Supercuts 2006 Annual Report Download - page 88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Based upon the actual and preliminary purchase price allocations, the change in the carrying amount of the goodwill for the years ended
June 30, 2006 and 2005 is as follows:
(1)
Relates to the resolution of an income tax contingency related to prior acquisitions.
In a limited number of acquisitions, the Company guarantees that the stock issued in conjunction with the acquisition will reach a certain
market price. If the stock should not reach this price during an agreed upon time frame (typically three years from the date of acquisition), the
Company is obligated to issue additional consideration to the sellers. Once the agreed upon stock price is met or exceeded for a period of five
consecutive days, the contingency is met and the Company is no longer liable. At June 30, 2006, one contingency of this type exists, which
expires in March of 2008. Based on the June 30, 2006 market price, the Company would be required to provide an additional 65,430 shares
with an aggregate market value on that date of $2.3 million related to these acquisition contingencies if the agreed upon time frame was
assumed to have expired June 30, 2006. These contingently issuable shares have been included in the calculation of diluted earnings per share.
The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets.
This stems from the value associated with the walk-in customer base of the acquired salons, which is not recorded as an identifiable intangible
asset under current accounting guidance, as well as the limited value and customer preference associated with the acquired hair salon brand.
Key factors considered by consumers of hair salon services include personal relationships with individual stylists (driven by word of mouth
referrals), service quality and price point competitiveness. These attributes represent the “going concern” value of the salon. While the value of
the acquired customer base is the primary driver of any potential acquisition’s cash flows (which determines the purchase price), it is neither
known nor identifiable at the time of the acquisition. The cash flow history of a salon primarily results from repeat walk-
in customers driven by
the existing personal relationship between the customer and the stylist(s). Under SFAS No. 141, Business Combinations , a walk-in customer
base does not meet the criteria for recognition apart from goodwill.
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, beauty
schools 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
87
Salons
Beauty
Hair
Restoration
North America
International
Schools
Centers
Consolidated
(Dollars in thousands)
Balance at June 30, 2004
$
370,347
$
68,681
$
18,112
$
—
$
457,140
Goodwill acquired
79,544
1,432
11,206
127,506
219,688
Finalization of purchase accounting(1)
—
3,767
—
—
3,767
Impairment
—
(
38,319
)
—
—
(
38,319
)
Translation rate adjustments
2,805
1,471
(42
)
—
4,234
Balance at June 30, 2005
452,696
37,032
29,276
127,506
646,510
Goodwill acquired
64,150
3,316
52,573
7,298
127,337
Translation rate adjustments
3,468
876
37
—
4,381
Balance at June 30, 2006
$
520,314
$
41,224
$
81,886
$
134,804
$
778,228