News Column

REGIS CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 26, 2014

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. BUSINESS DESCRIPTION Regis Corporation owns, franchises and operates beauty salons. As of June 30, 2014, the Company owned, franchised or held ownership interests in 9,674 locations worldwide. The Company's locations consist of 9,456 company-owned and franchised salons and 218 locations in which we maintain a non-controlling ownership interest of less than 100%. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market. See discussion within Part I, Item 1. RESULTS OF OPERATIONS Beginning with the period ended September 30, 2012, the Hair Restoration Centers reportable segment was accounted for as a discontinued operation. See Note 2 to the Consolidated Financial Statements. All comparable periods reflect Hair Restoration Centers as a discontinued operation. Explanations are primarily for North American Value, unless otherwise noted. Discontinued operations are discussed at the end of this section. Beginning in fiscal year 2014, costs associated with field leaders, excluding salons within the North American Premium segment, that were previously recorded within General and Administrative expense are now categorized within Cost of Service and Site Operating expense as a result of the field reorganization that took place in the fourth quarter of fiscal year 2013. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders now spend most of their time on the salon floor leading and mentoring stylists, and serving guests. As a result, district and senior district leader labor costs are now reported within Cost of Service rather than General and Administrative expenses, and their travel costs are reported within Site Operating expenses rather than General and Administrative expenses. Beginning in the second quarter of fiscal year 2014, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business subsequent to the restructuring of its North American field organization that took place in the fourth quarter of fiscal year 2013 and was completed during the second quarter of fiscal year 2014. See Notes 1 and 14 to the Consolidated Financial Statements. 21



--------------------------------------------------------------------------------

Table of Contents

Consolidated Results of Operations The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations. The percentages are computed as a percent of total revenues, except as otherwise indicated. Fiscal Years 2014 2013 2012 2014 2013 2012 2014 2013 2012 Basis Point (Dollars in millions) % of Total Revenues Increase (Decrease)



Service revenues $ 1,480.1$ 1,563.9$ 1,643.9 78.2 % 77.5 % 77.5 % 70 - (30 ) Product revenues

371.5 415.7 440.0 19.6 20.6 20.7 (100 ) (10 ) 20 Franchise royalties and fees 40.9 39.1 38.3 2.2



1.9 1.8 30 10 10

Cost of service(1) 907.3 930.7 941.7 61.3



59.5 57.3 180 220 (10 ) Cost of product(2)

187.2 228.6 221.6 50.4 55.0 50.4 (460 ) 460 10 Site operating expenses 202.4 203.9 207.0 10.7 10.1 9.8 60 30 10 General and administrative 172.8 226.7 249.6 9.1



11.2 11.8 (210 ) (60 ) (130 ) Rent

322.1 324.7 331.8 17.0 16.1 15.6 90 50 30 Depreciation and amortization 99.7 91.8 105.0 5.3 4.5 4.9 80 (40 ) 70 Goodwill impairment 34.9 - 67.7 1.8



- 3.2 180 (320 ) (20 )

Interest expense 22.3 37.6 28.2 1.2



1.9 1.3 (70 ) 60 (30 ) Interest income and other, net

2.0 35.4 5.1 0.1



1.8 0.2 (170 ) 160 -

Income taxes(3) (71.1 ) 10.0 4.4 (130.9 ) (99.3 ) 17.5 N/A N/A N/A Equity in loss of affiliated companies, net of income taxes (11.6 ) (16.0 ) (30.9 ) (0.6 )



(0.8 ) (1.5 ) 20 70 (180 )

Income (loss) from discontinued operations, net of taxes 1.4 25.0 (62.4 ) 0.1



1.2 (2.9 ) (110 ) 410 (350 )

____________________________________________________________________________

(1) Computed as a percent of service revenues and excludes depreciation and amortization expense. (2) Computed as a percent of product revenues and excludes depreciation and amortization expense.



(3) Computed as a percent of (loss) income from continuing operations before

income taxes and equity in loss of affiliated companies. The income tax

(expense) benefit basis point change is noted as not applicable (N/A) as

the discussion below is related to the effective income tax rate. 22



--------------------------------------------------------------------------------

Table of Contents

Consolidated Revenues Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees and franchise royalties and fees. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change: Fiscal Years 2014 2013 2012 (Dollars in thousands) North American Value salons: SmartStyle $ 487,722$ 509,537$ 514,050 Supercuts 343,372 343,464 343,764 MasterCuts 127,758 146,506 159,627 Other Value 471,231 516,074 553,101



Total North American Value salons 1,430,083 1,515,581 1,570,542 North American Premium salons

333,858 373,820 410,563 International salons 128,496 129,312 141,122 Consolidated revenues $ 1,892,437$ 2,018,713$ 2,122,227 Percent change from prior year (6.3 )% (4.9 )% (2.7 )% Salon same-store sales decrease(1) (4.8 )% (2.4 )%



(3.5 )%

_______________________________________________________________________________

(1) Same-store sales are calculated on a daily basis as the total change in

sales for company-owned locations which were open on a specific day of the

week during the current period and the corresponding prior period.

Quarterly and fiscal year same-store sales are the sum of the same-store

sales computed on a daily basis. Locations relocated within a one mile radius are included in same-store sales as they are considered to have been open in the prior period. International same-store sales are



calculated in local currencies to remove foreign currency fluctuations

from the calculation.

