Supercuts 2011 Annual Report Download - page 36

Table of Contents
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 method of accounting. The Company also has loan receivables from certain of these entities. 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 year 2011, we recorded an impairment 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.
Note Receivables, Net
The note receivable balances within the Company's Consolidated Balance Sheet primarily include a note receivable with the purchaser of
Trade Secret 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.
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 impairment 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 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.
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 for determining terminal value. The Company's
estimated
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