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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended March 31, 2010

 

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

 

41-0749934

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

7201 Metro Boulevard, Edina, Minnesota

 

55439

(Address of principal executive offices)

 

(Zip Code)

 

(952) 947-7777

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Indicate by check mark whether the registrant 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 be submit and post such files).  Yes  o   No o

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 5, 2010:

 

Common Stock, $.05 par value

 

57,434,084

Class

 

Number of Shares

 

 

 



Table of Contents

 

REGIS CORPORATION

 

INDEX

 

Part I.

Financial Information UNAUDITED

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of March 31, 2010 and June 30, 2009

3

 

 

 

 

 

 

Condensed Consolidated Statement of Operations for the three months ended March 31, 2010 and 2009

4

 

 

 

 

 

 

Condensed Consolidated Statement of Operations for the nine months ended March 31, 2010 and 2009

5

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows for the nine months ended March 31, 2010 and 2009

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

 

 

 

Review Report of Independent Registered Public Accounting Firm

33

 

 

 

 

 

Item 2.

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

34

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

57

 

 

 

 

 

Item 4.

Controls and Procedures

58

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

58

 

 

 

 

 

Item 1A.

Risk Factors

58

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

 

 

 

 

 

Item 6.

Exhibits

61

 

 

 

 

 

Signatures

 

62

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

As Of March 31, 2010 and June 30, 2009
(In thousands, except share data)

 

 

 

March 31,
2010

 

June 30,
2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

168,905

 

$

42,538

 

Receivables, net

 

25,548

 

44,935

 

Inventories

 

152,982

 

158,570

 

Deferred income taxes

 

22,453

 

22,086

 

Income tax receivable

 

46,623

 

47,164

 

Other current assets

 

33,085

 

37,693

 

Total current assets

 

449,596

 

352,986

 

 

 

 

 

 

 

Property and equipment, net

 

362,494

 

391,538

 

Goodwill

 

737,726

 

764,422

 

Other intangibles, net

 

120,954

 

126,961

 

Investment in and loans to affiliates

 

199,270

 

211,400

 

Other assets

 

81,894

 

45,179

 

 

 

 

 

 

 

Total assets

 

$

1,951,934

 

$

1,892,486

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Long-term debt, current portion

 

$

76,959

 

$

55,454

 

Accounts payable

 

59,824

 

62,394

 

Accrued expenses

 

160,592

 

156,638

 

Total current liabilities

 

297,375

 

274,486

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

392,917

 

578,853

 

Other noncurrent liabilities

 

251,418

 

236,287

 

Total liabilities

 

941,710

 

1,089,626

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, $0.05 par value; issued and outstanding 57,147,390 and 43,881,364 common shares at March 31, 2010 and June 30, 2009, respectively

 

2,857

 

2,194

 

Additional paid-in capital

 

329,553

 

151,394

 

Accumulated other comprehensive income

 

62,850

 

51,855

 

Retained earnings

 

614,964

 

597,417

 

 

 

 

 

 

 

Total shareholders’ equity

 

1,010,224

 

802,860

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,951,934

 

$

1,892,486

 

 

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

 

3



Table of Contents

 

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three Months Ended March 31, 2010 and 2009

(In thousands, except per share data)

 

 

 

2010

 

2009

 

Revenues:

 

 

 

 

 

Service

 

$

447,879

 

$

453,301

 

Product

 

129,949

 

141,169

 

Royalties and fees

 

9,743

 

9,616

 

 

 

587,571

 

604,086

 

Operating expenses:

 

 

 

 

 

Cost of service

 

255,568

 

259,465

 

Cost of product

 

62,061

 

74,217

 

Site operating expenses

 

48,280

 

49,864

 

General and administrative

 

72,741

 

69,592

 

Rent

 

85,908

 

85,654

 

Depreciation and amortization

 

26,552

 

27,384

 

Goodwill impairment

 

35,277

 

 

Lease termination costs

 

 

838

 

Total operating expenses

 

586,387

 

567,014

 

 

 

 

 

 

 

Operating income

 

1,184

 

37,072

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(9,039

)

(9,684

)

Interest income and other, net

 

3,125

 

1,316

 

 

 

 

 

 

 

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

 

(4,730

)

28,704

 

 

 

 

 

 

 

Income taxes

 

525

 

(9,667

)

Equity in income of affiliated companies, net of income taxes

 

2,680

 

1,988

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

(1,525

)

21,025

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of income taxes (Note 2)

 

 

(12,171

)

 

 

 

 

 

 

Net (loss) income

 

$

(1,525

)

$

8,854

 

 

 

 

 

 

 

Net (loss) income per share:

 

 

 

 

 

Basic:

 

 

 

 

 

(Loss) income from continuing operations

 

(0.03

)

0.49

 

Income (loss) from discontinued operations

 

 

(0.28

)

Net (loss) income per share, basic

 

$

(0.03

)

$

0.21

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

(Loss) income from continuing operations

 

(0.03

)

0.49

 

Income (loss) from discontinued operations

 

 

(0.28

)

Net (loss) income per share, diluted

 

$

(0.03

)

$

0.21

 

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding:

 

 

 

 

 

Basic

 

56,301

 

42,905

 

Diluted

 

56,301

 

42,917

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.04

 

$

0.04

 

 

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

 

4



Table of Contents

 

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Nine Months Ended March 31, 2010 and 2009

(In thousands, except per share data)

 

 

 

2010

 

2009

 

Revenues:

 

 

 

 

 

Service

 

$

1,332,282

 

$

1,367,414

 

Product

 

406,773

 

408,126

 

Royalties and fees

 

29,431

 

29,501

 

 

 

1,768,486

 

1,805,041

 

Operating expenses:

 

 

 

 

 

Cost of service

 

760,349

 

783,380

 

Cost of product

 

203,976

 

204,914

 

Site operating expenses

 

147,365

 

145,886

 

General and administrative

 

217,912

 

219,887

 