Decreases in consolidated revenues were driven by the following:

Fiscal Years Factor 2014 2013 2012 Same-store sales (4.8 )% (2.4 )% (3.5 )% Closed salons (2.6 ) (3.3 ) (2.3 )



New stores and conversions 0.8 1.3 1.3 Other

0.3 (0.5 ) 1.8 (6.3 )% (4.9 )% (2.7 )%



Same-store sales by concept by fiscal year are detailed in the table below:

Fiscal Years 2014 2013 2012 SmartStyle (5.4 )% (1.1 )% (4.3 )% Supercuts 0.5 % (0.7 )% (0.3 )% MasterCuts (9.4 )% (5.1 )% (3.3 )% Other Value (5.4 )% (2.8 )% (2.7 )% Total North American Value salons (4.5 )% (2.0 )% (2.9 )% North American Premium salons (6.7 )% (3.1 )% (4.2 )% International salons (1.5 )% (4.3 )% (9.1 )% Consolidated same-store sales (4.8 )% (2.4 )% (3.5 )% 23



--------------------------------------------------------------------------------

Table of Contents

The same-store sales decrease of 4.8% during fiscal year 2014 was due to a 6.1% decrease in guest visits, partly offset by a 1.3% increase in average ticket. We closed 322 and 492 salons (including 63 and 69 franchised salons) during fiscal years 2014 and 2013, respectively. The Company constructed (net of relocations) 127 company-owned salons during fiscal year 2014. During fiscal year 2014, we acquired 2 company-owned salons via franchise buybacks. We did not acquire any company-owned locations during fiscal year 2013. The same-store sales decrease of 2.4% during fiscal year 2013 was due to a 3.0% decrease in guest visits, partly offset by a 0.6% increase in average ticket. We closed 492 and 384 salons (including 69 and 51 franchised salons) during fiscal years 2013 and 2012, respectively. The Company constructed (net of relocations) 153 company-owned salons during fiscal year 2013. We did not acquire any company-owned salons during fiscal year 2013 compared to 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012. The same-store sales decrease of 3.5% during fiscal year 2012 was due to a 3.4% decrease in guest visits and 0.1% decrease in average ticket. We acquired 13 company-owned salons (including 11 franchise buybacks) during fiscal year 2012 compared to 105 company-owned salons (including 78 franchise buybacks) during fiscal year 2011. The Company constructed (net of relocations) 166 company-owned salons during fiscal year 2012. We closed 384 and 305 salons (including 51 and 60 franchised salons) during fiscal years 2012 and 2011, respectively. Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees. Fluctuations in these three major revenue categories, operating expenses and other income and expense were as follows: Service Revenues The $83.8 million decrease in service revenues during fiscal year 2014 was primarily due to the 3.4% decrease in same-store services sales and the closure of 259 company-owned salons. The decrease in same-store services sales was primarily a result of a 4.9% decrease in same-store guest visits, partly offset by a 1.5% increase in average ticket. Partly offsetting the decrease was growth from construction (net of relocations) of 127 company-owned salons during fiscal year 2014. The $80.0 million decrease in service revenues during fiscal year 2013 was primarily due to the closure of 423 company-owned salons, same-store service sales decreasing 2.0% and the comparable prior period including an additional day from leap year. The decrease in same-store services sales was primarily a result of a 2.3% decrease in same-store guest visits, partly offset by a 0.3% increase in average ticket. Partly offsetting the decrease was growth from construction (net of relocations) of 153 company-owned salons during fiscal year 2013. The $51.5 million decrease in service revenues during fiscal year 2012 was primarily due the closure of 333 company-owned salons and same-store service sales decreasing 3.7%. The decrease in same-store services sales was primarily a result of a 3.1% decrease in same-store guest visits and a 0.6% decrease in average ticket due to promotional programs designed to generate additional guest visits. Partly offsetting the decrease was growth from construction (net of relocations) of 166 company-owned salons and acquisition of 13 company-owned salons during fiscal year 2012 and the additional day from leap year. Product Revenues The $44.3 million decrease in product revenues during fiscal year 2014 was primarily due to same-store product sales decreasing 10.3% and the closure of 259 company-owned salons. This was partly offset by an increase in product sales to franchisees primarily due to increases in franchised locations and product sales from 127 newly constructed company-owned salons (net of relocations) during fiscal year 2014. The decrease in same-store product sales was primarily a result of a 14.7% decrease in same-store guest visits, partly offset by a 4.4% increase in average ticket. The $24.3 million decrease in product revenues during fiscal year 2013 was primarily due to same-store product sales decreasing 3.9%, the closure of 423 company-owned salons and the comparable prior period including an additional day from leap year, partly offset by an increase in product sales to franchisees primarily due to increases in franchised locations and product sales from 153 newly constructed company-owned salons (net of relocations) during fiscal year 2013. The decrease in same-store product sales was primarily a result of a 6.5% decrease in same-store guest visits, partly offset by a 2.6% increase in average ticket. The $7.4 million decrease in product revenues during fiscal year 2012 was primarily due to same-store product sales decreasing 2.7%, and the closure of 333 company-owned salons, partly offset by the additional day from leap year and an increase in product sales to franchisees primarily due to increases in franchised locations and product sales from 166 newly constructed company-owned salons (net of relocations) and acquisition of 13 company-owned salons during fiscal year 2012. The decrease in same-store product sales was primarily a result of a 5.3% decrease in same-store guest visits, partly offset by a 2.6% increase in average ticket. 24



