must adhere to specified fixed charge coverage and leverage ratios, as well as minimum net worth levels. We wereratios. The Company was in compliance with all covenants and other requirements of our financing arrangements as of June 30, 2011. Additional details2013.

        Aggregate maturities of long-term debt, including associated capital lease obligations of $8.3 million at June 30, 2013, are included below with the discussion of the specific categories of debt.as follows:

Fiscal year
 (Dollars in thousands) 

2014

 $173,515 

2015

  1,253 

2016

  2 

2017

   

2018

   

Thereafter

   
    

 $174,770 
    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.7. FINANCING ARRANGEMENTS (Continued)

        Aggregate maturities of long-term debt, including associated capital lease obligations of $22.3 million at June 30, 2011, are as follows:

Fiscal year
 (Dollars in thousands) 

2012

 $32,252 

2013

  29,091 

2014

  178,200 

2015

  19,959 

2016

  18,195 

Thereafter

  35,714 
    

 $313,411 
    

Senior Term Notes

Private Shelf Agreement

        At June 30, 2011 and 2010,During fiscal year 2013, the Company had $133.6 and $174.1prepaid $89.3 million respectively, inof unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement, of which $22.1 and $40.5 million were classified as part of the current portion of the Company's long-term debt at June 30, 2011 and 2010, respectively. The notes require quarterly payments, and final maturity dates range from June 2013 through December 2017.

        The Private Shelf Agreement includes financial covenants including debt to EBITDA ratios, fixed charge coverage ratios and minimum net equity tests (as defined within the Private Shelf Agreement), as well as other customary terms and conditions. The maturity date for the debt may be accelerated upon the occurrence of various events of default, including breaches of the agreement, certain cross-default situations, certain bankruptcy related situations, and other customary events of default.

        In July 2009, the Company amended the Restated Private Shelf Agreement. The amendments included increasing the Company's minimum net worth covenant from $675.0 to $800.0 million, lowering the fixed charge coverage ratio requirement from 1.5x to 1.3x, amending certain definitions, including EBITDA and Fixed Charges, limiting the Company's restricted payments to $20.0 million if the Company's leverage ratio is greater than 2.0x and the addition of a risk based capital fee calculated on the daily average outstanding principal amount equal to an annual rate of 1.0 percent that commences one year after the amendment date. During fiscal year 2010, the net proceeds from the convertible senior notes and common stock issuances in July 2009 were utilized in part to repay $30.0 million of senior term notes under the Restated Private Shelf Agreement.

Private Placement Senior Term Notes

        At June 30, 2011, the Company did not have any outstanding private placement senior term notes.

        On June 29, 2009, the Company entered into a prepayment amendment on the private placement senior term notes whereby the Company negotiated to prepay the notes with a premium over the principal amount that is less than the make-whole premium that is otherwise payable upon redemption. During fiscal year 2010, the net proceeds from the convertible senior notes and common stock issuances in July 2009 were utilized to repay the $267.0 million of private placement senior term notes


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. FINANCING ARRANGEMENTS (Continued)


of varying maturities and $30.0 million of additional senior term notes under a Private Shelf Agreement.

shelf agreement. As a result of the repayment of a portion of the senior term notes during the twelve months ended June 30, 2010,prepayment, the Company incurred $12.8 million ina make-whole payments and other fees along with $5.2 million in interest rate swap settlements, as discussed in Note 9payment of the Consolidated Financial Statements, totaling $18.0$10.6 million that was recorded asin interest expense within the Consolidated Statement of Operations.

Convertible Senior Notes

        In July 2009, the Company issued $172.5 million aggregate principal amount of 5.0 percent convertible senior notes due July 2014. The notes are unsecured, senior obligations of the Company and interest will beis payable semi-annually in arrears on January 15 and July 15 of each year at a rate of 5.0 percent per year. TheAs of June 30, 2013, the notes will beare convertible subject to certain conditions further described below at an initiala conversion rate of 64.672665.4357 shares of the Company's common stock per $1,000 principal amount of notes, (representing an initialrepresenting a conversion price of approximately $15.46$15.28 per share of the Company's common stock). As of June 30, 2011, the conversion rate was 64.8263 shares of the Company's common stock per $1,000 principal amount of notes (representing a conversion price of approximately $15.43 per share of the Company's common stock).stock.

        Holders may convert their notes at their option prior to April 15, 2014 if the Company's stock price meets certain price triggers or upon the occurrence of specified corporate events as defined in the convertible senior note agreement. On or after April 15, 2014, holders may convert each of their notes at their option at any time prior to the maturity date forof the notes.

        The Company has the choice of net-cash settlement, settlement in its own shares or a combination thereof and concluded the conversion option is indexed to its own stock. As a result, in July 2009 the Company allocated $24.7 million of the $172.5 million principal amount of the convertible senior notes to equity, which resulted in a $24.7 million debt discount. The allocation was based on measuring the fair value of the convertible senior notes using a discounted cash flow analysis. The discount rate was based on an estimated credit rating for the Company. In July 2009, the estimated fair value of the convertible senior notes was $147.8 million. The resulting $24.7 million debt discount will beis being amortized over the period the convertible senior notes are expected to be outstanding, which is five years, as additional non-cash interest expense. The combined debt discount amortization and the contractual interest coupon resulted in an effective interest rate on the convertible debt of 8.9 percent.

        The following table provides equity and debt information for the convertible senior notes:


 Convertible Senior Notes
Due 2014 at
  June 30, 
(Dollars in thousands)
 June 30, 2011 June 30, 2010 

 2013 2012 

 (Dollars in thousands)
 

Principal amount on the convertible senior notes

 $172,500 $172,500  $172,500 $172,500 

Unamortized debt discount

 (16,252) (20,740) (6,046) (11,366)
          

Net carrying amount of convertible debt

 $156,248 $151,760  $166,454 $161,134 
          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. FINANCING ARRANGEMENTS (Continued)

        The following table provides interest rate and interest expense amounts related to the convertible senior notes:


 Convertible Senior Notes Due
2014 Twelve Months Ended
  Fiscal Years 
(Dollars in thousands)
 June 30, 2011 June 30, 2010 

 2013 2012 

 (Dollars in thousands)
 

Interest cost related to contractual interest coupon—5.0%

 $8,625 $8,266  $8,625 $8,625 

Interest cost related to amortization of the discount

 4,488 3,956  5,320 4,886 
          

Total interest cost

 $13,113 $12,222  $13,945 $13,511 
          

        In connection with the convertible senior note offering, the Company issued 13,225,000 sharesTable of common stock resulting in net proceeds of $163.5 million.Contents

Term Loan
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        The Company had a term loan with monthly interest payments based on a one-month LIBOR plus 2.25 percent. In June 2011, the Company repaid the outstanding term loan totaling $85.0 million.7. FINANCING ARRANGEMENTS (Continued)

Revolving Credit Facility

        On June 30, 2011,11, 2013, the Company amended its $400.0 million unsecured revolving credit facility agreement, which now provides for a $400.0 million senior unsecured five-year revolving credit facility.expires in June 2018. The revolving credit facility has rates tied to a LIBOR plus 145 basis points as of June 30, 2011. The revolving credit facility requiresspread and a quarterly facility fee on the average daily amount of the facility (whether used or unused) calculated at a rate of 30 basis points as of June 30, 2011.. Both the LIBOR credit spread and the facility fee are based on the Company's debt to EBITDA ratio at the end of each fiscal quarter. The amendments included increasing the Company's minimum net worth covenant from $800.0 to $850.0 million, and amending or adding certain definitions, including Change in Law, Defaulting Lender, EBITDA, Fronting Exposure, Replacement Lender, and Accounting Principles. In addition, the Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Under the new agreement, indebtedness related to Capital Leases is limited to $50.0 million, and Restricted Payments are tiered based on Debt to EBITDA. Events of default under the Credit Agreement include change of control of the Company and the Company's default ofwith respect to other debt exceeding $10.0 million. The facility expires in July 2016. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2011.

As of June 30, 20112013 and 2010,2012, the Company had no outstanding borrowings under this revolving credit facility. Additionally, the Company had outstanding standby letters of credit under the revolving credit facility of $26.0$2.2 and $24.6$26.1 million at June 30, 20112013 and 2010,2012, respectively, primarily related to its self-insurance program. Unused available credit under the facility at June 30, 20112013 and 20102012 was $374.0$397.8 and $275.4$373.9 million, respectively. The decrease in the outstanding standby letters of credit was due to the Company using $24.5 million of restricted cash to collateralize its self-insurance program during the fiscal year 2013, enabling the Company to reduce fees associated with the standby letters of credit.

Equipment and Leasehold Notes Payable

        The equipment and leasehold notes payable are primarily comprised of capital lease obligations which are payable in monthly installments through fiscalobligations. In September 2011, the Company entered into an agreement to refinance existing capital leases to a three year 2016. Theterm with a contract rate of 4.9 percent. As of June 30, 2013 the capital lease obligations are collateralized bybalance was $8.3 million and will be amortized at the assets purchased underhistorical rate of 9.2 percent. There was no gain or loss recorded on the agreement.refinance. The Company entered into the refinancing to reduce cash interest payments.

Other Notes Payable

        The Company had $1.3 and $1.7$0.3 million in unsecured outstanding notes at June 30, 2011 and 2010, respectively,2012, related to debt assumed in acquisitions.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DERIVATIVE FINANCIAL INSTRUMENTS

        The Company's primary market risk exposures in the normal course of business are changes in interest rates and foreign currency exchange rates. The Company has established policies and procedures that govern the management of these exposures through the use of a variety of strategies, including the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation or trading. Hedging transactions are limited to an underlying exposure. The Company has established an interest rate management policy that manages the interest rate mix of its total debt portfolio and related overall cost of borrowing. The Company's foreign currency exchange rate risk management policy includes frequently monitoring market data and external factors that may influence exchange rate fluctuations in order to minimize fluctuation in earnings due to changes in exchange rates. The Company enters into arrangements with counterparties that the Company believes are creditworthy. Generally, derivative contract arrangements settle on a net basis. The Company assesses the effectiveness of its hedges on a quarterly basis using the critical terms method in accordance with guidance for accounting for derivative instruments and hedging activities.

        The Company has primarily utilized derivatives which are designated as either cash flow or fair value hedges and qualify for hedge accounting treatment. For cash flow hedges and fair value hedges, changes in fair value are deferred in accumulated other comprehensive income (loss) within shareholders' equity until the underlying hedged item is recognized in earnings. Any hedge ineffectiveness is recognized immediately in current earnings. To the extent the changes offset, the hedge is effective. Any hedge ineffectiveness the Company has historically experienced has not been material. By policy, the Company designs its derivative instruments to be effective as hedges and aims to minimize fluctuations in earnings due to market risk exposures. If a derivative instrument is terminated prior to its contract date, the Company continues to defer the related gain or loss and recognizes it in current earnings over the remaining life of the related hedged item.

        The Company also utilizes freestanding derivative contracts which do not qualify for hedge accounting treatment. The Company marks to market such derivatives with the resulting gains and losses recorded within current earnings in the Consolidated Statement of Operations. For purposes of the Consolidated Statement of Cash Flows, cash flows associated with all derivatives (designated as hedges or freestanding economic hedges) are classified in the same category as the related cash flows subject to the hedging relationship.

Cash Flow Hedges

        As of June 30, 2011, the Company's cash flow hedges consist of forward foreign currency contracts.

        In the past, the Company used interest rate swaps to maintain its variable to fixed rate debt ratio in accordance with its established policy. The Company repaid variable and fixed rate debt during the twelve months ended June 30, 2011. Prior to the repayments, the Company had two outstanding interest rate swaps totaling $40.0 million on $85.0 million aggregate variable rate debt with maturity dates in fiscal year 2012. The interest rate swaps were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for an aggregate loss of $0.1 million. The $0.1 million loss was recorded during the fourth quarter of fiscal year 2011 on the termination of the interest rate swaps and was recorded within interest expense in the Consolidated Statement of Operations.

        The Company repaid variable and fixed rate debt during the twelve months ended June 30, 2010. Prior to the repayments, the Company had two outstanding interest rate swaps totaling $50.0 million on $100.0 million aggregate variable rate debt with maturity dates between fiscal years 2013 and 2015. The


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)


interest rate swaps were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for an aggregate loss of $5.2 million. The $5.2 million loss recorded during the first quarter of fiscal year 2010 on the termination of the interest rate swaps was recorded within interest expense in the Consolidated Statement of Operations as described in Note 8 to the Consolidated Financial Statements. The Company also had two outstanding treasury lock agreements with maturity dates between fiscal years 2013 and 2015. The treasury lock agreements were terminated prior to the maturity dates in conjunction with the repayments of debt and were settled for a loss of less than $0.1 million during the twelve months ended June 30, 2010 and recorded within interest expense in the Consolidated Statement of Operations.