Rent

 

257,298

 

259,846

 

Depreciation and amortization

 

81,253

 

82,171

 

Goodwill impairment

 

35,277

 

41,661

 

Lease termination costs

 

3,552

 

2,836

 

Total operating expenses

 

1,706,982

 

1,740,581

 

 

 

 

 

 

 

Operating income

 

61,504

 

64,460

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(45,424

)

(30,782

)

Interest income and other, net

 

6,768

 

6,513

 

 

 

 

 

 

 

Income from continuing operations before income taxes and equity in income of affiliated companies

 

22,848

 

40,191

 

 

 

 

 

 

 

Income taxes

 

(10,002

)

(29,008

)

Equity in income of affiliated companies, net of income taxes

 

8,394

 

142

 

 

 

 

 

 

 

Income from continuing operations

 

21,240

 

11,325

 

 

 

 

 

 

 

Income (loss) from discontinued operations, net of income taxes (Note 2)

 

3,161

 

(131,237

)

 

 

 

 

 

 

Net income (loss)

 

$

24,401

 

$

(119,912

)

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

Basic:

 

 

 

 

 

Income from continuing operations

 

0.38

 

0.26

 

Income (loss) from discontinued operations

 

0.06

 

(3.06

)

Net income (loss) per share, basic

 

$

0.44

 

$

(2.80

)

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Income from continuing operations

 

0.38

 

0.26

 

Income (loss) from discontinued operations

 

0.06

 

(3.05

)

Net income (loss) per share, diluted

 

$

0.44

 

$

(2.79

)

 

 

 

 

 

 

Weighted average common and common equivalent shares outstanding:

 

 

 

 

 

Basic

 

55,572

 

42,863

 

Diluted

 

55,688

 

42,966

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.12

 

$

0.12

 

 

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

 

5



Table of Contents

 

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Nine Months Ended March 31, 2010 and 2009

(In thousands)

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

24,401

 

$

(119,912

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

73,810

 

84,189

 

Amortization

 

7,443

 

7,544

 

Equity in income of affiliated companies

 

(8,394

)

(142

)

Deferred income taxes

 

574

 

(5,952

)

Impairment on discontinued operations

 

(154

)

183,090

 

Goodwill impairment

 

35,277

 

41,661

 

Excess tax benefits from stock-based compensation plans

 

 

(284

)

Stock-based compensation

 

6,934

 

5,450

 

Amortization of debt discount and financing costs

 

4,978

 

 

Other noncash items affecting earnings

 

(1,298

)

(4,291

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

(51

)

(3,808

)

Inventories

 

5,628

 

(547

)

Income tax receivable

 

541

 

(39,979

)

Other current assets

 

4,872

 

(2,391

)

Other assets

 

(13,130

)

1,137

 

Accounts payable

 

(2,844

)

(2,694

)

Accrued expenses

 

8,738

 

(21,344

)

Other noncurrent liabilities

 

3,761

 

(1,002

)

Net cash provided by operating activities

 

151,086

 

120,725

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(36,768

)

(64,039

)

Proceeds from sale of assets

 

47

 

51

 

Asset acquisitions, net of cash acquired and certain obligations assumed

 

(2,702

)

(40,051

)

Proceeds from loans and investments

 

16,099

 

17,489

 

Disbursements for loans and investments

 

 

(5,971

)

Freestanding derivative settlement

 

736

 

 

 

Net cash used in investing activities

 

(22,588

)

(92,521

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings on revolving credit facilities

 

337,000

 

4,899,600

 

Payments on revolving credit facilities

 

(342,000

)

(4,973,800

)

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

 

(316,597

)

(83,519

)

Excess tax benefits from stock-based compensation plans

 

 

284

 

Proceeds from issuance of common stock, net of $7.2 million underwriting discount

 

156,843

 

2,307

 

Dividends paid

 

(6,854

)

(5,181

)

Other

 

(2,878

)

(4,328

)

Net cash used in financing activities

 

(7,161

)

(79,637

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

5,030

 

(19,131

)

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

126,367

 

(70,564

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

42,538

 

127,627

 

End of period

 

$

168,905

 

$

57,063

 

 

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

 

6



Table of Contents

 

REGIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of March 31, 2010 and for the three and nine months ended March 31, 2010 and 2009, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2010 and the consolidated results of its operations and its cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

 

The Consolidated Balance Sheet data for June 30, 2009 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2009 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

 

The unaudited condensed consolidated financial statements of the Company as of March 31, 2010 and for the three and nine month periods ended March 31, 2010 and 2009 included in this Form 10-Q, have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their separate report dated May 10, 2010 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

 

Stock-Based Employee Compensation:

 

Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan (2004 Plan) and the 2000 Stock Option Plan (2000 Plan). Additionally, the Company has outstanding stock options under its 1991 Stock Option Plan (1991 Plan), although the Plan terminated in 2001. Under these plans, four types of stock-based compensation awards are granted: stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs) and restricted stock units (RSUs). The stock-based awards, other than the RSUs, expire within ten years from the grant date. 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’s primary employee stock-based compensation grant occurs during the fourth fiscal quarter.  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.

 

Total compensation cost for stock-based payment arrangements totaled $2.3 and $1.6 million for the three months ended March 31, 2010 and 2009 respectively, and $6.9 and $5.5 million for the nine months ended March 31, 2010 and 2009, respectively.