--------------------------------------------------------------------------------

Table of Contents

Royalties and Fees Total franchised locations open at June 30, 2014 and 2013 were 2,179 and 2,082, respectively. The $1.8 million increase in royalties and fees was due to increased franchised locations during fiscal year 2014 and same-store sales increases at franchised locations. Total franchised locations open at June 30, 2013 and 2012 were 2,082 and 2,016, respectively. The $0.8 million increase in royalties and fees was due to increased franchised locations during fiscal year 2013 and same-store sales increases at franchised locations. Total franchised locations open at June 30, 2012 and 2011 were 2,016 and 1,936, respectively. During fiscal year 2012, we purchased a 60.0% ownership interest in a franchise network, consisting of 31 franchised locations. The $1.0 million increase in royalties and fees was also due to same-store sales increases at franchised locations, partly offset by the Company purchasing 11 of our franchised salons during fiscal year 2012. Cost of Service The 180 basis point increase in cost of service as a percent of service revenues during fiscal year 2014 was primarily due to the change in expense categorization as a result of the field reorganization that took place during the fourth quarter of fiscal year 2013. The change in the expense categorization accounted for 140 basis points of the increase for fiscal year 2014. The remaining increase of 40 basis points for fiscal year 2014 was primarily the result of negative leverage from stylist hours caused by a decline in same-store service sales, increased stylists wages and an increase in healthcare costs, partly offset by cost reductions due to the field reorganization and lower levels of bonuses and the lapping of a full commission coupon event that was not repeated this year. The 220 basis point increase in cost of service as a percent of service revenues during fiscal year 2013 was primarily due to increased labor costs in our North American Value salons, a result of the Company's strategy to increase stylist hours in order to reduce guest wait times and improve the overall guest experience, and the negative leverage this created with same-store service sales declines. The Company made slight improvement during the year in optimizing salon schedules to align with guest traffic. Also contributing to the basis point increase was the Company's decision earlier in the year to compensate stylists on the gross sales amount during certain coupon events and an increase in health insurance expense due to higher claims. The 10 basis point decrease in cost of service as a percent of service revenues during fiscal year 2012 was due to lower commissions as a result of leveraged pay plans for new stylists and a decrease in salon health insurance costs due to lower claims, partly offset by decreased productivity in our North American Value and Premium salons. Cost of Product The 460 basis point decrease in cost of product as a percent of product revenues during fiscal year 2014 was primarily the result of lapping a $12.6 million non-cash impairment charge recorded during the fourth quarter of fiscal year 2013. Prior year clearance sales in connection with standardizing plan-o-grams and reducing retail product assortments and reduced sales commissions in fiscal year 2014 further contributed to the decrease in cost of product as a percent of product revenues. The 460 basis point increase in cost of product as a percent of product revenues during fiscal year 2013 was mainly attributed to our inventory simplification program, which standardized retail plan-o-grams, eliminated retail products and consolidated from four own-branded product lines to one. In connection with these activities, the Company sold through clearance approximately $8.0 million of product and liquidated approximately $12.6 million of remaining inventory into non Regis distribution channels within the parameters of existing supply agreements. While negatively impacting cost of product as a percent of product revenues, clearance sales and liquidation of inventories generated higher cash returns than past practices of repackaging and returning products to distribution centers for restocking, disposal or return to vendors. Further impacting cost of product as a percent of product sales were Hurricane Sandy product donations, partly offset by reductions to commissions paid on retail sales. The 10 basis point increase in cost of product as a percentage of product revenues during fiscal year 2012 was primarily due to increases in freight costs due to higher fuel prices partly offset by a reduction in commissions paid to new employees on retail product sales in our North American Value and Premium salons. Site Operating Expenses Site operating expenses decreased $1.6 million during fiscal year 2014. After considering the prior year change in expense categorization as a result of the field reorganization that took place during the fourth quarter of fiscal year 2013, site operating expense decreased $10.1 million during fiscal year 2014, primarily from cost savings initiatives to lower utilities, janitorial and repairs and maintenance expenses, lower travel expense due to the field reorganization, reduced incentive 25