        The Company uses forward foreign currency contracts to manage foreign currency rate fluctuations associated with certain forecasted intercompany transactions. The Company's primary forward foreign currency contracts hedge approximately $0.6 million of monthly payments in Canadian dollars for intercompany transactions. The Company's forward foreign currency contracts hedge transactions through September 2012.

        These cash flow hedges were designed and are effective as cash flow hedges. They were recorded at fair value within other noncurrent liabilities or other current assets in the Consolidated Balance Sheet, with corresponding offsets primarily recorded in other comprehensive income (loss), net of tax.

Fair Value Hedges

        In the past, the Company had two interest rate swaps designated as fair value hedges. The Company paid variable rates of interest and received fixed rates of interest under these contracts. The contracts and related debt matured during the twelve months ended June 30, 2009.

Freestanding Derivative Forward Contracts

        The Company uses freestanding derivative forward contracts to offset the Company's exposure to the change in fair value of certain foreign currency denominated investments and intercompany assets and liabilities. These derivatives are not designated as hedges and therefore, changes in the fair value of these forward contracts are recognized currently in earnings, thereby offsetting the current earnings effect of the related foreign currency denominated assets and liabilities.

        In November 2009, the Company terminated its freestanding derivative contract on its remaining payments on the MY Style Note and recorded a gain of $0.7 million. The contract was settled in cash, discounted to present value. Gains and losses over the life of the contract were recognized in earnings in conjunction with marking the contract to fair value. A net loss of $0.2 million was recognized during fiscal year 2010.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

        The Company had the following derivative instruments in its Consolidated Balance Sheet as of June 30, 2011 and 2010:

 
 Asset Liability 
 
  
 Fair Value  
 Fair Value 
Type
 Classification June 30,
2011
 June 30,
2010
 Classification June 30,
2011
 June 30,
2010
 
 
  
 (In thousands)
  
 (In thousands)
 

Designated as hedging instruments—Cash Flow Hedges:

                 

Interest rate swaps

  $ $ Other noncurrent liabilities $ $(1,039)

Forward foreign currency contracts

 Other current assets $ $274 Other current liabilities $(599)$ 

Freestanding derivative contracts—not designated as hedging instruments:

                 

Forward foreign currency contracts

 Other current assets $212 $ Other current liabilities $ $(401)
              

Total

   $212 $274   $(599)$(1,440)
              

        The table below sets forth the (gain) or loss on the Company's derivative instruments recorded within accumulated other comprehensive income (AOCI) in the Consolidated Balance Sheet for the twelve months ended June 30, 2011 and 2010. The table also sets forth the (gain) or loss on the Company's derivative instruments that has been reclassified from AOCI into current earnings during the twelve months ended June 30, 2011 and 2010 within the following line items in the Consolidated Statement of Operations.

 
 (Gain) Loss Recognized in
Other Comprehensive Income
Twelve Months Ended June 30,
 (Gain) Loss Reclassified from
Accumulated OCI into
Income (Loss) at June 30,
 
Type
 2011 2010 2009 Classification 2011 2010 2009 
 
 (In thousands)
  
 (In thousands)
 

Designated as hedging instruments—Cash Flow Hedges:

                     

Interest rate swaps

 $(636)$(2,967)$(2,732) $ $ $ 

Forward foreign currency contracts

  456  519  (495)Cost of sales  48  (261) (142)

Treasury lock contracts

    (146) 41 Interest income    388  (25)
                

Total

 $(180)$(2,594)$(3,186)  $48 $127 $(167)
                

        As of June 30, 2011 the Company estimates that it will reclassify into earnings during the next twelve months a gain of $0.6 million from the pretax amount recorded in AOCI as the anticipated cash flows occur.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

        The table below sets forth the gain or (loss) on the Company's derivative instruments for the years ended June 30, 2011 and 2010 recorded within interest income and other, net in the Consolidated Statement of Operations.

 
 Derivatives Impact on Income (Loss) at June 30, 
Type
 Classification 2011 2010 2009 
 
  
 (In thousands)
 

Designated as hedging instruments—Fair Value Hedges:

            

Fair value interest rate swap

 Interest income and other, net $ $ $335 

Freestanding derivative contracts—not designated as hedging instruments:

            

Forward foreign currency contracts

 Interest income and other, net $613 $(811)$1,147 
          

Total

   $613 $(811)$1,482 
          

10.8. COMMITMENTS AND CONTINGENCIES:

Operating Leases:

        The Company is committed under long-term operating leases for the rental of most of its company-owned salonsalons and hair restoration center locations.some of its corporate facilities and distribution centers under operating leases. The original terms of the salon leases range from one to 20 years, with many leases renewable for an additional five to ten year term at the option of the Company, and certain leases include escalation provisions.Company. For certainmost leases, the Company is required to pay additional rent based on a percent of sales in excess of a predetermined amount and, in most cases, real estate taxes and other occupancy expenses. Rent expense for the Company's international department store salons is based primarily on a percentpercentage of sales.

        The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees.

        During fiscal year 2005, the Company entered into a lease agreement for a 102,448 square foot building, located in Edina, Minnesota. The Company began to recognize rent expense related to this property during the three months ended September 30, 2005, which was the date that it obtained the legal right to use and control the property. The original lease term ends in May 2016 and the aggregate amount of lease payments to be made over the remaining original lease term are approximately $5.6$3.4 million. The lease agreement includes an option to purchase the property or extend the original term for two successive periods of five years.

In addition, the Company leases an 89,900 square foot building near the company-owned distribution center located in Chattanooga, Tennessee. The original lease term ends in August 2013 and the aggregate amount of lease payments to be made over the remaining original lease term are approximately $0.5 million

        Sublease income was $28.4, $29.2, and $29.9 million in fiscal years 2011, 2010 and 2009, respectively. Rent expense on premises subleased was $27.9, $28.8, and $29.5 million in fiscal years 2011, 2010 and 2009, respectively. Rent expense and the related rental income on the sublease arrangements with franchisees is netted within the rent expense line item on the Consolidated


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.8. COMMITMENTS AND CONTINGENCIES: (Continued)


fiscal year 2013, the Company began consolidating its corporate headquarters and expects to exit this building during fiscal year 2014.

        The Company also has guarantees associated with approximately 20 operating leases associated with the Company's former Trade Secret concept. As the Company has not experienced and does not expect any material loss to result from these arrangements, the Company has determined the exposure to the risk of loss on the guarantee of the operating leases to be immaterial to the financial statements.

        Sublease income was $29.1, $28.3, and $28.4 million in fiscal years 2013, 2012 and 2011, respectively. Rent expense on premises subleased was $28.7, $27.9, and $27.9 million in fiscal years 2013, 2012 and 2011, respectively. Rent expense and related rental income on sublease arrangements with franchisees is netted within the rent expense line item on the Consolidated Statement of Operations. In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net income (loss). However, in limited cases, the Company charges a ten percent mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4, $0.4, and $0.5 million for fiscal year 2013, 2012 and 2011, and $0.4 million for each fiscal year 2010 and 2009,respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.

        Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:

 Fiscal Years 

 2011 2010 2009  2013 2012 2011 

 (Dollars in thousands)
  (Dollars in thousands)
 

Minimum rent

 $260,644 $259,984 $260,140  $246,787 $250,487 $251,417 

Percentage rent based on sales

 9,225 10,138 11,623  7,566 8,938 9,225 

Real estate taxes and other expenses

 72,417 73,976 76,029  70,363 72,344 72,417 
              

 $342,286 $344,098 $347,792  $324,716 $331,769 $333,059 
              

        As of June 30, 2011,2013, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases with remaining terms of greater than one year are as follows:

Fiscal year
 Corporate
leases
 Franchisee
leases
 Guaranteed
leases
  Corporate
leases
 Franchisee
leases
 Guaranteed
leases
 

 (Dollars in thousands)
  (Dollars in thousands)
 

2012

 $266,339 $43,549 $2,150 

2013

 216,435 35,135 1,215 

2014

 164,420 26,686 787  $248,458 $47,958 $912 

2015

 115,048 18,269 552  197,170 39,751 729 

2016

 68,458 9,871 409  143,330 30,798 554 

2017

 94,772 20,989 422 

2018

 53,569 11,304 221 

Thereafter

 87,410 7,653 483  56,431 9,436 125 
              

Total minimum lease payments

 $918,110 $141,163 $5,596  $793,730 $160,236 $2,963 
              

Salon Development Program:

        As a part of its salon development program, the        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.locations.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. COMMITMENTS AND CONTINGENCIES: (Continued)

Contingencies:

        The Company is self-insured for most workers' compensation, employment practice liability, and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. LEASE TERMINATION COSTS

        The Company approved plans in June 2009Litigation and July 2008 to close approximately 80 and 160, respectively, underperforming company-owned salons. As lease settlements were negotiated, the Company found that some lessors were willing to negotiate rent reductions which allowed the Company to keep operating certain salons. As a result, the number of salons closed was less than the amount of salons per the approved plans. For salons that did not receive rent reductions, the Company ceased using the right to use the leased property or negotiated a lease termination agreement with the lessors. Lease termination costs represents either the lease settlement or the net present value of remaining contractual lease payments related to closed salons, reduced by estimated sublease rentals. Lease termination costs from continuing operations are presented as a separate line item in the Consolidated Statement of Operations. The plans are substantially complete.

        The activity reflected in the accrual for lease termination costs is as follows:

 
 For the Twelve
Months Ended
June 30,
 
Accrual for Lease Terminations
 2011 2010 
 
 (Dollars in thousands)
 

Balance at July 1,

 $1,386 $2,760 
 

Provision for lease termination costs:

       
  

Provisions associated with store closings

    2,145 
  

Cash payments

  (1,059) (3,519)
      

Balance at June 30,

 $327 $1,386 
      

12. LITIGATIONSettlements:

        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 consumer and wage and hour violations. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleges that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. The Board of Directors appointed a Special Litigation Committee to investigate the claims and allegations made in the derivative action, and to decide on behalf of the Company whether the claims and allegations should be pursued. The derivative action has been stayed by the court pending the decision of the Special Litigation Committee. We do not know when the Special Litigation Committee will complete its work, or what it will decide. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the Company's counsel believes thatactions are being vigorously defended, 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 Consolidated Financial Statementsresults of operations in any particular period.

        During fiscal year 2013, the Company incurred $1.2 million of expense in conjunction with the derivative shareholder action.

        During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit.

        During fiscal year 2011, the Company settled a legal claim with the former owner of Hair Club for $1.7 million.

        During fiscal year 2010, the Company settled two legal claims regarding certain customer and employee matters for an aggregate charge9. INCOME TAXES

        The components of $5.2 million plus a commitment to provide discount coupons. Payments aggregating $4.3 and $0.9 million were made during fiscal years 2011 and 2010, respectively.income (loss) before income taxes are as follows:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

Income (loss) before income taxes:

          

U.S. 

 $(25,177)$(35,430)$(49,669)

International

  35,275  10,116  5,736 
        

 $10,098 $(25,314)$(43,933)
        

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.9. INCOME TAXES (Continued)

        The components of (loss) income before income taxes are as follows:

 
 2011 2010 2009 
 
 (Dollars in thousands)
 

(Loss) income before income taxes:

          
 

U.S. 

 $(31,963)$35,289 $112,524 
 

International

  6,334  17,925  (33,758)
        

 $(25,629)$53,214 $78,766 
        

        The (benefit) provision for income taxes consists of:

 Fiscal Years 


 2011 2010 2009  2013 2012 2011 


 (Dollars in thousands)
  (Dollars in thousands)
 

Current:

Current:

  

U.S. 

 $3,658 $5,580 $48,935 

International

 1,557 14,882 (3,142)

U.S.

 $(21,053)$(1,095)$(4,409)

International

 707 2,261 1,106 

Deferred:

Deferred:

  

U.S.

 10,405 (5,519) (16,283)

International

 (83) (77) 3,253 

U.S. 

