Supercuts 2011 Annual Report Download - page 57

Table of Contents
expected by Regis management during the Company's fiscal year ended June 30, 2009. In addition, Provalliance significantly increased its debt
levels resulting from acquisitions since January 31, 2008 but had significantly reduced future income expectations as a result of current
economic conditions. The Company calculated the estimated fair value of Provalliance based on discounted future cash flows that utilize
estimates in annual revenue growth, gross margins, capital expenditures, income taxes and long-
term growth for determining terminal value. The
discounted cash flow model utilizes projected financial results based on Provalliance's business plans and historical trends. The increased debt
and reduced earnings expectations reduced the fair value of Provalliance as of June 30, 2009. Accordingly, the Company could no longer justify
the carrying amount of its investment in Provalliance and recorded a $25.7 million other than temporary impairment charge in its fourth quarter
ended June 30, 2009. The $4.8 million impairment charge was based on Intelligent Nutrients, LLC's inability to develop a professional organic
brand of shampoo and conditioner with broad consumer appeal. The Company determined the losses in value to be other than temporary.
Partially offsetting the impairment losses was equity in income recorded for our investments in Provalliance, EEG and Hair Club for Men, Ltd.
See Note 6 to the Consolidated Financial Statements for further discussion of each respective affiliated company.
Income (Loss) from Discontinued Operations, net of Taxes
Income (loss) from discontinued operations was as follows:
During fiscal year 2010, the Company recorded a $3.0 million tax benefit in discontinued operations to correct the prior year calculation of
the income tax benefit related to the disposition of the Trade Secret Salon concept.
During the quarter ended December 31, 2008, we concluded that our Trade Secret concept was held for sale and presented it as
discontinued operations for all comparable prior periods. The loss from discontinued operations during fiscal year 2009 represents operating
losses and non-cash impairment charges of $183.3 million. The decrease in income from discontinued operations during fiscal year 2008 was
primarily due to same-store sales decreasing 7.9 percent and reduced retail product margins, largely the result of recent salon acquisitions which
have lower product margins. The decrease in income from discontinued operations during fiscal year 2008 was also due to long-lived asset
impairment charges of $4.4 million in fiscal year 2008 as compared to $1.7 million during fiscal year 2007. See Note 2 to the Consolidated
Financial Statements for further discussion.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements.
Effects of Inflation
We compensate some of our salon employees with percentage commissions based on sales they generate, thereby enabling salon payroll
expense as a percent of company-owned salon revenues to remain relatively constant. Accordingly, this provides us certain protection against
inflationary increases, as payroll expense and related benefits (our major expense components) are variable costs of sales. In addition, we may
increase pricing in our salons to offset any significant increases in wages. Therefore, we do not believe inflation has had a significant impact on
the results of our operations.
55
(Decrease) Increase
Over Prior Fiscal Year
Income (Loss)
from Discontinued
Operations,
Net of Taxes
Years Ended June 30, Dollar Percentage
(Dollars in thousands)
2011
$
—
$
(
3,161
)
(100.0
)%
2010
3,161
134,597
102.4
2009
(131,436
)
(132,739
)
(10,187.2
)