--------------------------------------------------------------------------------

Table of Contents

compensation from lower same-store sales and reduced freight and self-insurance expenses. These were partly offset by increased salon connectivity costs to support the Company's new POS system and salon workstations and increased marketing costs. The change in basis points during fiscal year 2014 was negatively impacted from negative leverage as a result of a decline in same-store sales. The 30 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage from the decrease in same-store sales. Site operating expenses declined $3.1 million primarily within our North American Value and Premium segments due to a decrease in advertising costs, utilities and janitorial expense, partly offset by increases in salon connectivity costs to support the Company's new POS system and salon workstations and higher salon repairs and maintenance expense. The 10 basis point increase in site operating expenses as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage from the decrease in same-store sales. General and Administrative General and administrative expense (G&A) declined $53.9 million, or 210 basis points as a percent of consolidated revenues, during fiscal year 2014. This improvement was primarily due to the change in expense categorization as a result of the field reorganization. The change in expense categorization accounted for $29.6 million of the decrease for fiscal year 2014. The remaining decrease of $24.3 million during fiscal year 2014 was primarily due to reduced levels of incentive compensation in our North American Value and Unallocated Corporate segments, cost savings from various initiatives and the field reorganization, reduced health insurance costs and a favorable deferred compensation adjustment within our Unallocated Corporate segment, partly offset by legal and professional fees. The Company remains focused on simplification to drive further costs efficiencies. G&A declined $22.9 million, or 60 basis points as a percent of consolidated revenues, during fiscal year 2013. This improvement was primarily due to reductions in salaries and benefits from our corporate reorganization executed in the prior year, certain cost savings initiatives in fiscal year 2013 and reduced levels of incentive pay in fiscal year 2013, partly offset by costs associated with rolling out our new POS system. The $36.2 million decrease or 130 basis point improvement in G&A costs as a percent of consolidated revenues during fiscal year 2012 was the result of lapping a $31.2 million valuation reserve on the note receivable with the purchaser of Trade Secret in fiscal year 2011. Also contributing to the improvement during fiscal year 2012 was a reduction in salaries and other employee benefits as a result of the reduction in Salon Support workforce that occurred in January 2012. Partly offsetting these improvements were incremental costs associated with the Company's senior management restructuring, severance charges and professional fees incurred in connection with the contested proxy and the exploration of alternatives for non-core assets. Rent Rent expense decreased by $2.6 million during fiscal year 2014 primarily due to salon closures, mainly within our North American Value and Premium segments. The 90 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2014 was primarily due to negative leverage associated with this fixed cost category. Rent expense decreased by $7.1 million during fiscal year 2013 primarily due to salon closures, mainly within our North American Value and Premium segments. The 50 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2013 was primarily due to negative leverage associated with this fixed cost category. The 30 basis point increase in rent expense as a percent of consolidated revenues during fiscal year 2012 was primarily due to negative leverage in this fixed cost category due to negative same-store sales, partly offset by favorable common area maintenance adjustments from landlords and salon closures. Depreciation and Amortization Depreciation and amortization expense (D&A) increased $8.0 million or 80 basis points as a percent of consolidated revenues during fiscal year 2014. This increase was primarily due to increased fixed asset impairment charges recorded in our North American Premium and Value segments, partly offset by declines in depreciation expense as a result of the fixed asset impairment charges recorded during fiscal years 2014 and 2013. D&A decreased $13.2 million or 40 basis points as a percent of consolidated revenues during fiscal year 2013. This decrease was primarily due to our lapping $16.2 million of accelerated amortization associated with the adjustment to the useful life of the Company's previously internally developed POS system. Partly offsetting the 40 basis point improvement was $1.9 million ($1.2 million net of tax or $0.02 per diluted share) of accelerated depreciation expense in the current year 26



--------------------------------------------------------------------------------

Table of Contents

associated with exiting a leased building in conjunction with consolidating the Company's headquarters and negative leverage from the decrease in same-store sales. D&A increased $12.8 million or 70 basis points as a percent of consolidated revenues during fiscal year 2012. This increase was primarily due to $16.2 million ($10.2 million net of tax or $0.18 per diluted share) of accelerated amortization expense in the current year resulting from the useful life adjustment of the Company's internally developed POS system and negative leverage from the decrease in same-store sales. Partly offsetting the basis point increase was the continuation of a decrease in depreciation expense from the reduction in salon construction beginning in fiscal year 2009 as compared to historical levels prior to fiscal year 2009. Goodwill Impairment The Company recorded a goodwill impairment charge of $34.9 million related to the Regis salon concept during fiscal year 2014. The Company redefined its operating segments during the second quarter of fiscal year 2014. In addition, overall performance trends were down. For these reasons, the Company was required to perform this goodwill assessment in the second quarter of fiscal year 2014. As a result of this non-cash charge, the Company has no further goodwill on its balance sheet associated with the Regis salon concept (North American Premium). The Company remains focused on improving the performance of this business as it stabilizes and turns around the business. See Notes 1 and 4 to the Consolidated Financial Statements. The Company did not record a goodwill impairment charge in fiscal year 2013. The Company recorded a goodwill impairment charge of $67.7 million related to the Regis salon concept during fiscal year 2012. Due to the continuation of decreased same-store sales, the estimated fair value of the Regis salon operations was less than the carrying value of this concept's net assets, including goodwill. The $67.7 million impairment charge was the excess of the carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept. Interest Expense Interest expense decreased by $15.3 million during fiscal year 2014 primarily due to a $10.6 million make-whole payment associated with the prepayment of private placement debt in June 2013 and decreased average outstanding debt and related interest rates compared to the prior year. Interest expense increased by $9.3 million during fiscal year 2013 primarily due to a $10.6 million make-whole payment associated with the prepayment of private placement debt in June 2013, partly offset by decreased debt levels as compared to fiscal year 2012. The 30 basis point improvement in interest as a percent of consolidated revenues during fiscal year 2012 was primarily due to decreased debt levels as compared to fiscal year 2011. Interest Income and Other, net Interest income and other, net decreased $33.4 million or 170 basis points as a percent of consolidated revenues during fiscal year 2014. This decrease was primarily due to the recognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance during fiscal year 2013. Interest income and other, net increased $30.3 million or 160 basis points as a percent of consolidated revenues during fiscal year 2013. This increase was primarily due to the recognition of a $33.8 million foreign currency translation gain in connection with the sale of Provalliance, partly offset by fiscal year 2012 including a favorable legal settlement and the foreign currency impact on the Company's investment in MY Style. Interest income and other, net as a percent of consolidated revenues during fiscal year 2012, was consistent with the comparable prior period as there was a favorable foreign currency impact related to the Company's investment in MY Style and a favorable legal settlement during fiscal year 2012 that were offset by the prior year comparable period including higher fees received for warehousing services provided to the purchaser of Trade Secret. Income Taxes During fiscal year 2014, the Company recognized income tax expense of $71.1 million on $54.3 million of loss from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (130.9)%. The recorded tax expense and effective tax rate for fiscal year 2014 are higher than would be expected as a result of the $84.4 million non-cash valuation allowance established against the Company's U.S. and U.K. deferred tax assets and the tax effect of the $34.9 million goodwill impairment charge, which was partly non-deductible for tax purposes. Because we have a valuation allowance against most of our deferred tax assets, our effective tax rate will likely fluctuate from quarter-to-quarter. Going 27