 (17,882) 4,007 568        

International

 3,171 1,108 (4,411) $(10,024)$(4,430)$(16,333)
              

 $(9,496)$25,577 $41,950 
       

        The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings (loss) earnings before income taxes, as a result of the following:


 2011 2010 2009  Fiscal Years 

U.S. statutory rate

 (35.0)% 35.0% 35.0%

 2013 2012 2011 

U.S. statutory rate (benefit)

 35.0% (35.0)% (35.0)%

State income taxes, net of federal income tax benefit

 (0.1) 3.4 3.4  3.6 3.5 (1.7)

Tax effect of goodwill impairment

 10.8 11.4 14.5   47.7 6.5 

Foreign income taxes at other than U.S. rates

 7.9 (0.8) (1.6) 4.1 (0.5) 4.7 

Tax effect of foreign currency translation gain

 (107.0)   

Work Opportunity and Welfare-to-Work Tax Credits

 (15.3) (6.4) (4.9) (42.8) (19.4) (8.8)

Adjustment of prior year income tax balances

  3.9 4.8 

Other, net

 (5.4) 1.6 2.1  7.8 (13.8) (2.9)
              

 (37.1)% 48.1% 53.3% (99.3)% (17.5)% (37.2)%
              

        ForThe 7.8 percent of Other, net in fiscal year 2011,2013 includes the Company reported a $25.6 million loss from continuing operations before income taxes as compared to income from continuing operations before income taxesrate impact of $53.2meals and $78.8 millionentertainment expense disallowance, donated inventory, unrecognized tax benefits, and miscellaneous items of 4.9, (3.4), 5.5, and 0.8 percent, respectively.

        The (13.8) percent of Other, net in fiscal years 2010year 2012 includes the rate impact of meals and 2009,entertainment expense disallowance, unrecognized tax benefits, and miscellaneous items of 2.1, (9.1), and (6.8) percent, respectively.

        The rate reconciliation items have a greater impact on the annual effective income tax rate(2.9) percent of Other, net in fiscal year 2011 asincludes the magnitude of the loss from continuing operations before income taxes is less than the magnitude of income from continuing operations before income taxes in fiscal year 2010. The annual effective tax rate was favorably impacted by the employment credits related to the Small Business and Work Opportunity Tax Act of 2007. Based upon current legislation, these credits are scheduled to expire on December 31, 2011. Partially offsetting the favorable impact of the employment credits was the adverse impactunrecognized tax benefits and miscellaneous items of the pre-tax non-cash goodwill impairment charge of $74.1 million recorded during the third quarter of fiscal year 2011, which is only partially deductible for tax purposes. Additionally, the foreign income taxes at other(1.8) and (1.1) percent, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.9. INCOME TAXES (Continued)


than U.S. rates adversely impacted the annual effective tax rate due to a decrease in foreign income from continuing operations before income taxes and other foreign non-deductible items.

        The (5.4) percent of other, net in fiscal year 2011 includes the rate impact of meals and entertainment, donated inventory, unrecognized tax benefits, and miscellaneous items of 2.8, (3.0), (3.7), and (1.5) percent, respectively.

        During the fiscal year 2010, the Company recorded adjustments to correct its income tax balances. The adjustments increased the Company's fiscal year 2010 income tax provision by $2.1 million and increased its effective income tax rate by 3.9 percent. Included in the income tax provision are U.S. and international income tax adjustments resulting in a shift of the income tax provision between jurisdictions. On a world-wide basis the adjustments are immaterial. The Company does not believe the adjustments are material to its fiscal 2010 results of operations or its financial position or results of operations of any prior periods.

        During the fourth quarter of fiscal year 2009, the Company recorded an adjustment to correct its prior year deferred income tax balances. The adjustment increased the Company's fiscal year 2009 income tax provision by $3.8 million and increased its effective income tax rate by 4.8 percent. The Company does not believe the adjustment is material to its fiscal 2009 results of operations or its financial position or results of operations of any prior periods.

        The components of the net deferred tax assets and liabilities are as follows:

 June 30, 

 2011 2010  2013 2012 

 (Dollars in thousands)
  (Dollars in thousands)
 

Deferred tax assets:

  

Deferred rent

 $15,233 $15,677  $12,953 $14,725 

Payroll and payroll related costs

 37,852 34,294  34,073 43,717 

Net operating loss carryforwards

 1,210 2,106  2,484 759 

Tax credit carryforwards

 4,366  

Salon asset impairment

 5,176 4,154  720 5,038 

Inventories

 2,968 3,136  7,920 2,118 

Derivatives

 229 311 

Deferred gift card revenue

 1,536 1,581 

Federal and state benefit on uncertain tax positions

 8,549 10,178  1,888 2,113 

Allowance for doubtful accounts/notes

 9,855 575  7,004 5,144 

Insurance

 5,669 6,301  6,106 6,439 

Other

 6,167 5,481  11,745 6,362 
          

Total deferred tax assets

 $94,444 $83,794  $89,259 $86,415 
          

Deferred tax liabilities:

  

Depreciation

 $(29,348)$(17,603) $(20,684)$(17,831)

Amortization of intangibles

 (94,257) (107,392) (72,635) (61,139)

Accrued property taxes

 (1,942) (2,029)

Deferred debt issuance costs

 (6,215) (7,937) (2,303) (4,336)

Other

 (3)   (4,903) (2,102)
          

Total deferred tax liabilities

 $(131,765)$(134,961) $(100,525)$(85,408)
          

Net deferred tax liabilities

 $(37,321)$(51,167)

Net deferred tax (liability) asset

 $(11,266)$1,007 
          

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

        At June 30, 2011,2013, the Company hadhas tax effected state and foreignU.K. net operating loss carryforwards of approximately $18.6$1.8 million (net of $0.1 million of valuation allowance) and $8.4$0.7 million, respectively. These losses relate to various states, the U.K., Netherlands, and Luxembourg. The Company has recorded a valuation allowance of $7.5 million relating to losses in the Netherlands and Luxembourg. The Company expects to fully utilize all of thestate loss carryforwards for which a valuation allowanceexpire from 2016 to 2033. The U.K. loss carryforward has not been established.no expiration.

        At June 30, 2010, the Company had set up a valuation allowanceThe Company's tax credit carryforward of $1.0$4.4 million relating to the Netherlands tax losses. The valuation allowance increase of $6.5 million is due to additional tax losseswill expire in the Netherlands and Luxemborg.2033.

        As of June 30, 2011,2013, undistributed earnings of international subsidiaries of approximately $42.3$25.2 million were considered to have been reinvested indefinitely and, accordingly, the Company has not provided for U.S. income taxes on such earnings. It is not practicable for the Company to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

        The Company files tax returns and pays tax primarily in the U.S,U.S., Canada, the U.K., Luxembourg and the NetherlandsLuxembourg as well as states, cities, and provinces within these jurisdictions. In the U.S,U.S., fiscal years 20072010 and afterbeyond remain open for federal tax audit. The Company's U.S. federal income tax returns for the fiscal years 2007 through 20092010 and 2011 are currently under audit.examination by the Internal Revenue Service. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2007.2009. However, the companyCompany is under audit in a number of states in which the statute of limitations has been extended for fiscal years 20002007 and forward. Internationally, (including Canada),including Canada, the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years. A rollforward of the unrecognized tax benefits is as follows:


 Fiscal Years 
 2013 2012 2011 

 2011 2010 2009  (Dollars in thousands)
 

Balance at beginning of period

 $16,856 $14,787 $20,400  $4,381 $13,493 $16,856 

Additions based on tax positions related to the current year

 796 5,549 2,765  44 482 796 

(Reductions) additions based on tax positions of prior years

 (759) (185) 121 

Reductions on tax positions related to the expiration of the statue of limitations

 (2,718) (2,993) (8,167)

(Reductions)/additions based on tax positions of prior years

 7,132 (7) (759)

Reductions on tax positions related to the expiration of the statute of limitations

 (1,403) (1,571) (2,718)

Settlements

 (682) (302) (332) (139) (8,016) (682)
              

Balance at end of period

 $13,493 $16,856 $14,787  $10,015 $4,381 $13,493 
              

        If the Company were to prevail on all unrecognized tax benefits recorded, a benefit of approximately $6.0$2.8 million of the $13.5 million reserve would benefitbe recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the fiscal years ended June 30,2013, 2012, and 2011 2010 and 2009 we recorded income tax (benefit) expenseinterest and penalties of approximately $(0.6), $(1.1)$0.7, $(1.2), and $2.1$(0.6) million, respectively, for the fiscal years additions to the accrual net of the respective reversal of previously accrued interest and penalties. As of June 30, 2011,2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $2.7$2.2 million. This amount is not included in the gross unrecognized tax benefits noted above.

        It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next twelve months.fiscal year. However, we do not expectan estimate of the amount or range of the change to have a significant effect on our results of operations or our financial position.


Table of Contentscannot be made at this time.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.10. BENEFIT PLANS

Regis Retirement Savings PlanPlan:

        The Company maintains a defined contributedcontribution 401(k) plan, the Regis Retirement Savings Plan (the RRSP)(RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify withunder Section 401(a) of the Internal Revenue Code (Code) and is subject to the Employee Retirement Income Security Act of 1974.1974 ("ERISA").

        The 401(k) portion of the PlanRRSP is a contributory defined contribution plancash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. BENEFIT PLANS (Continued)

their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding PlanRRSP year are eligible to participate in the PlanRRSP commencing with the first day of the month following their completion of one month of service.

        The discretionary employer contribution profit sharing portion of the PlanRRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the PlanRRSP year, are employed by the Employer on the last day of the PlanRRSP year and are employed at the home office or distribution centers, or as area or regional supervisors, artistic directors or educators, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0 percent vested after completing two years of service with vesting increasing 20.0 percent for each additional year of service, and with participants becoming fully vested after six full years of service.

Nonqualified Deferred Salary Plan:

        The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers, field supervisors, warehouse and corporate office employees who are highly compensated. The discretionary employer contribution profit sharing portion of the Executive Plan is a noncontributory defined contributionprofit sharing component in which a participants interest becomebecomes 20.0 percent vested after completing two years of service with vesting increasing 20.0 percent for each additional year of service, and with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company.

Stock Purchase Plan:

        The Company has an employee stock purchase plan (ESPP) available to substantially allqualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0 percent of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $10.0$11.8 million. As of June 30, 2011,2013, the Company's cumulative contributions to the ESPP totaled $8.5$9.3 million.

Franchise Stock Purchase Plan:

        The Company has a franchise stock purchase plan (FSPP) available to substantially all franchisee employees. Under the terms of the plan, eligible franchisees and their employees may purchase the Company's common stock. The Company contributes an amount equal to five percent of the purchase price of the stock to be purchased on the open market and pays all expenses of the plan and its administration, not to exceed an aggregate contribution of $0.7 million. As of June 30, 2011,2013, the Company's cumulative contributions to the FSPP totaled $0.2 million.

Deferred Compensation Contracts:

        The Company has unfunded deferred compensation contracts covering certain current and former key executives. Prior to June 30, 2012, deferred compensation benefits were based on the executive's years of service and compensation for the 60 months preceding the executive's termination date.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.10. BENEFIT PLANS (Continued)

Deferred Compensation Contracts:Effective June 30, 2012, these contracts were amended and the benefits were frozen as of June 30, 2012.

        The Company has agreed to payExpense associated with the Chief Executive Officer, commencing upon his retirement, an amount equal to 60.0 percent of his salary, adjusted for inflation, for the remainder of his life. Additionally, the Company has a survivor benefit plan payable upon his death at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. In addition, the Company has other unfunded deferred compensation contracts covering key executives within the Company. The key executives' benefits are based on years of service and the employee's compensation prior to departure. The Company utilizes a June 30 measurement date for these deferred compensation contracts, a discount rate based on the Aa Bond index rate (5.5 and 5.4 percent at June 30, 2011 and 2010, respectively) and projected salary increases of 4.0 percent at June 30, 2011 and 2010 to estimate the obligations associated with these deferred compensation contracts. Compensation associated with these agreements is charged to expense as services are provided. Associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $4.3, $5.2,$1.6, $5.9 and $3.7$2.5 million for fiscal years 2011, 2010,2013, 2012, and 2009,2011, respectively. The accrued liability and projected benefit obligation of these deferred compensation contracts totaled $33.6$13.0 and $30.2$21.3 million at June 30, 20112013 and 2010,2012, respectively, in the Consolidated Balance Sheet. As of June 30, 20112013 and 2010, $28.62012, $9.5 and $29.6$11.8 million is included in other noncurrent liabilities, respectively. As of June 30, 20112013 and 2010, $5.02012, $3.5 and $0.6$9.5 million of the balance is included in accrued liabilities, respectively. The tax-affected accumulated other comprehensive lossincome (loss) for the deferred compensation contracts, consisting of primarily unrecognized actuarial loss,income (loss), was $1.6$0.1 and $1.9$(0.5) million at June 30, 20112013 and 2010,2012, respectively. The amount included in accumulated other comprehensive loss expected to be recognized as a component of net periodic

        In connection with the former Chief Executive Officer's deferred compensation expensecontract, the Company paid the former Chief Executive Officer $15.1 million in fiscal year 2012 is approximately $0.2 million. The Company intends to fund its future obligations under these arrangements through company-owned life insurance policies2013. Associated compensation expense included in general and administrative expenses on the participants. Cash valuesConsolidated Statement of these policiesOperations totaled $22.3$3.7 and $20.2$1.8 million atfor fiscal years 2012 and 2011, respectively. As of June 30, 2011 and 2010, respectively, and are2012, $15.1 million of the balance is included in other assets in the Consolidated Balance Sheet.accrued liabilities.