 

7



Table of Contents

 

Stock options outstanding, weighted average exercise price and weighted average fair values as of March 31, 2010 were as follows:

 

Options

 

Shares

 

Weighted
Average Exercise
Price

 

 

 

(in thousands)

 

 

 

Outstanding at June 30, 2009

 

1,385

 

$

25.55

 

Granted

 

 

 

Exercised

 

 

 

Forfeited or expired

 

(70

)

20.91

 

Outstanding at September 30, 2009

 

1,315

 

$

25.80

 

Granted

 

 

 

Exercised

 

 

 

Forfeited or expired

 

(8

)

31.44

 

Outstanding at December 31, 2009

 

1,307

 

$

25.76

 

Granted

 

 

 

Exercised

 

(27

)

15.07

 

Forfeited or expired

 

(259

)

16.48

 

Outstanding at March 31, 2010

 

1,021

 

$

28.40

 

Exercisable at March 31, 2010

 

792

 

$

26.97

 

 

Outstanding options of 1,021,071 at March 31, 2010 had an intrinsic value (the amount by which the stock price exceeded the exercise or grant date price) of $0.9 million and a weighted average remaining contractual term of 4.0 years.  Exercisable options of 791,771 at March 31, 2010 had an intrinsic value of $0.9 million and a weighted average remaining contractual term of 3.1 years.  Of the outstanding and unvested options, 222,040 are expected to vest with a $33.42 per share weighted average grant price, a weighted average remaining contractual life of 7.2 years and a total intrinsic value of zero.

 

All options granted relate to stock option plans that have been approved by the shareholders of the Company.

 

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, 2009

 

1,032

 

$

26.33

 

1,114

 

$

26.30

 

Granted

 

 

 

 

 

Vested/Exercised

 

2

 

23.54

 

 

 

Forfeited or expired

 

(2

)

20.02

 

(6

)

38.63

 

Balance, September 30, 2009

 

1,032

 

$

26.34

 

1,108

 

$

26.24

 

Granted

 

 

 

 

 

Vested/Exercised

 

2

 

22.56

 

 

 

Forfeited or expired

 

 

 

 

 

Balance, December 31, 2009

 

1,034

 

$

26.33

 

1,108

 

$

26.24

 

Granted

 

 

 

 

 

Vested/Exercised

 

2

 

22.56

 

 

 

Forfeited or expired

 

 

 

 

 

Balance, March 31, 2010

 

1,036

 

$

26.33

 

1,108

 

$

26.24

 

 

Outstanding and unvested RSAs of 821,198 at March 31, 2010 had an intrinsic value of $15.3 million and a weighted average remaining contractual term of 1.9 years.  Of the outstanding and unvested awards, 779,447 are expected to vest with a total intrinsic value of $14.6 million.

 

Outstanding and unvested RSUs of 215,000 at March 31, 2010 had an intrinsic value of $4.0 million and a weighted average remaining contractual term of 2.0 years.  All unvested RSUs are expected to vest in fiscal year 2012.

 

Outstanding SARs of 1,108,400 at March 31, 2010 had a total intrinsic value of zero and a weighted average remaining contractual term of 7.9 years.  Exercisable SARs of 258,760 at March 31, 2010 had a total intrinsic value of zero and a weighted average remaining contractual term of 5.6 years.  Of the outstanding and unvested rights, 819,395 are expected to

 

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vest with a $23.00 per share weighted average grant price, a weighted average remaining contractual life of 8.6 years and a total intrinsic value of zero.

 

During both the three and nine months ended March 31, 2010 total cash received from the exercise of share-based instruments was $0.4 million. During the three and nine months ended March 31, 2009 total cash received from the exercise of share-based instruments was zero and $2.3 million, respectively.

 

As of March 31, 2010, the total unrecognized compensation cost related to all unvested stock-based compensation arrangements was $24.0 million.  The related weighted average period over which such cost is expected to be recognized was approximately 3.3 years as of March 31, 2010.

 

The total intrinsic value of all stock-based compensation that was exercised during both the three and nine months ended March 31, 2010 was $0.1 million. The total intrinsic value of all stock-based compensation that was exercised during the three and nine months ended March 31, 2009 was zero and $1.6 million, respectively.

 

Goodwill:

 

Goodwill is tested for impairment annually or when events or circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. 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 growth, gross margins, fixed expense rates, allocated corporate overhead, and long-term growth for determining terminal value. The Company’s estimated 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. The Company’s policy is to perform its annual goodwill impairment test during its third quarter of each fiscal year ending June 30.

 

In the situations where a reporting unit’s carrying value exceeds its 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. 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.

 

For the three months ended December 31, 2009, the Regis salon concept reported same-store sales of negative 10.0 percent, which was unfavorable compared to the Company’s budgeted same-store sales. As a result of the lower than expected same-store sales, the Company performed the first step of a goodwill impairment test by comparing the carrying value of the Regis salon concept, including goodwill to its estimated fair value as of December 31, 2009.  The estimated fair value as of December 31, 2009 was approximately $26.0 million or 14.0 percent above the carrying value.

 

The Regis salon concept reported same-store sales results of negative 5.8 percent for the three months ended March 31, 2010, which was unfavorable compared to the Company’s budgeted same-store sales. Such results indicated customer visitation patterns were not rebounding as quickly as the Company had originally projected.  Accordingly, the Company reduced the budgeted financial projections for the remainder of fiscal 2010 and all of fiscal year 2011. The lowered projections assume the higher price point Regis salon concept remains a strong viable business that will require a longer, slower recovery.  As a result of the lowered projections for the remainder of fiscal year 2010 and all of fiscal year 2011, the estimated fair value of the Regis salon concept decreased to a level below the Regis salon concept’s carrying value.

 

As a result of the Company’s annual impairment testing of goodwill during the three months ended March 31, 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 the goodwill for the Regis salon concept.  After the impairment charge the Regis salon concept reporting unit has $101.3 million of goodwill.

 

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As of March 31, 2010, the estimated fair value of the Promenade salon concept exceeded its respective carrying value by approximately 10.0 percent. 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 Regis and Promenade to be appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Regis and Promenade may become impaired 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 this 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 the Regis salon concept and Promenade salon concept goodwill is dependent on many factors and cannot be predicted with certainty.

 

As part of the Company’s annual impairment testing as of March 31, 2010, 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.