--------------------------------------------------------------------------------

Table of Contents

forward, we expect a component of our income tax rate to include non-cash tax expense relating to tax benefits on certain indefinite-lived assets that we cannot recognize for reporting purposes. This non-cash tax expense will continue as long as we have a valuation allowance in place. During fiscal year 2013, the Company recognized an income tax benefit of $10.0 million on $10.1 million of income from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of (99.3)%. The larger than expected effective tax rate benefit was because the $33.8 million foreign currency translation gain recognized at the time of the sale of Provalliance was primarily non-taxable, along with a benefit from Work Opportunity Tax Credits. During fiscal year 2012, the Company recognized an income tax benefit of $4.4 million on $25.3 million of losses from continuing operations before income taxes and equity in loss of affiliated companies, for an effective tax rate of 17.5%. The smaller than expected effective tax rate was primarily because the $67.7 million Regis salon concept goodwill impairment charge was partly non-deductible for tax purposes. Equity in Loss of Affiliated Companies, Net of Income Taxes The loss in affiliated companies, net of taxes for fiscal year 2014, was primarily due to the Company recording its portion of EEG's goodwill impairment charge ($12.6 million, net of taxes) and fixed asset impairment charges ($3.3 million, net of taxes), partly offset by the recovery of $3.1 million on previously impaired investments in Yamano. See Note 5 to the Consolidated Financial Statements. The loss in affiliated companies, net of taxes for fiscal year 2013 was primarily due to the Company's $17.9 million other than temporary impairment charge recorded on its investment in EEG, partly offset by the Company's share of EEG's net income and a $0.6 million gain on the Provalliance Equity Put that automatically terminated as a result of the sale of the Company's investment in Provalliance. See Note 5 to the Consolidated Financial Statements. The loss in affiliated companies, net of taxes for fiscal year 2012 was primarily due to the impairment losses of $17.2 and $19.4 million recorded on our investments in Provalliance and EEG, respectively. In conjunction with entering into a purchase agreement to sell Provalliance, the Company recorded a $37.4 million other than temporary impairment charge on its investment in Provalliance and $20.2 million reduction in the fair value of the Equity Put, resulting in a net impairment charge of $17.2 million. The Company recorded a $19.4 million other than temporary impairment charge for the excess of the carrying value of its investment in EEG over the fair value. The Company also recorded its $8.7 million share of an intangible asset impairment recorded directly by EEG. These impairments recorded during fiscal year 2012 were partly offset by our share of earnings of $9.7 and $4.7 million recorded for our investments in Provalliance and EEG, respectively. See Note 5 to the Consolidated Financial Statements. Income from Discontinued Operations, net of Taxes During fiscal year 2014, the Company recognized a $1.4 million tax benefit from discontinued operations for the release of tax reserves associated with the disposition of our Trade Secret salon concept. See Note 2 to the Consolidated Financial Statements. During fiscal year 2013, the Company recognized $25.0 million of income, net of taxes from discontinued operations, primarily from an after-tax gain of $17.8 million realized upon the sale of Hair Club and $12.6 million of income from Hair Club operations, net of taxes, partly offset by $5.4 million of expense, net of taxes, associated with professional and transaction fees. During fiscal year 2012, the Company recognized $62.4 million of loss, net of taxes from discontinued operations, primarily from a $61.9 million loss, net of taxes from Hair Club operations, as a result of the $78.4 million goodwill impairment charge, and $1.6 million of expense, net of taxes associated with professional and transaction fees, partly offset by $1.1 million tax benefit related to the release of tax reserves associated with the disposition of our Trade Secret salon concept. Recent Accounting Pronouncements Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents, and our revolving credit facility are our most significant sources of liquidity. We believe our sources of liquidity will be sufficient to sustain operations and to finance strategic initiatives. We also anticipate having access to long-term financing. However, in the event our liquidity is insufficient 28