        The Company has agreed to pay the former Vice Chairman an annual amount of $0.6 million, adjusted for inflation to $0.9 million in fiscal years 20112013 and 2010,2012, for the remainder of his life. The former Vice Chairman has agreed that during the period in which payments are made, as provided in the agreement, he will not engage in any business competitive with the business conducted by the Company. Additionally, the Company has a survivor benefit plan for the former Vice Chairman's spouse, payable upon his death, at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. Estimated associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.7, $0.6,$0.8 and $0.8$0.7 million for each of fiscal years 2011, 2010,2013, 2012, and 2009,2011, respectively. Related obligations totaled $5.9$5.7 and $6.2$5.8 million at June 30, 20112013 and 2010,2012, respectively, $0.9 million within accrued expenses and arethe remainder included in other noncurrent liabilities in the Consolidated Balance Sheet. The Company intends to fund all future obligations under this agreement through company-owned life insurance policies on the former Vice Chairman. Cash values of these policies totaled $4.2$4.9 and $3.9$4.5 million at June 30, 20112013 and 2010,2012, respectively, and are included in other assets in the Consolidated Balance Sheet. The policy death benefits exceed

        Compensation expense included in (loss) income before income taxes and equity in (loss) income of affiliated companies related to the obligations under this agreement.aforementioned plans, excluding amounts paid for expenses and administration of the plans included the following:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

RRSP Plan profit sharing

 $ $ $1,907 

Executive Plan (including profit sharing)

  311  394  933 

ESPP

  441  449  494 

FSPP

  7  9  8 

Deferred compensation contracts

  2,370  10,452  4,977 

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. BENEFIT PLANS (Continued)

        Compensation expense included in income before income taxes related to the aforementioned plans, excluding amounts paid for expenses and administration of the plans, for the three years ended June 30, 2011, 2010 and 2009, included the following:

 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Profit sharing plan

 $1,907 $3,206 $1,697 

Executive Profit Sharing Plan

  477  654  303 

ESPP

  494  484  634 

FSPP

  8  8  12 

Deferred compensation contracts

  4,977  5,814  4,479 

15. SHAREHOLDERS' EQUITY

Net Income Per Share:11. EARNINGS PER SHARE

        The Company's basic earnings per share is calculated as net income divided by weighted average common shares outstanding, excluding unvested outstanding RSAs and RSUs. The Company's dilutive earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan, and dilutive securities. Stock-based awards with exercise prices greater than the average market valuefollowing table sets forth a reconciliation of the Company'sincome (loss) from continuing operations available to common stock are excludedshareholders and the income (loss) from the computation of diluted earnings per share. The Company's dilutive earnings per share will also reflect the assumed conversion under the Company's convertible debt if the impact is dilutive, along with the exclusion of interest expense, net of taxes. The impact of the convertible debt is excluded from the computation ofcontinuing operations for diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basicunder the if-converted method:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

Income (loss) from continuing operations available to common shareholders

 $4,166 $(51,743)$(20,939)

Effect of dilutive securities:

          

Interest on convertible debt(1)

       
        

Income (loss) from continuing operations for diluted earnings per share

 $4,166 $(51,743)$(20,939)
        

(1)
Interest on convertible debt was excluded from income (loss) from continuing operations for diluted earnings per share.

share as the convertible debt was not dilutive.

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

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Shares in thousands)
 

Weighted average shares for basic earnings per share

  56,704  57,137  56,704 

Effect of dilutive securities:

          

Dilutive effect of convertible debt

       

Dilutive effect of stock-based compensation(1)

  142     
        

Weighted average shares for diluted earnings per share

  56,846  57,137  56,704 
        

 
 2011 2010 2009 
 
 (Shares in thousands)
 

Weighted average shares for basic earnings per share

  56,704  55,806  42,897 

Effect of dilutive securities:

          
 

Dilutive effect of convertible debt

    10,730   
 

Dilutive effect of stock-based compensation(1)

    217  129 
        

Weighted average shares for diluted earnings per share

  56,704  66,753  43,026 
        

(1)
For fiscal year 2012 and 2011, 334182,270 and 333,595 common stock equivalents of potentially dilutive common stock were not included in the diluted earnings per share calculation because to do so would have been anti-dilutive.

Table        The computation of Contentsweighted average shares outstanding, assuming dilution, excluded 1,593,228, 1,987,784 and 2,553,642 of equity-based compensation awards during the fiscal years 2013, 2012, and 2011, respectively. These amounts were excluded because they were not dilutive under the treasury stock method. The computation of weighted average shares outstanding, assuming dilution also excluded 11,260,261, 11,208,552, and 11,163,056 of shares from convertible debt for fiscal years 2013, 2012, and 2011, respectively. These amounts were excluded as they were not dilutive.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHAREHOLDERS' EQUITY (Continued)12. STOCK-BASED COMPENSATION

        The following table sets forth theCompany grants long-term equity-based awards which are excluded from the various earnings per share calculations:

 
 2011 2010 2009 
 
 (Shares in thousands)
 

Basic earnings per share:

          

RSAs(1)

  862  931  817 

RSUs(1)

  215  215  215 
        

  1,077  1,146  1,032 
        

Diluted earnings per share:

          

Stock options(2)

  890  960  899 

SARs(2)

  1,084  1,110  613 

RSAs(2)

  580  677  301 

RSUs(2)

      215 

Shares issuable upon conversion of debt(2)

  11,163     
        

  13,717  2,747  2,028 
        

(1)
Awards were not vested

(2)
Awards were anti-dilutive

        The following table sets forth a reconciliation of the net income from continuing operations available to common shareholders and the net income from continuing operations for diluted earnings per share under the if-converted method:

 
 2011 2010 2009 
 
 (Dollars in thousands)
 

Net (loss) income from continuing operations available to common shareholders

 $(8,905)$39,579 $6,970 

Effect of dilutive securities:

          
 

Interest on convertible debt

    7,520   
        

Net (loss) income from continuing operations for diluted earnings per share

 $(8,905)$47,099 $6,970 
        

Stock-based Compensation Award Plans:

        In May of 2004, the Company's Board of Directors approved the 2004 Long Term Incentive Plan (2004 Plan)(the "2004 Plan"). The 2004 Plan received shareholder approval at the annual shareholders' meeting held on October 28, 2004. The 2004 Plan provides for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units (RSUs), and restricted stock,stock-settled performance share units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company. On March 8, 2007, the Company's BoardA maximum of Directors approved an amendment to the 2004 Plan to permit the granting and issuance of restricted stock units (RSUs). On October 28, 2010, the shareholders of Regis Corporation approved an amendment to the 2004 Plan to increase the maximum number of6,750,000 shares of the Company's common stock authorizedare available for issuance pursuant to grants and awards from 2,500,000 to 6,750,000. The 2004 Plan expires on May 26, 2014. Stock options, SARs and restricted stock under the 2004 Plan generally vest at a rate of 20.0 percent


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHAREHOLDERS' EQUITY12. STOCK-BASED COMPENSATION (Continued)


annually on each ofunder the first five anniversaries of the date of grant. The stock options and SARs have a maximum term of ten years. The cash-based performance grants will be tied2004 Plan. All unvested awards granted prior to the achievement of certain performance goals during a specified performance period, not less than one fiscal year in length. The RSUs cliff vest after five years and payment of the RSUs is deferred until January 31 of the year following vesting. Unvested awardsJuly 1, 2012 are subject to forfeiture in the event of termination of employment. See NoteFor awards granted subsequent to July 1, to the Consolidated Financial Statements2012, SAR and RSU awards generally include various acceleration terms for discussionparticipants aged sixty-two years or older and employees aged fifty-five or older and have fifteen years of the Company's measure of compensation cost for its incentive stock plans, as well as an estimate of future compensation expense related to these awards.continuous service.

        The Company also has outstanding stock options under the 2000 Stock Option Plan (2000(the "2000 Plan), although the plan terminated in 2010 whichand no additional awards have since been or will be made under the 2000 Plan. The 2000 Plan allowed the Company to grant both incentive and nonqualified stock options and replaced the Company's 1991 Stock Option Plan.

        Under the 2004 Plan (1991 Plan). Total options covering 3,500,000 shares of common stock were available for grant underand the 2000 Plan, to employees of the Company for a term not to exceed ten years from the date of grant. The term may not exceed five years for incentive stock optionsstock-based awards are granted to employees of the Company possessing more than ten percent of the total combined voting power of all classes of stock of the Companyat an exercise price or any subsidiary of the Company. Options may also be grantedinitial value equal to the Company's outside directors for a term not to exceed ten years from the grant date. The 2000 Plan contains restrictions on transferability, time of exercise, exercise price and on disposition of any shares acquired through exercise of the options. Stock options were granted at not less than fair market value on the date of grant. The Board of Directors determines the 2000 Plan participants and establishes the terms and conditions of each option.

        The terms and conditions of the shares granted under the 1991 Plan are similar to the 2000 Plan. The 1991 Plan terminated in 2001. All shares granted under the 1991 Plan have been exercised, forfeited, or cancelled as of June 30, 2011.

        Common shares available for grant under the following plans as of June 30 were:

 
 2011 2010 2009 
 
 (Shares in thousands)
 

2000 Plan

    4  268 

2004 Plan

  4,209  12  103 
        

  4,209  16  371 
        

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHAREHOLDERS' EQUITY (Continued)

        Stock options outstanding and weighted average exercise prices were as follows:

 
 Options Outstanding 
 
 Shares Weighted
Average
Exercise Price
 
 
 (in thousands)
  
 

Balance, June 30, 2008

  1,713 $24.55 

Granted

  9  35.15 

Cancelled

  (102) 30.20 

Exercised

  (235) 16.60 
      

Balance, June 30, 2009

  1,385  25.55 

Granted

  135  18.90 

Cancelled

  (337) 17.74 

Exercised

  (203) 15.12 
      

Balance, June 30, 2010

  980  29.48 

Granted

     

Cancelled

  (96) 18.89 

Exercised

  (46) 15.04 
      

Balance, June 30, 2011

  838 $31.48 
      

Exercisable June 30, 2011

  670 $33.22 
      

        Outstanding options of 838,318 at June 30, 2011 had an intrinsic value (the amount by which the stock price exceeded the exercise or grant date price) of zero and a weighted average remaining contractual term of 4.7 years. Exercisable options of 670,198 at June 30, 2011 had an intrinsic value of zero and a weighted average remaining contractual term of 3.9 years. An additional 154,708 options are expected to vest with a $24.81 per share weighted average exercise price and a weighted average remaining contractual life of 7.7 years that have a total intrinsic value of zero.