 

Recent Accounting Standards Adopted by the Company:

 

Accounting Standards Codification

 

In June 2009, the Financial Accounting Standards Board (FASB) issued guidance that establishes two levels of U.S. generally accepted accounting principles (GAAP), authoritative and nonauthoritative. The guidance establishes the FASB Accounting Standards Codification™ (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority.  The Codification was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009.  The adoption of the Codification changed the Company’s references to GAAP accounting standards, but did not impact the Company’s financial position, results of operations and cash flows.

 

Fair Value Measurements

 

In February 2008, the FASB issued guidance for the accounting for non-financial assets and non-financial liabilities.  The new guidance permitted a one-year deferral of the application of fair value accounting for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

 

The adoption of the new guidance on July 1, 2009, for non-financial assets and non-financial liabilities, did not have a material effect on the Company’s financial position, results of operations and cash flows.

 

Business Combinations

 

In December 2007, the FASB issued guidance for accounting for business combinations.  The guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interests in the acquiree and the goodwill acquired. Some of the key changes are the accounting treatment for certain specific acquisition related items including: (1) accounting for acquired in process research and development as an indefinite-lived intangible asset until approved or discontinued rather than as an immediate expense; (2) expensing acquisition costs rather than adding them to the cost of an acquisition; (3) expensing restructuring costs in connection with an acquisition rather than adding them to the cost of an acquisition; (4) including the fair value of contingent consideration at the date of an acquisition in the cost of an acquisition; and (5) recording an asset or liability arising from a contingency at the date of an acquisition at fair value if fair value can be reasonably determined. If fair value can not be determined, the asset or liability would be recognized in accordance with accounting for contingencies guidance.

 

The adoption of the new guidance on July 1, 2009, for business combinations, did not have a material effect on the Company’s financial position, results of operations and cash flows for the three and nine months ended March 31, 2010.  The guidance may have a material impact on future fiscal periods in the event the Company’s acquisition activity increases.

 

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Disclosures about Fair Value of Financial Instruments

 

In April 2009, the FASB issued guidance on disclosures about fair value of financial instruments to be presented in interim financial statements in addition to annual financial statements. The Company adopted the new disclosure guidance about fair value of financial instruments on July 1, 2009.

 

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 (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, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which will be adopted by the Company on July 1, 2011. Other than the additional disclosures, adoption of this new guidance did not have a material impact on our financial statements.

 

Participating Securities Granted in Share-Based Payment Transactions

 

In June 2008, the FASB issued guidance that clarified all share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Therefore, awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied rather than the treasury stock method. In addition, once effective, all prior period earnings per share data presented must be adjusted retrospectively to conform to the provisions of the guidance.

 

The Company’s outstanding unvested restricted stock awards do not contain rights to non-forfeitable dividends and as a result, the adoption of the new guidance on July 1, 2009, had no impact on the Company’s diluted earnings per share.

 

Equity Method Investment Accounting Considerations

 

In November 2008, the FASB issued guidance that indicates, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings.

 

The adoption of the new guidance on July 1, 2009, for equity method investment accounting considerations 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:

 

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 provisions will be effective for revenue arrangements entered into or materially modified in the Company’s fiscal year 2011 and must be applied prospectively. The Company is currently evaluating the impact the guidance will have on the Company’s Consolidated Financial Statements.

 

Amendments to Accounting for Variable Interest Entities

 

In June 2009, the FASB issued guidance on the accounting for variable interest entities. The guidance amends previous variable interest entity guidance to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. This guidance requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. It would also require ongoing assessments to determine whether an entity is a variable interest entity and whether an enterprise is the primary

 

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beneficiary of a variable interest entity. The guidance is effective for the Company’s fiscal year 2011. The Company is evaluating the impact the guidance will have on the Company’s Consolidated Financial Statements.

 

2.                                     DISCONTINUED OPERATIONS:

 

On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret). The Company concluded, after a comprehensive review of 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 sale of Trade Secret included 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 as held for sale as of December 31, 2008, under accounting for the impairment or disposal of long-lived asset guidance, and is presented as discontinued operations in the Condensed 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 and there will be no significant continuing involvement in the operations after disposal pursuant to guidance in determining whether to report discontinued operations. The agreement included a provision that the Company would supply product to the buyer of Trade Secret and provide certain administrative services for a transition period. Under this agreement, the Company recognized $20.0 and $12.6 million of product revenues on the supply of product sold to the purchaser of Trade Secret during the nine months ended March 31, 2010 and 2009, respectively, and $1.9 and $1.0 million of other income related to the administrative services during the nine months ended March 31, 2010 and 2009, respectively. The agreement was substantially complete as of September 30, 2009. The Company currently has an agreement in which the Company provides warehouse services to the purchaser of Trade Secret. Under the warehouse services agreement, the Company recognized $1.0 and $2.1 million of other income related to warehouse services during the three and nine months ended March 31, 2010.

 

As of March 31, 2010, $32.0 million was due to the Company from the purchaser of Trade Secret, $2.5 million was classified within current assets and $29.5 million was classified within other assets. During the three months ended March 31, 2010, the Company entered into a formal note receivable agreement with the purchaser of Trade Secret that requires quarterly interest payments of 8.0 percent and quarterly principal payments that escalate until the final payment in November of 2014.  Collateral for the receivables under the agreement is assets of the purchaser of Trade Secret, including property and equipment, inventory, promissory notes and cash.  The Company recognized $1.2 million of interest income related to the note receivable agreement for the nine months ended March 31, 2010.

 

The income (loss) from discontinued operations are summarized below:

 

 

 

For the Periods Ended March 31,

 

 

 

Three Months

 

Nine Months

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

Revenues

 

$

 

$

28,889

 

$

 

$

163,436

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations, before income taxes

 

$

 

$

(12,789

)

$

154

 

$

(190,234

)

Income tax benefit on discontinued operations

 

 

618

 

3,007

 

58,997

 

Income (loss) from discontinued operations, net of income taxes

 

$

 

$

(12,171

)

$

3,161

 

$

(131,237

)

 

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 nine months ended March 31, 2010 or its financial position or results of operations of any prior periods.

