Supercuts 2012 Annual Report Download - page 112

Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENTS IN AND LOANS TO AFFILIATES (Continued)
sheet and results of operations. In addition, EEG may be required to record impairment charges related to long-lived assets and goodwill, and
our share of such impairment charges could be material to our consolidated balance sheet and results of operations.
The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in EEG was a
variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of the VIE. The Company concluded that EEG was
not a VIE based on the fact that EEG had sufficient equity at risk. As the substantive voting control relates to the voting rights of the Board of
Directors, the Company granted the other shareholder a proxy to vote such number of the Company's shares such that the other shareholder
would have voting control of 51.0 percent of the common stock of EEG. The Company accounts for EEG as an equity investment under the
voting interest model. During fiscal years ended June 30, 2012, 2011, and 2010, the Company recorded $(4.0), $5.5, and $6.4 million of equity
(loss) earnings related to its investment in EEG. During the twelve months ended June 30, 2011, EEG declared and distributed a dividend in
which the Company received $4.1 million in cash and recorded tax expense of $0.3 million.
Investment in 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 27.1 percent of the 800 outstanding shares of common stock of MY Style. 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. 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).
In March 2010 the Company amended the agreement with Yamano for which 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". Portions of the Exchangeable Note that became
due as a result of the March 2010 amendments were contributed in-kind as payment for the Preferred Shares. The Preferred Shares have the
same terms and rights, yield a 5.0 percent dividend that accrues if not paid and have no voting rights. The preferred shares are accounted for as
an available for sale debt security.
Due to the natural disasters in Japan that occurred in March 2011, the Company was required to assess the preferred shares and premium
for other than temporary impairment. The fair value of the collateral which is the equity value of MY Style, declined due to changes in
projected revenue growth rates after the natural disasters. As MY Style is highly leveraged, any change in growth rates has a significant impact
on fair value. The estimated fair value was negligible. The Company recorded an other than temporary impairment during the third quarter of
fiscal year 2011 for the carrying value of the preferred shares and premium of $3.9 million (326,700,000 Yen) and $5.3 million (435,000,000
Yen), respectively.
Exchangeable Note. As of June 30, 2012, the principal amount outstanding under the Exchangeable Note is $1.3 million (100,000,000
Yen) and is due September 30, 2012. The Company
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