        All options granted relate to stock option plans that have been approved by the shareholders of the Company. Stock options granted in fiscal year 2010 were granted under the 2000 and 2004 plan. Stock options granted in fiscal year 2009 were granted under the 2004 Plan.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHAREHOLDERS' EQUITY (Continued)

        A rollforward of RSAs, RSUs and SARs outstanding, as well as other relevant terms of the awards, were as follows:

 
 Nonvested SARs Outstanding 
 
 Restricted
Stock
Outstanding
Shares/Units
 Weighted
Average
Grant Date
Fair Value
 Shares Weighted
Average
Exercise
Price
 
 
 (in thousands)
  
 (in thousands)
  
 

Balance, June 30, 2008

  523 $36.76  527 $35.70 

Granted

  618  19.14  632  19.14 

Cancelled

  (28) 35.41  (45) 35.73 

Vested/Exercised

  (81) 35.72     
          

Balance, June 30, 2009

  1,032  26.33  1,114  26.30 
          

Granted

  304  19.12  2  28.57 

Cancelled

  (2) 20.02  (6) 38.63 

Vested/Exercised

  (188) 24.74     
          

Balance, June 30, 2010

  1,146  24.70  1,110  26.24 
          

Granted

  277  16.60  103  16.60 

Cancelled

  (118) 20.42  (126) 24.35 

Vested/Exercised

  (228) 22.69     
          

Balance, June 30, 2011

  1,077 $23.48  1,087 $25.54 
          

        Outstanding and unvested RSAs of 862,094 at June 30, 2011 had an intrinsic value of $13.2 million and a weighted average remaining vesting term of 2.2 years. Due to estimated forfeitures, 806,986 awards are expected to vest with a total intrinsic value of $12.4 million.

        Outstanding and unvested RSUs of 215,000 at June 30, 2011 had an intrinsic value of $3.3 million and a weighted average remaining vesting term of 0.7 years. All unvested RSUs are expected to vest in fiscal year 2012.

        Outstanding SARs of 1,087,460 at June 30, 2011 had a total intrinsic value of zero and a weighted average remaining contractual term of 6.9 years. Exercisable SARs of 604,140 at June 30, 2011 had a total intrinsic value of zero and a weighted average contractual term of 6.0 years. An additional 459,838 SARs are expected to vest with a $20.39 per share weighted average grant price, a weighted average remaining contractual life of 8.0 years and a total intrinsic value of zero.

        During fiscal year 2011, the Company accelerated the vesting of 68,390 unvested RSAs held by the Company's Chief Executive Officer and the Company's Executive Vice President, Fashion and Education. Under the terms of the modifications, any unvested RSAs granted to the Chief Executive Officer and the Executive Vice President, Fashion and Education fully vest on their last days of employment, which is expected to be February 8, 2012 and June 30, 2012, respectively. As a result of the modifications, the Company recognized an incremental compensation cost of less than $0.1 million during fiscal year 2011.

        Total cash received from the exercise of share-based instruments in fiscal years 2011, 2010 and 2009 was $0.7, $3.1 and $3.9 million, respectively.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHAREHOLDERS' EQUITY (Continued)

        As of June 30, 2011, the total unrecognized compensation cost related to all unvested stock-based compensation arrangements was $20.9 million. The related weighted average period over which such cost is expected to be recognized was approximately 3.1 years as of June 30, 2011.

        The total intrinsic value of all stock-based compensation that was exercised during fiscal years 2011, 2010 and 2009 was $0.2, $0.7, and $1.9 million, respectively.

        Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2011, 20102013, 2012 and 20092011 were as follows:

 
 2011 2010 2009 

Stock options

 $ $7.36 $8.60 

SARs

  6.26  8.60  7.07 

Restricted stock awards

  16.60  19.12  19.14 

Restricted stock units

       
 
 2013 2012 2011 

Stock options & SARs

  6.63  N/A  6.26 

RSAs & RSUs

  17.40  16.94  16.60 

PSUs

  18.33  N/A  N/A 

        The expense associated with the RSAfair value of stock options and RSU grantsSARs granted is basedestimated on the market price of the Company's stock at the date of grant.grant using a lattice option valuation model. The fair value of market-based RSUs is estimated on the date of grant using a Monte Carlo simulation model. The significant assumptions used in determining the underlyingestimated fair value on the date of grant of each stock optionoptions, SARs, and SAR grant issuedmarket-based RSUs granted during the fiscal years 2013, 2012, and 2011 2010 and 2009 is presented below:were as follows:


 2011 2010 2009 2013 2012 2011 

Risk-free interest rate

 2.29% 2.79%2.45 - 3.29% 0.66 - 0.87% N/A 2.29%

Expected term (in years)

 5.50 5.50 5.50 6.00 N/A 5.50 

Expected volatility

 44.00% 42.00%28.00 - 40.00% 44.00 - 47.00% N/A 44.00%

Expected dividend yield

 1.45% 0.85%0.56 - 0.84% 1.33 - 1.46% N/A 1.45%

        The risk free rate of return is determined based on the U.S. Treasury rates approximating the expected life of the stock options and SARs granted. Expected volatility is established based on historical volatility of the Company's stock price. Estimated expected life was based on an analysis of historical stock options granted data which included analyzing grant activity including grants exercised, expired, and canceled. The expected dividend yield is determined based on the Company's annual dividend amount as a percentage of the strike price at the time of the grant. The Company uses historical data to estimate pre-vesting forfeiture rates.

        CompensationEffective July 1, 2013, the Company changed from the lattice option valuation model to the Black-Scholes-Merton (BSM) option valuation model for valuing SARs. The Company elected to make the change in valuation methodology because the Company's historical grants of SARs lacked any complex vesting conditions or maximum payout limitations on the value of the awards. The Company does not expect a material difference in future valuations as a result of the change in models.

        Shares issued under the 2004 Plan and 2000 Plan are issued from new shares. As of June 30, 2013 there were 4,620,934 shares available for grant under the 2004 Plan.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. STOCK-BASED COMPENSATION (Continued)

        Stock-based compensation expense, includedrecorded within General and Administrative expense in the Consolidated Statement of Operations, was as follows:

 
 2013 2012 2011 

SARs & stock options

 $1,986 $1,447 $2,283 

RSAs, RSUs, & PSUs

  3,895  6,150  7,313 
        

Total stock-based compensation expense

  5,881  7,597  9,596 
        

Less: Income tax benefit

  (2,235) (2,898) (3,670)
        

Total stock-based compensation expense, net of tax

 $3,646 $4,699 $5,926 
        

Stock Appreciation Rights & Stock Options:

        SARs and stock options granted under the 2004 Plan and 2000 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries and expire ten years from the grant date. SARs granted subsequent to fiscal year 2012 vest ratably over a three year period.

        Activity for all of our outstanding SARs and stock options is as follows:

 
 Shares
(in thousands)
  
  
  
 
 
  
 Weighted-
Average
Remaining
Contractual Life
  
 
 
 SARs Stock
Options
 Weighted
Average
Exercise Price
 Aggregate
Intrinsic Value
(in thousands)
 

Outstanding balance at June 30, 2012

  734  652 $29.08       

Granted

  596    17.97       

Forfeited/Expired

  (456) (220) 26.84       

Exercised

  (14) (3) 17.69       
            

Outstanding balance at June 30, 2013

  860  429 $25.26  5.6   
            

Exercisable at June 30, 2013

  325  413 $30.68  3.2   
            

Unvested options, net of estimated forfeitures

  494  15 $18.01  8.8   
            

        The total intrinsic value, cash proceeds and income before income taxestax benefit associated with the exercise of SARs and stock options during fiscal years 2013, 2012 and 2011 were immaterial. As of June 30, 2013, there was $2.3 million of unrecognized expense related to stock- based compensation was $9.6, $9.3,SARs and $7.5 millionstock options that is to be recognized over a weighted-average period of 2.1 years.

Restricted Stock Awards & Restricted Stock Units:

        RSAs and RSUs granted to employees under the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a five year period. In addition, the Company has an outstanding RSU grant to its Chief Executive Officer that vests upon the achievement of a specified value for the three years endedCompany's stock over a specified period of time. RSUs granted to non-employee directors under the 2004 Plan generally vest in equal monthly amounts over a one year period from the Company's previous annual shareholder meeting date. Distributions on vested RSUs granted to non-employee directors are deferred until the director's board service ends.


Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. STOCK-BASED COMPENSATION (Continued)

        Activity for all of our RSAs and RSUs is as follows:

 
 Shares/Units
(in thousands)
  
  
 
 
 Weighted
Average
Grant Date
Fair Value
  
 
 
 Aggregate Intrinsic
Value
(in thousands)
 
 
 RSAs RSUs 

Outstanding balance at June 30, 2012

  403  257 $25.44    

Granted

  118  232  17.40    

Forfeited

  (84) (23) 18.24    

Vested

  (122) (216) 32.77    
          

Outstanding balance at June 30, 2013

  315  250 $17.46 $9,276 
          

Vested at June 30, 2013

    70 $17.70 $1,142 
          

Unvested awards, net of estimated forfeitures

  300  160 $17.43 $7,554 
          

        As of June 30, 2011, 2010,2013, there was $6.5 million of unrecognized expense related to RSAs and 2009, respectively.RSUs that is expected to be recognized over a weighted-average period of 2.6 years.

Performance Share Units:

        PSUs represent shares potentially issuable in the future. Issuance is based upon the relative achievement of the Company's performance goals. PSUs granted to employees under the 2004 Plan generally cliff vest after two years following a one year performance period.

        For PSUs granted in the fiscal year 2013, the Company's performance goals related to achieving specified levels of same-store sales and earnings before interest, taxes, depreciation and amortization, as adjusted, for fiscal year 2013. As the Company did not achieve thresholds related to performance goals for fiscal year 2013, no PSUs were earned during fiscal year 2013. As of June 30, 2013 there was no unrecognized expense related to PSUs.

13. SHAREHOLDERS' EQUITY

Authorized Shares and Designation of Preferred Class:

        The Company has 100 million shares of capital stock authorized, par value $0.05, of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common.

        In addition, 250,000 shares of authorized capital stock have been designated as Series A Junior Participating Preferred Stock (preferred stock). None of the preferred stock has been issued.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHAREHOLDERS' EQUITY (Continued)

Shareholders' Rights Plan:

        The Company has a shareholders' rights plan pursuant to which one preferred share purchase right is held by shareholders for each outstanding share of common stock. The rights become exercisable only following the acquisition by a person or group, without the prior consent of the Board of Directors, of 15.020.0 percent or more of the Company's voting stock, or following the announcement of a tender offer or exchange offer to acquire an interest of 15.020.0 percent or more. If the rights become exercisable, they entitle all holders, except the takeover bidder, to purchase one one-thousandth of a share of preferred stock at an exercise price of $140, subject to adjustment, or in lieu of purchasing the preferred stock, to purchase for the same exercise price common stock of the Company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SHAREHOLDERS' EQUITY (Continued)

Share Repurchase Program:

        In May 2000, the Company's Board of Directors (BOD) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The BOD elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2011, 2010, and 2009,2013, a total accumulated 6.87.7 million shares have been repurchased for $226.5$241.3 million. As of June 30, 2011, $73.52013, $58.7 million remains to be spent on share repurchasesoutstanding under thisthe approved stock repurchase program.

16.Accumulated Other Comprehensive Income

        The components of accumulated other comprehensive income are as follows:

 
 June 30, 
 
 2013 2012 
 
 (Dollars in thousands)
 

Foreign currency translation

 $20,434 $55,628 

Unrealized gains (losses) on derivatives

    21 

Unrealized gain (loss) on deferred compensation contracts

  122  (535)
      

Accumulated other comprehensive income

 $20,556 $55,114 
      

14. SEGMENT INFORMATION

        As of June 30, 2011,2013, the Company owned, franchised, or held ownership interests in approximately 12,700 worldwide locations.9,763 locations worldwide. The Company's locations consisted of 9,4199,166 North American salons, including 2,082 franchised salons (located in the U.S.,United States, Canada and Puerto Rico), 400351 international salons 96 hair restoration centers,(located primarily in the United Kingdom), and 2,786approximately 246 locations in which the Company maintains an ownership interest through its investmentsthe Company's investment in affiliates. See Note 5 to the Consolidated Financial Statements for discussion of the Company's investment in affiliates.

        Based on the way the Company manages its business, it has reported its North American salons and international salons as two separate reportable segments. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements.

        The Company operates its North American salon operations through five primary concepts: SmartStyle, Supercuts, MasterCuts, Regis Salons, MasterCuts, SmartStyle, Supercuts and Promenade salons. 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 display similar long-term economic characteristics. The salons share interdependencies and a common support base.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. SEGMENT INFORMATION (Continued)

        The Company operates its International salon operations, primarily in the United Kingdom, through three primary concepts: Regis, Supercuts, and Sassoon salons. Consistent with the North American concepts, the international concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels. All of the international salon concepts are


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. SEGMENT INFORMATION (Continued)

company-owned and are located in malls, leading department stores, and high-streethigh-traffic locations. Individual salons display similar long-term economic characteristics. The salons share interdependencies and a common support base.