 

3.                                     SHAREHOLDERS’ EQUITY:

 

Net Income 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 value of the Company’s common stock are excluded 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. The impact of the convertible debt is excluded

 

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from the computation of diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basic earnings per share.

 

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

 

 

 

For the Periods Ended March 31,

 

 

 

Three Months

 

Nine Months

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Shares in thousands)

 

(Shares in thousands)

 

Weighted average shares for basic earnings per share

 

56,301

 

42,905

 

55,572

 

42,863

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Dilutive effect of stock-based compensation (1)

 

 

12

 

116

 

103

 

Weighted average shares for diluted earnings per share

 

56,301

 

42,917

 

55,688

 

42,966

 

 


(1)            For the three months ended March 31, 2010, 220 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.

 

The following table sets forth the awards which are excluded from the various earnings per share calculations:

 

 

 

For the Periods Ended March 31,

 

 

 

Three Months

 

Nine Months

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Shares in thousands)

 

(Shares in thousands)

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

RSAs (1)

 

821

 

291

 

821

 

291

 

RSUs (1)

 

215

 

215

 

215

 

215

 

 

 

1,036

 

506

 

1,036

 

506

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Stock options (2)

 

770

 

1,533

 

770

 

905

 

SARs (2)

 

1,108

 

506

 

1,108

 

513

 

RSAs (2)

 

157

 

279

 

189

 

279

 

RSUs (2)

 

 

215

 

 

215

 

 

 

2,035

 

2,533

 

2,067

 

1,912

 

 


(1)            Shares were not vested

(2)            Shares were anti-dilutive

 

Additional Paid-In Capital:

 

The change in additional paid-in capital during the nine months ended March 31, 2010 was due to the following:

 

 

 

(Dollars in
thousands)

 

Balance, June 30, 2009

 

$

151,394

 

Additional paid-in capital from share offering

 

162,932

 

Equity component of convertible debt, net of taxes

 

15,386

 

Equity offering costs

 

(8,154

)

Stock-based compensation

 

6,934

 

Exercise of stock options

 

406

 

Stock option tax benefit

 

313

 

Franchise stock incentive plan

 

290

 

Other

 

52

 

Balance, March 31, 2010

 

$

329,553

 

 

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Comprehensive Income:

 

Components of comprehensive income for the Company include net income, changes in fair market value of financial instruments designated as hedges of interest rate or foreign currency exposure and foreign currency translation charged or credited to the cumulative translation account within shareholders’ equity. Comprehensive income (loss) for the three and nine months ended March 31, 2010 and 2009 was as follows:

 

 

 

For the Periods Ended March 31,

 

 

 

Three Months

 

Nine months

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

Net (loss) income

 

$

(1,525

)

$

8,854

 

$

24,401

 

$

(119,912

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Changes in fair market value of financial instruments designated as cash flow hedges of interest rate exposure, net of taxes

 

(16

)

235

 

2,134

 

(2,865

)

Cumulative foreign currency translation

 

(3,766

)

(14,432

)

8,861

 

(73,548

)

Total comprehensive (loss) income

 

$

(5,307

)

$

(5,343

)

$

35,396

 

$

(196,325

)

 

4.                                     FAIR VALUE MEASUREMENTS:

 

On July 1, 2008, the Company adopted fair value measurement guidance for financial assets and liabilities.  On July 1, 2009, the Company adopted fair value measurement guidance for nonfinancial assets and liabilities.  This guidance 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 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 March 31, 2010 and June 30, 2009, according to the valuation techniques the Company used to determine their fair values.

 

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Fair Value at

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

March 31, 2010

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

110

 

$

 

$

110

 

$

 

Preferred shares

 

3,362

 

 

 

3,362

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

79

 

$

 

$

79

 

$

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

1,283

 

$

 

$

1,283

 

$

 

Equity put option

 

23,232

 

 

 

23,232

 

 

 

 

Fair Value at

 

Fair Value Measurements
Using Inputs Considered as

 

 

 

June 30, 2009

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

1,543

 

$

 

$

1,543

 

$

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

16

 

$

 

$

16

 

$

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

5,786

 

$

 

$

5,786

 

$

 

Equity put option

 

24,161

 

 

 

24,161

 

 

Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

 

The following tables present the changes during the three and nine months ended March 31, 2010 and 2009 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

 

Total

 

 

 

(Dollars in thousands)

 

Balance at July 1, 2009

 

$

 

$

24,161

 

$

24,161

 

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

1,029

 

1,029

 

Balance at September 30, 2009

 

$

 

$

25,190

 

$

25,190

 

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

(551

)

(551

)

Balance at December 31, 2009

 

$

 

$

24,639

 

$

24,639

 

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

(1,407

)

(1,407

)

Additions to Level 3

 

3,362

 

 

3,362

 

Balance at March 31, 2010

 

$

3,362

 

$

23,232

 

$

26,594

 

 

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Changes in Financial Instruments
Measured at Level 3 Fair Value Classified
as

 

 

 

Equity Put Option

 

Total

 

 

 

(Dollars in thousands)

 

Balance at July 1, 2008

 

$

24,803

 

$

24,803

 

Total realized and unrealized gains (losses):

 

 

 

 

 

Included in other comprehensive income

 

(2,120

)

(2,120

)

Balance at September 30, 2008

 

$

22,683

 

$

22,683

 

Total realized and unrealized gains (losses):

 

 

 

 

 

Included in other comprehensive income

 

(552

)

(552

)

Balance at December 31, 2008

 

$

22,131

 

$

22,131

 

Total realized and unrealized gains (losses):

 

 

 

 

 

Included in other comprehensive income

 

(1,397

)

(1,397

)

Balance at March 31, 2009

 

$

20,734

 

$

20,734

 

 

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 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, as provided by sources independent from the Company. See breakout by type of contract and reconciliation to the balance sheet line item that each contract is classified within Note 7 of the Condensed Consolidated Financial Statements.