--------------------------------------------------------------------------------

Table of Contents

and we are not able to access long-term financing, we may be required to limit or delay our strategic initiatives. There can be no assurance that we will continue to generate cash flows at or above current levels. As of June 30, 2014, cash and cash equivalents were $378.6 million, with $349.1, $13.5 and $16.0 million in the U.S., Canada and Europe, respectively. We have a $400.0 million five-year senior unsecured revolving credit facility with a syndicate of banks that expires in June 2018. As of June 30, 2014, the Company had no outstanding borrowings under the facility and had outstanding standby letters of credit under the facility of $2.2 million, primarily related to its self-insurance program. Accordingly, unused available credit under the facility at June 30, 2014 was $397.8 million. Refer to additional discussion under Financing Arrangements. Our ability to access our revolving credit facility is subject to our compliance with the terms and conditions of such facility, including a maximum leverage ratio, a minimum fixed charge ratio and other covenants and requirements. At June 30, 2014, we were in compliance with all covenants and other requirements of our credit agreement and senior notes. Uses of Cash In December 2013, the Company announced the implementation of a new capital allocation policy. Three key principles underlying this strategy focus on preserving a strong balance sheet and enhancing operating flexibility, preventing unnecessary dilution so the benefits of future value accrue to existing shareholders and deploying capital to the highest and best use by optimizing the tradeoff between risk and after-tax returns. As a result of this strategy, the Company intends to retain excess cash during its ongoing turnaround efforts and focus primarily on growing the number of franchised locations and expanding company-owned locations primarily through its partnership with Walmart. Cash Flows Cash Flows from Operating Activities Fiscal year 2014 cash provided by operating activities of $117.4 million increased by $48.3 million compared to the previous fiscal year, primarily as a result of increased cash provided by working capital partly offset by the operating loss. The $75.6 million working capital improvement over the previous year was primarily the result of cash received in fiscal year 2014 for income tax refunds and the collection of weekend credit card receivables outstanding at the end of the previous fiscal year. Fiscal year 2013 working capital included cash used for increased deferred compensation payments and build of the outstanding income tax receivable collected in fiscal year 2014. Fiscal year 2013 cash provided by operating activities of $69.1 million declined by $84.6 million compared to the previous fiscal year. Despite higher earnings in the fiscal year 2013, the decrease was attributable to decreases in revenues and increased cost of service and product resulting in changes in working capital. Cash payments of deferred compensation and income taxes also contributed to declines in cash provided by operating activities. Fiscal year 2012 cash provided by operating activities of $153.7 million declined by $75.5 million compared to the previous fiscal year, $51.8 million of this decrease related to the timing of accruals and a reduction in the amount received for income taxes, as fiscal year 2011 included a tax refund related to the fiscal year 2009 loss on discontinued operations. Cash provided by operating activities was also lower due to a decrease of $6.0 million in dividends received from affiliated companies. Cash Flows from Investing Activities Cash used in investing activities during fiscal year 2014 of $44.4 million was less than the $165.1 million cash provided in fiscal year 2013. In fiscal year 2014, we used $49.4 million for capital expenditures and received $3.1 million from the recovery of the Company's previously impaired investment in Yamano and the receipt of $2.0 million for the final working capital adjustment on the sale of Hair Club. Cash provided by investing activities during fiscal year 2013 of $165.1 million was greater than the $90.9 million use of cash in fiscal year 2012. In fiscal year 2013, we received $266.2 million from sales of Hair Club and Provalliance and $26.4 million from EEG related to principal payments on the outstanding note receivable and revolving line of credit. These were partly offset by the Company placing $24.5 million into restricted cash to collateralize its self-insurance program, enabling the Company to reduce fees associated with previously utilized standby letters of credit and increased capital expenditures primarily related to the Company's POS system implementation. Cash used by investing activities of $90.9 million during fiscal year 2012 was less than fiscal year 2011 of $144.3 million due to the comparable prior period including the acquisition of approximately 17% additional equity interest in Provalliance for 29



--------------------------------------------------------------------------------

Table of Contents

$57.3 million, a decrease in the amount of cash paid for acquisitions during fiscal year 2012, partly offset by an increase in capital expenditures during fiscal year 2012 for a POS system and new salon construction. Cash Flows from Financing Activities During fiscal years 2014, 2013 and 2012, cash provided by (used in) financing activities were for net borrowings (repayments) of long-term debt of $111.0, $(118.2) and $(29.7) million, respectively and dividend payments of $6.8, $13.7 and $13.9 million, respectively. During fiscal year 2014, the Company issued $120.0 million aggregate principal amount of senior unsecured notes due December 2017. During fiscal year 2013, the Company repurchased $14.9 million of common stock and prepaid $89.3 million in private placement debt. Financing Arrangements Financing activities are discussed in Note 7 to the Consolidated Financial Statements. Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk." Management believes cash generated from operations and amounts available under existing debt facilities will be sufficient to fund its anticipated capital expenditures and required debt repayments for the foreseeable future. As of June 30, 2014, we have $397.8 million available under our existing revolving credit facility. We were in compliance with all covenants and other requirements of our credit agreement and senior notes as of June 30, 2014. The Company's financing arrangements consists of the following: Interest rate % Fiscal Years June 30, Maturity Dates 2014 2013 2014 2013 (fiscal year) (Dollars in thousands) Convertible senior notes(1)(2) 2015 5.0% 5.0% $ 172,246$ 166,454 Senior term notes 2018 5.75 - 120,000 - Revolving credit facility 2018 - - - - Equipment and leasehold notes payable 2015 - 2016 4.90 - 8.75 4.90 - 8.75 1,257 8,316 293,503 174,770 Less current portion (1) (173,501 ) (173,515 ) Long-term portion $ 120,002$ 1,255



_______________________________________________________________________________

(1) As of June 30, 2013, the Company included the convertible senior notes within long-term debt, current portion on the Consolidated Balance Sheet



as the holders of the senior convertible notes had the option to convert

at any time after April 15, 2014.

(2) In July 2014, the Company settled the convertible senior notes with $172.5

million in cash.