        The Company's company-owned and franchise hair restoration centers are located in the U.S. and Canada. The Company's hair restoration centers offer three hair restoration solutions; hair systems, hair transplants, and hair therapy, which are targeted at the mass market consumer. Hair restoration centers are located primarily in office and professional buildings within larger metropolitan areas.

        Based on the way the Company manages its business, it has reported its North American salons, International salons, and Hair Restoration Centers as three separate reportable segments.

        The accounting policies of the reportable operating segments are the same as those described in Note 1 to the Consolidated Financial Statements. Corporate assets detailed below are primarily comprised of property and equipment associated with the Company's headquarters and distribution centers, corporate cash, inventories located at corporate distribution centers, deferred income taxes, franchise receivables and other corporate assets. Intersegment sales and transfers are not significant.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. SEGMENT INFORMATION (Continued)


Summarized financial information concerning the Company's reportable operating segments is shown in the following table as of June 30, 2011, 2010, and 2009:table:

 
 Fiscal Years 
 
 2013 2012 2011 
 
 (Dollars in thousands)
 

Revenues(1):

          

North American Salons

 $1,889,401 $1,981,105 $2,029,944 

International Salons

  129,312  141,122  150,237 
        

 $2,018,713 $2,122,227 $2,180,181 
        

Depreciation and amortization expense(1):

          

North American Salons

 $72,257 $71,253 $72,207 

International Salons

  5,222  5,297  4,750 
        

Total segment depreciation and amortization expense

  77,479  76,550  76,957 
        

Unallocated Corporate

  14,276  28,420  15,194 
        

 $91,755 $104,970 $92,151 
        

Operating income (loss)(1):

          

North American Salons(2)

 $127,253 $139,974 $139,957 

International Salons

  (1,380) 2,505  6,738 
        

Total segment operating income

  125,873  142,479  146,695 
        

Unallocated Corporate

  (113,547) (144,646) (160,977)
        

Operating income (loss)(1)

 $12,326 $(2,167)$(14,282)
        

Interest expense

  (37,594) (28,245) (34,374)

Interest income and other, net

  35,366  5,098  4,723 
        

Income (loss) from continuing operations before income taxes and equity in income (loss) of affiliated companies

 $10,098 $(25,314)$(43,933)
        

 
 For the Year Ended June 30, 2011 
 
 Salons  
  
  
 
 
 Hair
Restoration
Centers
 Unallocated
Corporate
  
 
 
 North America International Consolidated 
 
 (Dollars in thousands)
 

Revenues:

                
 

Service

 $1,588,690 $106,734 $67,550 $ $1,762,974 
 

Product

  403,962  43,503  75,729    523,194 
 

Royalties and fees

  37,292    2,409    39,701 
            

  2,029,944  150,237  145,688    2,325,869 
            

Operating expenses:

                
 

Cost of service

  919,526  54,213  39,129    1,012,868 
 

Cost of product

  201,560  23,631  24,788    249,979 
 

Site operating expenses

  183,552  9,852  4,318    197,722 
 

General and administrative

  122,281  12,630  37,038  167,908  339,857 
 

Rent

  292,479  38,423  9,227  2,157  342,286 
 

Depreciation and amortization

  69,763  4,750  12,958  17,638  105,109 
 

Goodwill impairment

  74,100        74,100 
 

Lease termination costs

           
            

Total operating expenses

  1,863,261  143,499  127,458  187,703  2,321,921 
            

Operating income (loss)

  166,683  6,738  18,230  (187,703) 3,948 

Other income (expense):

                
 

Interest expense

        (34,388) (34,388)
 

Interest income and other, net

        4,811  4,811 
            

Income (loss) from continuing operations before income taxes and equity in income (loss) of affiliated companies

 $166,683 $6,738 $18,230 $(217,280)$(25,629)
            

Total assets

 $881,526 $69,932 $306,005 $548,290 $1,805,753 

Long-lived assets

  254,939  15,193  17,784  59,895  347,811 

Capital expenditures

  51,091  2,957  5,542  11,879  71,469 

Purchases of salon assets

  18,551        18,551 
(1)
See Note 2 to the Consolidated Financial Statements for discussion of the classification of the results of operations of Hair Club as discontinued operations.

(2)
Included in the North American salons segments operating income for fiscal years 2012 and 2011 are goodwill impairment charges of $67.7 and $74.1 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. SEGMENT INFORMATION (Continued)


 
 For the Year Ended June 30, 2010 
 
 Salons  
  
  
 
 
 Hair
Restoration
Centers
 Unallocated
Corporate
  
 
 
 North America International Consolidated 
 
 (Dollars in thousands)
 

Revenues:

                
 

Service

 $1,605,979 $111,833 $66,325 $ $1,784,137 
 

Product

  417,363  44,252  72,978    534,593 
 

Royalties and fees

  37,221    2,483    39,704 
            

  2,060,563  156,085  141,786    2,358,434 
            

Operating expenses:

                
 

Cost of service

  920,905  57,657  37,158    1,015,720 
 

Cost of product

  219,745  22,570  21,568    263,883 
 

Site operating expenses

  183,881  10,152  5,305    199,338 
 

General and administrative

  113,956  13,115  36,207  128,713  291,991 
 

Rent

  294,263  38,681  9,013  2,141  344,098 
 

Depreciation and amortization

  72,681  4,986  12,198  18,899  108,764 
 

Goodwill impairment

  35,277        35,277 
 

Lease termination costs

    2,145      2,145 
            

Total operating expenses

  1,840,708  149,306  121,449  149,753  2,261,216 
            

Operating income (loss)

  219,855  6,779  20,337  (149,753) 97,218 

Other income (expense):

                
 

Interest expense

        (54,414) (54,414)
 

Interest income and other, net

        10,410  10,410 
            

Income (loss) from continuing operations before income taxes and equity in income (loss) of affiliated companies

 $219,855 $6,779 $20,337 $(193,757)$53,214 
            

Total assets

 $992,410 $74,633 $284,615 $567,914 $1,919,572 

Long-lived assets

  262,575  15,654  17,484  63,537  359,250 

Capital expenditures

  40,393  1,764  3,658  12,006  57,821 

Purchases of salon assets

  3,664        3,664 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. SEGMENT INFORMATION (Continued)


 
 For the Year Ended June 30, 2009(1) 
 
 Salons  
  
  
 
 
 Hair
Restoration
Centers
 Unallocated
Corporate
  
 
 
 North America International Consolidated 
 
 (Dollars in thousands)
 

Revenues:

                
 

Service

 $1,646,239 $122,664 $65,055 $ $1,833,958 
 

Product

  434,340  48,905  72,960    556,205 
 

Royalties and fees

  37,119    2,505    39,624 
            

  2,117,698  171,569  140,520    2,429,787 
            

Operating expenses:

                
 

Cost of service

  944,782  64,326  35,611    1,044,719 
 

Cost of product

  235,520  25,855  21,663    283,038 
 

Site operating expenses

  173,457  11,762  5,237    190,456 
 

General and administrative

  117,673  15,720  33,924  124,344  291,661 
 

Rent

  292,253  44,492  8,887  2,160  347,792 
 

Depreciation and amortization

  73,395  12,492  11,327  18,441  115,655 
 

Goodwill impairment

    41,661      41,661 
 

Lease termination costs

  4,990  742      5,732 
            

Total operating expenses

  1,842,070  217,050  116,649  144,945  2,320,714 
            

Operating income (loss)

  275,628  (45,481) 23,871  (144,945) 109,073 

Other income (expense):

                
 

Interest expense

        (39,768) (39,768)
 

Interest income and other, net

        9,461  9,461 
            

Income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies

 $275,628 $(45,481)$23,871 $(175,252)$78,766 
            

Total assets

 $966,596 $49,779 $293,017 $583,094 $1,892,486 

Long-lived assets

  281,504  20,314  18,234  71,486  391,538 

Capital expenditures

  49,355  3,081  9,858  11,280  73,574 

Purchases of salon assets

  39,215  22  889    40,126 

(1)
Beginning with the period ended December 31, 2008, the operations of Trade Secret concept within the North American reportable segment were accounted for as discontinued operations. All comparable periods will reflect Trade Secret as discontinued operations. See further discussion at Note 2 to the Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.14. SEGMENT INFORMATION (Continued)

        Total revenues and long-lived assetsproperty and equipment, net associated with business operations in the U.S. and all other countries in aggregate were as follows:


 Year Ended June 30,  June 30, 

 2011 2010 2009  2013 2012 2011 

 Total
Revenues
 Long-lived
Assets
 Total
Revenues
 Long-lived
Assets
 Total
Revenues
 Long-lived
Assets
  Total
Revenues
 Property and
Equipment, Net
 Total
Revenues
 Property and
Equipment, Net
 Total
Revenues
 Property and
Equipment, Net
 

 (Dollars in thousands)
  (Dollars in thousands)
 

U.S.

 $2,007,042 $314,406 $2,055,059 $327,753 $2,121,531 $355,330  $1,737,517 $285,111 $1,815,797 $274,711 $1,861,354 $296,622 

Other countries

 318,827 33,405 303,375 31,497 308,256 36,208  281,196 28,349 306,430 31,088 318,827 33,405 
                          

Total

 $2,325,869 $347,811 $2,358,434 $359,250 $2,429,787 $391,538  $2,018,713 $313,460 $2,122,227 $305,799 $2,180,181 $330,027 
                          

17.15. QUARTERLY FINANCIAL DATA (UNAUDITED)

        Summarized quarterly data for fiscal years 20112013 and 20102012 follows:

 
 Quarter Ended  
 
 
 September 30(e) December 31 March 31 June 30(f) Year Ended 
 
 (Dollars in thousands, except per share amounts)
 

2013

                

Revenues

 $505,360 $506,165 $504,937 $502,251 $2,018,713 

Cost of service and product revenues, excluding depreciation and amortization

  285,660  289,329  287,597  296,678  1,159,264 

Operating income (loss)(a)

  9,273  8,723  3,308  (8,978) 12,326 

Income (loss) from continuing operations(a)(b)

  34,647  (16,119) 896  (15,258) 4,166 

Income from discontinued operations(c)

  3,777  3,853  1,465  15,933  25,028 

Net income (loss)(a)(b)(c)

  38,424  (12,266) 2,361  675  29,194 

Income (loss) from continuing operations per share, basic

  0.60  (0.28) 0.02  (0.27) 0.07 

Income from discontinued operations per share, basic(d)

  0.07  0.07  0.03  0.28  0.44 

Net income (loss) per basic share(d)

  0.67  (0.22) 0.04  0.01  0.51 

Income (loss) from continuing operations per share, diluted(d)

  0.54  (0.28) 0.02  (0.27) 0.07 

Income from discontinued operations per share, diluted

  0.06  0.07  0.03  0.28  0.44 

Net income (loss) per diluted share(d)

  0.59  (0.22) 0.04  0.01  0.51 

Dividends declared per share

  0.06  0.06  0.06  0.06  0.24 

 
 Quarter Ended  
 
 
 September 30 December 31 March 31 June 30 Year Ended 
 
 (Dollars in thousands, except per share amounts)
 

2011

                

Revenues

 $578,245 $574,372 $581,267 $591,985 $2,325,869 

Gross margin, excluding depreciation

  257,558  251,132  253,017  261,614  1,023,321 

Operating income (loss)(a)(b)

  33,434  22,864  (59,504) 7,154  3,948 

Income (loss) from continuing operations(a)(b)(e)

  18,320  14,505  (25,335) (16,395) (8,905)

Net income (loss)(a)(b)(e)

  18,320  14,505  (25,335) (16,395) (8,905)

Income (loss) from continuing operations per share, basic

  0.32  0.26  (0.45) (0.29) (0.16)

Net income (loss) per basic share(f)

  0.32  0.26  (0.45) (0.29) (0.16)

Income (loss) from continuing operations per share, diluted

  0.30  0.24  (0.45) (0.29) (0.16)

Net income (loss) per diluted share(f)

  0.30  0.24  (0.45) (0.29) (0.16)

Dividends declared per share

  0.04  0.04  0.06  0.06  0.20 

Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 67 in this Form 10-K for explanations of items, which impacted fiscal year 20112013 revenues, operating and net income.income (loss).