 

Equity put option. 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. See further discussion within Note 6 of the Condensed 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.  At March 31, 2010, the fair value of the equity put option was $23.2 million and is classified within other noncurrent liabilities on the balance sheet.

 

Preferred Shares. The Company has preferred shares in Yamano Holding Corporation. See further discussion within Note 6 of the Condensed Consolidated Financial Statements. 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 Condensed Consolidated Balance Sheet. The fair value 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.  As of March 31, 2010 the subscription value of the preferred shares of 311,131,284 Yen ($3.4 million) represents the fair value of the preferred shares.

 

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 approximated the carrying values as of March 31, 2010.  At March 31, 2010, the estimated fair values and carrying amounts of debt were $482.6 and $469.9 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.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

We measure certain assets, including the Company’s equity method investments, 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.

 

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March 31, 2010

 

Level 1

 

Level 2

 

Level 3

 

Total Losses

 

 

 

(Dollars in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Goodwill - Regis

 

$

101,337

 

$

 

$

 

$

101,337

 

$

(35,277

)

Total

 

$

101,337

 

$

 

$

 

$

101,337

 

$

(35,277

)

 

Goodwill of the Regis salon concept with a carrying value of $136.6 million was written down to its implied fair value of $101.3 million, resulting in an impairment charge of $35.3 million, which was recorded during the three months ended March 31, 2010.

 

The assets measured at fair value on a nonrecurring basis during the nine months ended March 31, 2009 were goodwill of the salon concepts in the United Kingdom and the Company’s investment in and loans to Intelligent Nutrients, LLC. During the nine months ended March 31, 2009 the Company recorded $41.7 million and $7.8 million of impairment charges for the entire carrying value of the United Kingdom salon concept goodwill and investment in and loans to Intelligent Nutrients, LLC, respectively.

 

5.                                     GOODWILL AND OTHER INTANGIBLES:

 

The table below contains details related to the Company’s recorded goodwill as of March 31, 2010 and June 30, 2009:

 

 

 

Salons

 

Hair Restoration

 

 

 

 

 

North America

 

International

 

Centers

 

Consolidated

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill at June 30, 2009

 

$

615,055

 

$

41,661

 

$

149,367

 

$

806,083

 

Accumulated impairment losses (1)

 

 

(41,661

)

 

(41,661

)

Net goodwill at June 30, 2009

 

615,055

 

 

149,367

 

764,422

 

Goodwill acquired

 

1,842

 

 

 

1,842

 

Translation rate adjustments

 

6,731

 

 

8

 

6,739

 

Goodwill impairment (2)

 

(35,277

)

 

 

(35,277

)

Gross goodwill at March 31, 2010

 

623,628

 

41,661

 

149,375

 

814,664

 

Accumulated impairment losses (1)(2)

 

(35,277

)

(41,661

)

 

(76,938

)

Net goodwill at March 31, 2010

 

$

588,351

 

$

 

$

149,375

 

$

737,726

 

 


(1)          During the three months ended December 31, 2008, the fair value of the Company’s stock declined such that it began trading below book value per share.  As a result of the Company’s interim impairment test of goodwill during the three months ended December 31, 2008, there was a $41.7 million impairment charge for the full carrying amount of goodwill within the salon concepts in the United Kingdom.

(2)          As a result of the Company’s annual impairment testing of goodwill during the three months ended March 31, 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.

 

The table below presents other intangible assets as of March 31, 2010 and June 30, 2009:

 

 

 

March 31, 2010

 

June 30, 2009

 

 

 

 

 

Accumulated

 

 

 

 

 

Accumulated

 

 

 

 

 

Cost

 

Amortization (1)

 

Net

 

Cost

 

Amortization (1)

 

Net

 

 

 

(Dollars in thousands)

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Brand assets and trade names

 

$

79,870

 

$

(11,688

)

$

68,182

 

$

79,064

 

$

(9,964

)

$

69,100

 

Customer lists

 

52,045

 

(27,304

)

24,741

 

52,045

 

(23,252

)

28,793

 

Franchise agreements

 

21,569

 

(7,404

)

14,165

 

20,691

 

(6,299

)

14,392

 

Lease intangibles

 

14,720

 

(4,298

)

10,422

 

14,615

 

(3,737

)

10,878

 

Non-compete agreements

 

335

 

(136

)

199

 

121

 

(60

)

61

 

Other

 

6,875

 

(3,630

)

3,245

 

6,887

 

(3,150

)

3,737

 

 

 

$

175,414

 

$

(54,460

)

$

120,954

 

$

173,423

 

$

(46,462

)

$

126,961

 

 


(1)      Balance sheet accounts are converted at the applicable exchange rates effective as of the reported balance sheet dates, while income statement accounts are converted at the average exchange rates for the year-to-date periods presented.

 

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All intangible assets have been assigned an estimated finite useful life and are amortized over the number of years that approximate their respective useful lives (ranging from 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:

 

 

 

Weighted Average

 

 

 

Amortization Period

 

 

 

(In years)

 

 

 

March
31, 2010

 

June
30, 2009

 

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

 

4

 

Other

 

18

 

18

 

Total

 

26

 

26

 

 

Total amortization expense related to the amortizable intangible assets was approximately $2.5 million during the three months ended March 31, 2010 and 2009 and $7.4 and $7.5 million during the nine months March 31, 2010 and 2009, respectively.  As of March 31, 2010, future estimated amortization expense related to amortizable intangible assets is estimated to be:

 

Fiscal Year

 

(Dollars in
thousands)

 

2010 (Remainder: three-month period)

 

$

2,358

 

2011

 

9,688

 

2012

 

9,436

 

2013

 

9,127

 

2014

 

8,930

 

 

6.                                     ACQUISITIONS, INVESTMENT IN AND LOANS TO AFFILIATES:

 

Acquisitions

 