In November 2013, the Company issued $120.0 million aggregate principal amount of 5.75% unsecured senior notes due December 2017. Net proceeds from the issuance of the Senior Term Notes were $118.1 million. Interest on the Senior Term Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2014. The entire outstanding principal is due at maturity. The Company has a $400.0 million unsecured five-year revolving credit facility that expires in June 2018 and includes, among other things, a maximum leverage ratio covenant, a minimum fixed charge coverage ratio covenant and certain restrictions on liens, liquidity and other indebtedness. The Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Events of default under the Credit Agreement include a change of control of the Company. During June 2013, the Company prepaid $89.3 million of unsecured, fixed rate, senior term notes outstanding under a private shelf agreement. 30



--------------------------------------------------------------------------------

Table of Contents

Our debt to capitalization ratio, calculated as total debt as a percentage of total debt and shareholders' equity at fiscal year-end, was as follows:

Basis Point Debt to Increase As of June 30, Capitalization (Decrease)(1) 2014 28.9 % 1,200 2013 16.9 (750 ) 2012 24.4 110

_______________________________________________________________________________



(1) Represents the basis point change in debt to capitalization as compared to

prior fiscal year-end (June 30).

The basis point increase in the debt to capitalization ratio as of June 30, 2014 compared to June 30, 2013 was primarily due to the issuance of the $120.0 million Senior Term Notes, the $34.9 million non-cash goodwill impairment charge for the Regis salon concept, the $84.4 million non-cash valuation allowance established against the United States and United Kingdom deferred tax assets and the $12.6 million (net of tax) charge recorded by the Company for its share of the noncash goodwill impairment charge recorded by EEG. The basis point improvement in the debt to capitalization ratio as of June 30, 2013 compared to June 30, 2012 was primarily due to the prepayment of $89.3 million in private placement debt. The basis point increase in the debt to capitalization ratio as of June 30, 2012 compared to June 30, 2011 was primarily due to the decrease in shareholders' equity as a result of the non-cash goodwill impairment charges related to the Regis salon concept and Hair Restoration Centers reporting unit and a $36.6 million net impairment charge associated with our investments in Provalliance and EEG. Partly offsetting the impact of the decrease in shareholders' equity was a decrease in debt levels. Contractual Obligations and Commercial Commitments The following table reflects a summary of obligations and commitments outstanding by payment date as of June 30, 2014: Payments due by period Within More than Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years 5 years (Dollars in thousands) On-balance sheet: Debt obligations $ 292,246$ 172,246 $ - $ 120,000 $ - Capital lease obligations 1,257 1,255 2 - - Other long-term liabilities 16,338 3,242 3,570 2,166 7,360 Total on-balance sheet 309,841 176,743 3,572 122,166 7,360 Off-balance sheet(a): Operating lease obligations 952,010 299,067 411,510 178,635 62,798 Interest on long-term debt and capital lease obligations 24,705 7,321 13,800 3,584 - Total off-balance sheet 976,715 306,388 425,310 182,219 62,798 Total $ 1,286,556$ 483,131$ 428,882$ 304,385$ 70,158



_______________________________________________________________________________

(a) In accordance with accounting principles generally accepted in the United

States of America, these obligations are not reflected in the Consolidated

Balance Sheet.

On-Balance Sheet Obligations Our long-term obligations are composed primarily of convertible debt and senior term notes. There were no outstanding borrowings under our revolving credit facility at June 30, 2014. Interest payments on long-term debt and capital lease obligations are estimated based on each debt obligation's agreed upon rate as of June 30, 2014 and scheduled contractual repayments. 31



--------------------------------------------------------------------------------

Table of Contents

Other long-term liabilities of $16.3 million include $13.0 million related to a Nonqualified Deferred Salary Plan and a salary deferral program of $3.3 million related to established contractual payment obligations under retirement and severance payment agreements for a small number of retired employees. This table excludes short-term liabilities, other than the current portion of long-term debt, disclosed on our balance sheet as the amounts recorded for these items will be paid in the next year. We have no unconditional purchase obligations. Also excluded from the contractual obligations table are payment estimates associated with employee health and workers' compensation claims for which we are self-insured. The majority of our recorded liability for self-insured employee health and workers' compensation losses represents estimated reserves for incurred claims that have yet to be filed or settled. The Company has unfunded deferred compensation contracts covering certain management and executive personnel. The deferred compensation contracts are offered to key executives based on their level within the Company. Because we cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above. Related obligations totaled $2.9 and $7.7 million and are included in accrued liabilities and other noncurrent liabilities, respectively, in the Consolidated Balance Sheet at June 30, 2014. See Note 10 to the Consolidated Financial Statements. As of June 30, 2014, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. During the fourth quarter ended June 30, 2014, the Company paid $9.5 million to the IRS in anticipation of resolution of various issues related to income tax returns for fiscal years 2010 and 2011. See Note 9 to the Consolidated Financial Statements. Off-Balance Sheet Arrangements Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as future salon franchisee lease payments of approximately $181.6 million, which are reimbursed to the Company by franchisees, and the guarantee of operating leases of salons operated by the purchaser of Trade Secret with future minimum lease payments of approximately $1.0 million. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Management has not experienced and does not expect any material loss to result from these arrangements. We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect to result in a material liability. We do not have other unconditional purchase obligations or significant other commercial commitments such as commitments under lines of credit and standby repurchase obligations or other commercial commitments. We continue to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2014. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. Dividends We paid dividends of $0.12 per share during fiscal year 2014 and $0.24 per share during fiscal years 2013 and 2012. In December 2013, the Company announced a new capital allocation policy. As a result of this policy, the Board of Directors elected to discontinue declaring regular quarterly dividends. Share Repurchase Program In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005 and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares 32