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17.15. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

 
 Quarter Ended  
 
 
 September 30 December 31 March 31 June 30 Year Ended 
 
 (Dollars in thousands, except per share amounts)
 

2012

                

Revenues

 $531,346 $526,138 $535,901 $528,842 $2,122,227 

Cost of service and product revenues, excluding depreciation and amortization

  288,688  288,399  296,277  289,942  1,163,306 

Operating income (loss)(a)

  9,004  11,936  22,950  (46,057) (2,167)

Income (loss) from continuing operations(a)(b)

  5,622  11,900  (3,878) (65,387) (51,743)

Income (loss) from discontinued operations(c)

  2,715  (69,327) 2,509  1,753  (62,350)

Net income (loss)(a)(b)(c)

  8,337  (57,427) (1,369) (63,634) (114,093)

Income (loss) from continuing operations per share, basic

  0.10  0.21  (0.07) (1.14) (0.91)

Income (loss) from discontinued operations per share, basic

  0.05  (1.22) 0.04  0.03  (1.09)

Net income (loss) per basic share(d)

  0.15  (1.01) (0.02) (1.11) (2.00)

Income (loss) from continuing operations per share, diluted

  0.10  0.20  (0.07) (1.14) (0.91)

Income (loss) from discontinued operations per share, diluted

  0.05  (1.01) 0.04  0.03  (1.09)

Net income (loss) per diluted share(d)

  0.15  (0.81) (0.02) (1.11) (2.00)

Dividends declared per share

  0.06  0.06  0.06  0.06  0.24 

 
 Quarter Ended  
 
 
 September 30 December 31 March 31 June 30 Year Ended 
 
 (Dollars in thousands, except per share amounts)
 

2010

                

Revenues(c)

 $605,550 $575,365 $587,571 $589,948 $2,358,434 

Gross margin, excluding depreciation(c)

  259,967  254,564  260,199  264,397  1,039,127 

Operating income (loss)(b)(c)

  28,257  32,063  1,184  35,714  97,218 

Income (loss) from continuing operations(b)

  4,611  18,154  (1,525) 18,339  39,579 

Income from discontinued operations(d)

  3,161        3,161 

Net income (loss)(b)(d)

  7,772  18,154  (1,525) 18,339  42,740 

Income (loss) from continuing operations per share, basic

  0.09  0.32  (0.03) 0.32  0.71 

Income (loss) from discontinued operations per share, basic(d)

  0.06        0.06 

Net income (loss) per basic share(f)

  0.14  0.32  (0.03) 0.32  0.77 

Income (loss) from continuing operations per share, diluted

  0.09  0.30  (0.03) 0.30  0.71 

Income (loss) from discontinued operations per share, diluted(f)

  0.06        0.05 

Net income (loss) per diluted share(f)

  0.14  0.30  (0.03) 0.30  0.75 

Dividends declared per share

  0.04  0.04  0.04  0.04  0.16 

Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 67 in this Form 10-K for explanations of items, which impacted fiscal year 20102012 revenues, operating and net income.

(a)
Operating income and net income decreased $31.2During the fourth quarter of fiscal year 2013, the Company recorded a $12.6 million ($19.27.7 million net of tax) as a result of a valuationinventory reserve on a note receivableassociated with the purchaseCompany's implementation of Trade Secret that was recordedstandardized plan-o-grams in fiscal year 2014. During the third quarter ($9.0 million) and fourth quarter ($22.2 million) of fiscal year 2011.2012, the Company recorded a goodwill impairment charge of $67.7 million ($55.2 million net of tax).

(b)
ExpenseDuring the first quarter of $74.1 million ($50.8fiscal year 2013, the Company recorded a $32.2 million net of tax) was recorded intax foreign currency gain associated with the third quarter ended March 31, 2011 related to our Promenade salon concept goodwill impairment due to recent performance challenges in that concept. Expensesale of $35.3 million ($28.7 million net of tax) was recorded in the third quarter ended March 31, 2010 related to our Regis salon concept goodwill impairment due to recent performance challenges in that concept and current economic conditions.

(c)
The Company sold $20.0 million of product to the purchaser of Trade Secret at cost for the three months ended September 30, 2009.

(d)
Provalliance. During the second quarter ended December 31, 2008,of fiscal year 2013, the Company determined Trade Secret to be held for sale and accounted for it asrecorded a discontinued operation. An income$17.9 million impairment charge net of tax benefit of $3.0 million was recorded in the first quarter ended September 30, 2009 to correct the prior year calculation of the income tax benefit related to the dispositionimpairment of the Trade Secret concept.

(e)
Income (loss) from continuing operations and net income decreased as a result of $9.2 million that was recorded in the third quarter ($8.7 million) and inEEG. During the fourth quarter ($0.5 million) asof fiscal year 2013, the Company incurred $6.7 million net of tax of expense for a resultmake-whole payment associated with the prepayment of an other than temporarydebt. Expense of $17.2 million net of tax was recorded during fiscal year 2012 related to the impairment on anof our investment in preferred sharesProvalliance. Expense of Yamano and a premium paid at$19.4 million net of tax was recorded during fiscal year 2012 related to the timeimpairment of an initialour investment in MY Style.EEG.

(f)(c)
During the fourth quarter of fiscal year 2013, the Company recorded a $15.4 million gain, net professional and transaction fees and taxes, associated with the disposition of Hair Club. During the second quarter of quarter of fiscal year 2012, the Company recorded a goodwill impairment charge of $72.6 million net of tax.

(d)
Total is aan annual recalculation; line items calculated individuallyquarterly may not sum to total.

(e)
As filed within the 10-Q/A for the period ended September 30, 2012.

(f)
During the fourth quarter of fiscal year 2013, the Company identified certain errors that related to prior periods. The errors related to an understatement of interest expense and certain uncertain tax positions in prior periods. Because these errors are not material to the Company's consolidated financial statements for any prior periods, the current year fourth quarter, or fiscal 2013, the Company recorded a cumulative adjustment to correct the errors during the fourth quarter of fiscal 2013. The impact of these items on the Company's Consolidated Statement of Operations increased interest expense by $0.4 million, increased income tax expense by $0.3 million and decreased net income by $0.7 million.

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including the presidentchief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

        Our Disclosure Committee, consisting of certain members of management, assists in this evaluation. The Disclosure Committee meets on a quarterly basis and more often if necessary.

        With the participation of management, the Company's presidentchief executive officer and chief financial officer evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-5(e) and 15d-15(e) promulgated under the Exchange Act) at the conclusion of the period ended June 30, 2011.2013. Based upon this evaluation, the presidentchief executive officer and chief financial officer concluded that the Company's disclosure controls and procedures were effective.

Management's Report on Internal Control over Financial Reporting

        In Part II, Item 8 above, management provided a report on internal control over financial reporting, in which management concluded that the Company's internal control over financial reporting was effective as of June 30, 2011.2013. In addition, PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, provided a report on the Company's effectiveness of internal control over financial reporting. The full text of management's report and PricewaterhouseCoopers' report appears on pages 7744 and 7845 herein.

Changes in Internal Controls

        Based on management's most recent evaluationDuring the fourth quarter of fiscal year 2013, the Company made substantial progress with the implementation of a new POS system for our salon operations. The Company expects to complete this implementation over the course of the Company'snext fiscal year. Management has taken the necessary steps to monitor and maintain appropriate internal control over financial reporting, management determined thatcontrols during this period of change and will continue to evaluate the operating effectiveness of related key controls during subsequent periods. With the exception of the implementation of the system described above, there were no other changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter.

Item 9B.    Other Information

        None.


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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        Information regarding the Directors of the Company and Exchange Act Section 16(a) filings will be set forth in the sections titled "Item 1—Election of Directors", "Corporate Governance" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's 20112013 Proxy, and is incorporated herein by reference. The information required by Item 401 of Regulation S-K regarding the Company's executive officers is included under "Executive Officers" in Item 1 of this Annual Report on Form 10-K. Additionally, information regarding the Company's audit committee and audit committee financial expert, as well nominating committee functions, will be set forth in the section titled "Committees of the Board" and shareholder communications with directors will be set forth in the section titled "Communications with the Board" of the Company's 20112013 Proxy Statement, and is incorporated herein by reference.

        The Company has adopted a code of ethics, known as the Code of Business Conduct & Ethics that applies to all employees, including the Company's chief executive officer, chief financial officer, directors and executive officers. The Code of Business Conduct & Ethics is available on the Company's website atwww.regiscorp.com, under the heading "Corporate Governance / Guidelines" (within the "Investor Information" section). The Company intends to disclose any substantive amendments to, or waivers from, its Code of Business Conduct & Ethics on its website or in a report on Form 8-K. In addition, the charters of the Company's Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and the Company's Corporate Governance Guidelines may be found on the Company's website. Copies of any of these documents are available upon request to any shareholder of the Company by writing to the Company's Secretary at Regis Corporation, 7201 Metro Boulevard, Edina, Minnesota 55439.

Item 11.    Executive Compensation

        Information about Executive and director compensation will be set forth in the section titled "Executive Compensation" of the Company's 20112013 Proxy Statement, and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        Information regarding the Company's equity compensation plans will be set forth in the section titled "Equity Compensation Plan Information" of the Company's 20112013 Proxy Statement, and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

        Information regarding certain relationships and related transactions will be set forth in the section titled "Certain Relationships and Related Transactions" of the Company's 20112013 Proxy Statement, and is incorporated herein by reference. Information regarding director independence is includedwill be set forth in the section titled "Corporate Governance—Director Independence" of the Company's 20102013 Proxy Statement, and is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services

        A description of the fees paid to the independent registered public accounting firm will be set forth in the section titled "Item 2—Ratification of Appointment of Independent Registered Public Accounting Firm" of the Company's 20112013 Proxy Statement and is incorporated herein by reference.


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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(b)
(1). All financial statements:

    Consolidated Financial Statements filed as part of this report are listed under Part II, Item 8 of this Form 10-K.

(b)(c)
Exhibits:

        The exhibits listed in the accompanying index are filed as part of this report. Except where otherwise indicated below, the SEC file number for each report and registration statement from which the exhibits are incorporated by reference is 1-12725.

Exhibit Number/Description

 2(a
2(a))Contribution Agreement, dated April 18, 2007, between the Company and Empire Beauty School Inc. (Incorporated by reference to Exhibit 2.1 of the Company's Report on Form 8-K filed on April 24, 2007.)
     
 2(b)2(bPurchase Agreement, dated November 13, 2004, between the Company and Hair Club Group Inc. (Incorporated by reference to Exhibit 2 of the Company's Report on Form 10-Q filed on February 9, 2005, for the quarter ended December 31, 2004.)
2(c)Stock Purchase Agreement dated as of January 26, 2009 between Regis Corporation, Trade Secret, Inc. and Premier Salons Beauty Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K filed on January 27, 2009.)
     
 3(a)2(c)Share Purchase Agreement, dated as of April 9, 2012, between Regis Merger S.A.R.L. and Mr. Yvon Provost, Mrs. Olivia Provost and Mr. Fabien Provost. (Incorporated by reference to Exhibit 2.1 of the Company's Report on Form 8-K filed on April 13, 2012.)
  
2(d)Stock Purchase Agreement, dated as of July 13, 2012, between Regis Corporation and Aderans Co., Ltd. (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on July 17, 2012).
3(a)Election of the Company to become governed by Minnesota Statutes Chapter 302A and Restated Articles of Incorporation of the Company, dated March 11, 1983; Articles of Amendment to Restated Articles of Incorporation, dated October 29, 1984; Articles of Amendment to Restated Articles of Incorporation, dated August 14, 1987; Articles of Amendment to Restated Articles of Incorporation, dated October 21, 1987; Articles of Amendment to Restated Articles of Incorporation, dated November 20, 1996; Articles of Amendment to Restated Articles of Incorporation, dated July 25, 2000. (Incorporated by reference to Exhibit 3(a) of the Company's Report on Form 10-Q filed on February 8, 2006, for the quarter ended December 31, 2005.)
     
 3(b)3(b)By-Laws of the Company. (Incorporated by reference to Exhibit 3.1 of the Company's Report on Form 8-K filed on October 31, 2006.)
     
 3(c)3(c)Certificate of the Voting Powers, Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations or Restrictions of Series A Junior Participating Preferred Stock of the Company. (Attached as Exhibit A to the Rights Agreement dated December 26, 2006, and incorporated by reference to Exhibit 2 of the Company's Registration Statement on Form 8-A12B filed on December 26, 2006.)
     
 4(a)4(a)Shareholder Rights Agreement, dated December 23, 1996, between the Company and Norwest Bank Minnesota, N.A. as Rights Agent. (Incorporated by reference to Exhibit 4 of the Company's Report on Form 8-A12G filed on February 4, 1997.)
 