During the nine months ended March 31, 2010 and 2009, the Company made salon acquisitions and the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

 

The components of the aggregate purchase prices of the acquisitions made during the nine months ended March 31, 2010 and 2009 and the allocation of the purchase prices were as follows:

 

 

 

For the Nine Months Ended
March 31,

 

Allocation of Purchase Prices

 

2010

 

2009

 

 

 

(Dollars in thousands)

 

Components of aggregate purchase prices:

 

 

 

 

 

Cash

 

$

2,702

 

$

40,051

 

Deferred purchase price

 

 

75

 

 

 

$

2,702

 

$

40,126

 

Allocation of the purchase price:

 

 

 

 

 

Current assets

 

$

156

 

$

1,321

 

Property and equipment

 

662

 

6,150

 

Deferred income taxes

 

 

1,787

 

Goodwill

 

1,842

 

30,608

 

Identifiable intangible assets

 

124

 

1,317

 

Accounts payable and accrued expenses

 

(82

)

(754

)

Other noncurrent liabilities

 

 

(303

)

 

 

$

2,702

 

$

40,126

 

 

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

 

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recorded as an identifiable intangible asset, 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 is not deductible for tax purposes due to the acquisition structure of the transaction.

 

During the nine months ended March 31, 2010 and 2009, certain of the Company’s salon acquisitions were from its franchisees. The Company evaluated the effective settlement of the preexisting franchise contracts and associated rights afforded by those contracts. The Company determined that the effective settlement of the preexisting franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the preexisting contracts. Therefore, no settlement gain or loss was recognized with respect to the Company’s franchise buybacks.

 

Investment in and loans to affiliates

 

The table below presents the carrying amount of investments in and loans to affiliates as of March 31, 2010 and June 30, 2009:

 

 

 

March 31, 2010

 

June 30, 2009

 

 

 

(Dollars in thousands)

 

Empire Education Group, Inc.

 

$

100,604

 

$

111,451

 

Provalliance

 

81,146

 

82,135

 

MY Style

 

12,146

 

12,718

 

Hair Club for Men, Ltd.

 

5,374

 

5,096

 

 

 

$

199,270

 

$

211,400

 

 

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 buyout of EEG’s minority interest shareholder. This transaction leverages EEG’s management expertise, while enabling the Company to maintain a vested interest in the beauty school industry. EEG operates 95 accredited cosmetology schools.

 

The carrying value of the contributed schools approximated the estimated fair value of the Company’s interest in EEG, resulting in no gain or loss on the date of contribution. The $40.5 million difference between the carrying amount and the Company’s underlying equity in net assets of EEG is related to the indefinite lived license and accreditation intangible assets and goodwill. The Company’s investment in EEG is accounted for under the equity method of accounting. At March 31, 2010, the Company had a $21.4 million outstanding loan receivable from EEG. The Company has also provided EEG with a $15.0 million revolving credit facility, against which there was no outstanding borrowings as of March 31, 2010. During the three and nine months ended March 31, 2010 and 2009, the Company recorded $0.2 and $0.1 million, respectively, and $0.6 and $0.4 million, respectively, of interest income related to the loan and revolving credit facility. The exposure to loss related to the Company’s involvement with EEG is the carrying value of the investment and the outstanding loan.

 

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 the nine months ended March 31, 2010 and 2009, the Company recorded $4.2 and $0.3 million of equity earnings related to its investment in EEG.

 

Provalliance

 

On January 31, 2008, the Company merged its continental European franchise salon operations with the operations of the

 

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Franck Provost Salon Group in exchange for a 30.0 percent equity interest in the newly formed Provalliance 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 2,500 company-owned and franchise salons as of March 31, 2010.

 

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 acquisition price is determined based on a multiple of 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 has been 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.  There was no change in the fair value of the Equity Put during the nine months ended March 31, 2010 and 2009.  The Company recorded a $2.1 million increase in the fair value of the Equity Put during fiscal year 2009. Any changes related to foreign currency translation are recorded in accumulated other comprehensive income. The Company recorded a $0.9 million decrease the Equity Put related to foreign currency translation during the nine months ended March 31, 2010, see further discussion within Note 4 to the Condensed Consolidated Financial Statements. The merger 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.

 

The Company utilized the consolidation of variable interest entities guidance to determine whether or not its investment in Provalliance was a VIE, and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that Provalliance is a VIE based 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 relationship and the significance of the activities of Provalliance is more closely associated with the Franck Provost Group. Furthermore, the Company determined, based on a quantitative analysis that the Franck Provost Group has greater exposure to the expected losses of Provalliance. The variability that the Company could be required to absorb via its equity interest in Provalliance and its expanded interest via exercise of the Equity Put was determined to be well less than 50.0 percent. 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.

 

During the nine months ended March 31, 2010 and 2009, the Company recorded $3.5 and $4.9 million, respectively, of equity in income related to its investment in Provalliance. Primarily the result of the weakened economy across continental Europe, Provalliance had recorded income at levels much less than expected by Regis management during the Company’s fiscal year ended June 30, 2009. In addition, Provalliance significantly increased its debt levels but had significantly reduced future income expectations as a result 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 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.

 

MY Style

 

In April 2007, the Company purchased exchangeable notes issued by Yamano Holding Corporation (Exchangeable Note) and a loan obligation of a Yamano Holdings subsidiary, MY Style, formally known as Beauty Plaza Co. Ltd., (MY Style Note) for 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 connection 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

 

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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 permitting 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. The Company recorded a $2.1 million (224,000,000 Yen as of September 2008) gain related to the modification of the Exchangeable Note. However, based upon the overall fair value of the Exchangeable Note on the date of modification, the Company recorded an 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 gain and other than 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 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 and recorded as part of the Company’s investment within the investment in and loans to affiliates line item on the Condensed Consolidated Balance Sheet with any changes in fair value recorded in other comprehensive income.