  

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 4(b)4(b)Rights Agreement, dated December 26, 2006, between the Company and Wells Fargo Bank, N.A., as Rights Agent, and Form of Right Certificate attached as Exhibit B to the Rights Agreement. (Incorporated by reference to Exhibits 1 and 3 of the Company's Registration Statement on Form 8-A12B, filed on December 26, 2006.)
     
 4(c)4(c)Amendment No. 1,2, dated as of October 29, 2008,June 13, 2013, to Rights Agreement, dated December 26, 2006, between Regis Corporation and Wells Fargo Bank, N.A. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A12B/A filed on October 29, 2008.June 19, 2013.)
     
 4(d)4(d)Form of Stock Certificate. (Incorporated by reference to Exhibit 4.1of4.1 of the Company's Registration Statement on Form S-1 (Reg. No. 40142).)
     
 4(e)4(e)Indenture dated July 14, 2009 by and between the Company and Wells Fargo Bank, N.A, as Trustee (Incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K filed July 17, 2009.)
     
 10(a)10(a(*)Survivor Benefit Agreement, dated June 27, 1994, between the Company and Myron Kunin. (Incorporated by reference to Exhibit 10(t) part of the Company's Report on Form 10-K filed on September 28, 1994, for the year ended June 30, 1994.)
10(b)Series G Senior Note, dated July 10, 1998, between the Company and Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(jj) of the Company's Report on Form 10-K filed on September 17, 1998, for the year ended June 30, 1998.)
10(c)Amended and Restated Private Shelf Agreement, dated October 3, 2000, between the Company and Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(ff) of the Company's Report on Form 10-Q filed on November 13, 2000, for the quarter ended September 30, 2000.)
10(d)Senior Series I Note, dated October 3, 2000, between the Company and Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(aa) of the Company's Report on Form 10-K filed on September 12, 2001, for the year ended June 30, 2001.)
10(e)Note Purchase Agreement, dated March 1, 2002, between the Company and purchasers listed in Schedule A attached thereto. (Incorporated by reference to Exhibit 10(aa) of the Company's Report on Form 10-K filed on September 24, 2002, for the year ended June 30, 2002.)
10(f)Form of Series A Senior Note. (Attached as Exhibit 1(a) to the Note Purchase Agreement dated March 1, 2002, and incorporated by reference to Exhibit 10(aa) of the Company's Report on Form 10-K filed on September 24, 2002, for the year ended June 30, 2002.)
10(g)Series J Senior Notes, dated June 9, 2003, between the Company and Prudential Insurance Company of America. (Incorporated by reference to Exhibit 10(dd) of the Company's Report on Form 10-K filed on September 17, 2003, for the year ended June 30, 2003.)
10(h)Promissory Note dated November 26, 2003, between the Company and Information Leasing Corporation. (Incorporated by reference to Exhibit 10(ee) of the Company's Report on Form 10-K filed on September 10, 2004, for the year ended June 30, 2004.)


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10(i)Lease Agreement commencing October 1, 2005, between the Company and France Edina, Property, LLP. (Incorporated by reference to Exhibit 99 of the Company's Report on Form 8-K filed on May 6, 2005.)
     
 10(j)10(b)(*)ThirdAmendment to Amended and Restated CreditCompensation Agreement, dated April 7, 2005, amongDecember 23, 2008, between the Company, Bank of America, N.A., as Administrative Agent, LaSalle Bank National Association, as Co-Administrative Agent and Co-Arranger and as Swing-Line Lender, J.P. Morgan Chase Bank, N.A., as Syndication Agent, Wachovia Bank, National Association, as Documentation Agent, Other Financial Institutions Party thereto, and Banc of America Securities LLC as Co-Arranger and Sole Book Manager.Myron Kunin (Incorporated by reference to Exhibit 99.110(f) of the Company's Report on Form 8-K10-Q filed April 12, 2005.)
10(k)Prepayment Agreement between Regis Corporation and various holders of Senior Notes of Regis Corporation, dated June 29, 2009 (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed July 6,February 9, 2009.)
     
 10(l)First Amendment to Term Loan agreement dated as of October 3, 2008 among Regis Corporation and various lenders, and JP Morgan Chase Bank, N.A, dated July 3, 2009 (Incorporated by reference to Exhibit 10.2 of the Company's Report on Form 8-K filed July 6, 2009.)
10(m)First Amendment to Fourth Amendment and Restated Credit Agreement dated as of July 12, 2007 among Regis Corporation and various lenders and JP Morgan Chase Bank, N.A, dated July 3, 2009 (Incorporated by reference to Exhibit 10.3 of the Company's Report on Form 8-K filed July 6, 2009.)
10(n)Amendment No.6 to Amend and Restated Private Shelf Agreement between Regis Corporation and Prudential Investment Management, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Pruco Life Insurance Company of New Jersey and other Prudential affiliates dated July 3, 2009 (Incorporated by reference to Exhibit 10.4 of the Company's Report on From 8-K filed July 6, 2009.)
10(o)First Amendment to Note Purchase Agreement dated March 1, 2005, between the Company and the purchasers listed in Schedule I attached thereto. (Incorporated by reference to Exhibit 99.3 of the Company's Report on Form 8-K filed April 12, 2005.)
10(p)10(c)(*)Short Term Incentive Compensation Plan, effective August 19, 2009. (Incorporated by reference to Appendix A of the Company's Proxy Statement on Form 14A filed on September 15, 2009, for the year ended June 30, 2009.)
     
 10(q)10(d)Consulting Agreement, dated April 18, 2007, between the Company and Empire Beauty School Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on April 24, 2007.)
     
 10(r)(*)Amended and Restated Compensation Agreement, dated June 29, 2007, between the Company and Myron Kunin. (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed on July 5, 2007.)
10(s)Master Agreement, dated October 11, 2007, between Mr. Yvon Provost, Mr. Fabien Provost, Mrs. Olivia Provost, Mrs. Monique La Rizza, Artal Services N.V., Mr. Jean Mouton, RHS Netherlands Holdings BV, RHS France SAS, the Company and Artal Group S.A. (Incorporated by reference to Exhibit 10 of the Company's Report on Form 10-Q filed on February 7, 2008, for the quarter ended December 31, 2007.)


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10(t)Stock Purchase Agreement, dated January 17, 2008, between the Company, Cameron Capital Investments, Inc., Stephen Powell and Mackenzie Limited Partnership. (Incorporated by reference to Exhibit 10(z) to the Company's Report on Form 10-K filed on August 29, 2008, for the year ended June 30, 2008.)
10(u)10(e)(*)Regis Corporation Executive Retirement Savings Plan Adoption Agreement and Trust Agreement, dated November 15, 2008 between the Company and Fidelity Management Trust Company (The CORPORATE Plan for Retirement EXECUTIVE PLAN basic plan document is incorporated by reference to Exhibit 10(c) to the Company's Report on Form 10-K filed on August 29, 2007, for the year ended June 30, 2007). (Incorporated by reference to Exhibit 10(a) of the Company's Report on Form 10-Q filed February 9, 2009.)
     
 10(v)10(f)(*)Employment Agreement, as Amended and Restated effective March 1, 2011,dated August 31, 2012, between the Company and Paul D. Finkelstein.Daniel J. Hanrahan. (Incorporated by reference to Exhibit 10(a) of the Company's Report on Form 10-Q filed May 10, 2011)November 9 2012)
     
 10(w)10(g)(*)Employment Agreement, as Amended and Restated effective December 31, 2008,dated November 28, 2012, between the Company and Randy L. Pearce.Steven M. Spiegel. (Incorporated by reference to Exhibit 10(c)10(a) of the Company's Report on Form 10-Q filed February 9, 2009.4, 2013.)
     
 10(x)(*)Amended and Restated Senior Officer Employment and Deferred Compensation Agreement, dated December 31, 2008, between the Company and Gordon Nelson. (Incorporated by reference to Exhibit 10(d) of the Company's Report on Form 10-Q filed February 9, 2009.)
10(y)10(h)(*)Form of Amended and Restated Senior Officer Employment and Deferred Compensation Agreement, dated DecemberAugust 31, 2008,2012, between the Company and certain senior executive officers. (Incorporated by reference to Exhibit 10(e)10(b) of the Company's Report on Form 10-Q filed FebruaryNovember 9, 2009.2012.)
     
 10(z)(*)Amendment to Amended and Restated Compensation Agreement, dated December 23, 2008, between the Company, and Myron Kunin (Incorporated by reference to Exhibit 10(f) of the Company's Report on Form 10-Q filed February 9, 2009.)
10(aa)10(i)(*)2004 Long Term Incentive Plan as Amended and Restated, effective October 28, 2011, (Incorporated by reference to Appendix A of the Company's Report on Form DEF14A filed September 14, 2010.)

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10(bb)(*)Separation Agreement and Release between Bruce Johnson, former EVP, Real Estate Design & Construction effective July 1, 2011.
     
 10(cc)10(j(*)Separation Agreement and Release between Mark Kartarik, former EVP and President, Franchise division effective July 1, 2011.
10(dd)(*)Amendment to Amended and Restated Senior Officer Employment and Deferred Compensation Agreement, dated April 26, 2011, between the Company and Gordon Nelson.
10(ee)FifthSixth Amended and Restated Credit Agreement, dated June 30, 2011,11, 2013, among the Company, and various financial institutions party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender, and Issuer, Bank of America, as Syndication Agent, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank National Association, and Wells Fargo Bank, N.A., as Documentation Agents (Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 8-K filed July 6, 2011.June 14, 2013.)


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18.1Preferability Letter of Independent Registered Public Accounting Firm dated August 26, 2011
     
 21 List of Subsidiaries of Regis Corporation
     
 23 Consent of PricewaterhouseCoopers LLP
     
 31.1 PresidentChief Executive Officer of the Company: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 31.2 SeniorExecutive Vice President and Chief Financial Officer of the Company: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 32.132 President of the Company: Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Senior Vice PresidentChief Executive Officer and Chief Financial Officer of the Company: Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
 101.INS(**)XBRL Instance Document
     
 101.SCH(**)XBRL Taxonomy Extension Schema
     
 101.CAL(**)XBRL Taxonomy Extension Calculation Linkbase
     
 101.LAB(**)XBRL Taxonomy Extension Label Linkbase
     
 101.PRE(**)XBRL Taxonomy Extension Presentation Linkbase
     
 101.DEF(**)XBRL Taxonomy Extension Definition Linkbase


(*)
Management contract, compensatory plan or arrangement required to be filed as an exhibit to the Company's Report on Form 10-K.

(**)
The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  REGIS CORPORATION

 

 

By

 

/s/ RANDY L. PEARCEDANIEL J. HANRAHAN

Randy L. Pearce,Daniel J. Hanrahan,
President and Chief Executive Officer
(Principal Executive Officer)

 

 

By

 

/s/ BRENT A. MOENSTEVEN M. SPIEGEL

Brent A. Moen,Steven M. Spiegel,
SeniorExecutive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

DATE: August 26, 201127, 2013

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ PAUL D. FINKELSTEINSTEPHEN E. WATSON

Paul D. Finkelstein, Stephen E. Watson,
Chairman of the
Board of Directors
 Date: August 26, 201127, 2013

/s/ DAVID B. KUNINDANIEL J. HANRAHAN

David B. Kunin, Daniel J. Hanrahan,
Director

 

Date: August 26, 201127, 2013

/s/ ROLF BJELLANDJOSEPH L. CONNER

Rolf Bjelland, Joseph L. Conner,
Director

 

Date: August 26, 201127, 2013

/s/ VAN ZANDT HAWNDANIEL G. BELTZMAN

Van Zandt Hawn, Daniel G. Beltzman,
Director

 

Date: August 26, 201127, 2013

/s/ SUSAN S. HOYTJAMES P. FOGARTY

Susan S. Hoyt, James P. Fogarty,
Director

 

Date: August 26, 2011

/s/ THOMAS L. GREGORY

Thomas L. Gregory, Director


Date: August 26, 201127, 2013

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/s/ STEPHEN E. WATSONMICHAEL J. MERRIMAN

Stephen E. Watson, Michael J. Merriman,
Director
 Date: August 26, 201127, 2013

/s/ JOSEPH L. CONNERJEFFREY C. SMITH

Joseph L. Conner, Jeffrey C. Smith,
Director

 

Date: August 26, 201127, 2013

/s/ DAVID P. WILLIAMS

David P. Williams,
Director


Date: August 27, 2013