 

As of March 31, 2010, the principal amount outstanding under the Exchangeable Note is $3.2 million (300,000,000 Yen). Principal payments of 100,000,000 Yen are due annually on September 30 through September 30, 2012. 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 less than $0.1 million in interest income related to the Exchangeable Note during the nine months ended March 31, 2010 and 2009.

 

MY Style Note.  As of March 31, 2010, the principal amount outstanding under the MY Style Note is $2.3 million (208,656,000 Yen). Principal payments of 52,164,000 Yen along with accrued interest are due annually on May 31 through May 31, 2013. 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 the nine months ended March 31, 2010 and 2009.

 

As of March 31, 2010, $1.7 and $12.1 million are recorded in the Condensed Consolidated Balance Sheet as current assets and investment in affiliates and loans, respectively, representing the Company’s total investment in MY Style. The exposure to loss related to the Company’s involvement with MY Style is the carrying value of the premium paid and 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 gain recorded through other income was $1.0 and $1.9 million during the nine months ended March 31, 2010 and 2009, respectively.

 

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 the nine months ended March 31, 2010 and 2009 the Company recorded income of $0.7 and $0.4 million, respectively, and received cash dividends of $0.4 and $0.7 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.

 

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Intelligent Nutrients LLC

 

Effective December 31, 2009, the Company transferred its ownership interest in Intelligent Nutrients, LLC to the other shareholder. In consideration for the transfer of the Company’s ownership interest, Intelligent Nutrients, the other shareholder, and the individual owner of the other shareholder will indemnify and hold harmless the Company from all current and future obligations of Intelligent Nutrients. Until December 31, 2009, the Company held a 49.0 percent interest in Intelligent Nutrients, LLC. The Company’s investment was previously accounted for under the equity method of accounting. During fiscal year 2009, the Company determined that its investment in and loans to Intelligent Nutrients, LLC were impaired and the fair value was zero due to Intelligent Nutrients, LLC’s inability to develop a professional organic brand of shampoo and conditioner with a price point that would develop broad consumer appeal. The Company also determined that the loss in value was “other-than-temporary” and recognized a pretax, non-cash impairment charge of $7.8 million for the full carrying value of the investment and loans as of December 31, 2008. The Company has no further exposure to loss related to the Company’s involvement with Intelligent Nutrients, LLC.

 

7.            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 variable rate debt typically represents 35.0 to 45.0 percent of the total debt portfolio. 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.

 

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, 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 Condensed Consolidated Statement of Operations. For purposes of the Condensed 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

 

The Company’s cash flow hedges include interest rate swaps, forward foreign currency contracts and treasury lock agreements.

 

The Company uses interest rate swaps to maintain its variable to fixed rate debt ratio in accordance with its established policy. As of March 31, 2010, the Company had $85.0 million of total variable rate debt outstanding, of which $40.0 million was swapped to fixed rate debt, resulting in $45.0 million of variable rate debt. The interest rate swap contracts pay fixed rates of interest and receive variable rates of interest. The contracts and related debt have maturity dates between fiscal year 2011 and 2012.

 

The Company repaid variable and fixed rate debt during the nine months ended March 31, 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 interest rate swaps were terminated prior to the maturity dates in conjunction with the repayments 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 Condensed Consolidated Statement of Operations.  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 and were settled for a loss of less than $0.1 million during the nine months ended

 

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March 31, 2010 and recorded within interest expense in the Condensed Consolidated Statement of Operations.

 

The Company uses forward foreign currency contracts to manage foreign currency rate fluctuations associated with certain forecasted intercompany transactions and international business travel. The Company’s primary forward foreign currency contracts hedge approximately 0.6 million of payments in Canadian dollars for intercompany transactions. The Company’s forward foreign currency contracts hedge transactions through fiscal year 2011.

 

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 Condensed 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 nine months ended March 31, 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 currently in earnings in conjunction with marking the contract to fair value.  A net loss of $0.2 million was recognized during the nine months ended March 31, 2010.  A net gain of $0.9 million was recognized during fiscal year ended June 30, 2009.

 

The Company had the following derivative instruments in its Condensed Consolidated Balance Sheet as of March 31, 2010 and June 30, 2009:

 

 

 

Asset

 

Liability

 

 

 

 

 

Fair Value

 

 

 

Fair Value

 

Type

 

Classification

 

March 31,
2010

 

June 30,
2009

 

Classification

 

March 31,
2010

 

June 30,
2009

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Designated as hedging instruments — Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

$

 

$

 

Other noncurrent liabilities

 

$

(1,283

)

$

(5,786

)

Forward foreign currency contracts

 

Other current assets

 

$

110

 

$

380

 

Other current liabilities

 

$

(79

)

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freestanding derivative contracts — not designated as hedging instruments:

 

 

 

 

 

 

 

Forward foreign currency contracts

 

Other current assets

 

$

 

$

1,163

 

Other current liabilities

 

$

 

$

(16

)

Total

 

 

 

$

110

 

$

1,543

 

 

 

$

(1,362

)

$

(5,802

)

 

The table below sets forth the (gain) or loss on the Company’s derivative instruments as of March 31, 2010 and 2009 recorded within accumulated other comprehensive income (AOCI) in the Condensed Consolidated Balance Sheet. 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 nine months ended March 31, 2010 and 2009 within the following line items in the Condensed Consolidated Statement of Operations.

 

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Table of Contents

 

 

 

Other Comprehensive Income
(Gain)/Loss at March 31,

 

(Gain) / Loss Reclassified from
Accumulated OCI into
Income at March  31,

 

Type

 

2010

 

2009

 

Classification

 

2010

 

2009

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Designated as hedging instruments — Cash Flow Hedges:

 

 

 

 

 

 

 

Interest rate swaps

 

$

799

 

$

4,781

 

 

 

$

 

$

 

Forward foreign currency contracts

 

67

 

(803

)

Cost of sales

 

(274

)

62

 

Treasury lock contracts

 

 

(255

)

Interest income

 

(388

)

(3

)

Total

 

$

866