--------------------------------------------------------------------------------

Table of Contents

become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. The Company did not repurchase any shares during fiscal year 2014 or 2012. The Company repurchased 909,175 shares of common stock through its share repurchase program during fiscal year 2013 for $14.9 million. As of June 30, 2014, a total accumulated 7.7 million shares have been repurchased for $241.3 million. As of June 30, 2014, $58.7 million remained outstanding under the approved stock repurchase program. CRITICAL ACCOUNTING POLICIES The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements. Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Investments In Affiliates The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. 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 years 2013 and 2012, the Company recorded noncash impairments of $17.9 and $19.4 million, respectively, related to its investment in EEG. Due to economic, regulatory and other factors, including declines in enrollment, revenue and profitability in the for-profit secondary educational market, the Company may be required to take additional noncash impairment charges related to its investments and such noncash impairments could be material to its consolidated balance sheet and results of operations. Based on EEG's annual goodwill impairment assessment during fiscal year 2014, the Company's portion of EEG's estimated fair value exceeds carrying value of its investment by approximately 10 percent. Any meaningful underperformance against plan or reduced outlook by EEG, changes to the carrying value of EEG or further erosion in valuations of the for-profit secondary educational market could lead to other than temporary impairments of the Company's investment in EEG. In addition, EEG may be required to record noncash impairment charges related to long-lived assets or establish valuation allowances against certain of its deferred tax assets and our share of such noncash impairment charges or valuation allowances could be material to the Company's consolidated balance sheet and results of operations. During fiscal years 2014, 2013 and 2012, the Company recorded its share, $21.2, $2.1 and $8.9 million, respectively, of noncash impairment charges recorded directly by EEG for goodwill and long-lived and intangible assets. As of June 30, 2014, EEG has no goodwill. As of June 30, 2014, our share of EEG's deferred tax assets was $7.8 million. See Note 5 to the Consolidated Financial Statements. Goodwill Goodwill is tested for impairment annually during the Company's fourth fiscal quarter or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill, as a basis for determining if the Company needs to perform the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than the carrying value, the Company does not need to perform the two-step impairment test. Depending on certain factors, the Company may elect to proceed directly to the two-step impairment test. In the two-step goodwill impairment assessment, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The Company's reporting units are its operating segments. In assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company evaluates certain factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance of the reporting unit. 33



--------------------------------------------------------------------------------

Table of Contents

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. For the two-step impairment test, the Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. In situations where a reporting unit's carrying value exceeds its estimated 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 under the assumption of a taxable transaction. 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. As a result of our annual impairment test during the fourth quarter of 2014, fair values of the Company's reporting units were deemed to be greater than their respective carrying values. For the fiscal year 2014 annual impairment testing of goodwill, respective fair values of the Company's reporting units with goodwill exceeded carrying values by greater than 20.0%. During the second quarter of fiscal year 2014, the Company experienced two triggering events that resulted in the Company testing its goodwill for impairment. First, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of restructuring the Company's North American field organization. The field reorganization, which impacted all North American salons except for salons in the mass premium category, was announced in the fourth quarter of fiscal year 2013 and completed in the second quarter of fiscal year 2014. The Company did not completely operate under the realigned operating structure prior to the second quarter of fiscal year 2014. Second, the Regis and f Promenade reporting units reported lower than projected same-store sales that were unfavorable compared to the Company's projections used in the fiscal year 2013 annual goodwill impairment test. The disruptive impact of foundational initiatives announced in the fourth quarter of fiscal year 2013 on the first two fiscal quarters of 2014 was greater than anticipated. Pursuant to the change in operating segments and the lower than projected same-store sales, during the second quarter of fiscal year 2014, the Company performed interim goodwill impairment tests on its former Regis and Promenade reporting units. The impairment tests resulted in a $34.9 million non-cash goodwill impairment charge on the former Regis reporting unit and no impairment on the former Promenade reporting unit, as its estimated fair value exceeded its carrying value by approximately 12.0%. The impairment was only partly deductible for tax purposes resulting in a tax benefit of $6.3 million. See Note 9 to the Consolidated Financial Statements. In connection with the change in operating segment structure, the Company changed its North American reporting units from five reporting units: SmartStyle, Supercuts, MasterCuts, Regis and Promenade, to two reporting units: North American Value and North American Premium. Based on the changes to the Company's operating segment structure, goodwill has been reallocated to the new reporting units at June 30, 2014 and 2013. Analyzing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill. However, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. During fiscal years 2014 and 2012, the Company impaired $34.9 and $67.7 million, respectively, of goodwill associated with our North American Premium reporting unit. No goodwill impairment charges were recorded during fiscal year 2013. As of June 30, 2014, the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of 30.0%. 34



--------------------------------------------------------------------------------

Table of Contents

A summary of the Company's goodwill balance by reporting unit follows:

June 30, Reporting Unit 2014 2013 (Dollars in thousands) North American Value $ 425,264$ 425,932 North American Premium - 34,953 Total $ 425,264$ 460,885

_______________________________________________________________________________ (1) As of June 30, 2014 and 2013, the International reporting unit had no goodwill. See Note 4 to the Consolidated Financial Statements. Long-Lived Assets, Excluding Goodwill The Company assesses the impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets that do not recover the carrying values. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the assets' estimated fair value. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including market data and salon level revenues and expenses. Long-lived asset impairment charges are recorded within depreciation and amortization in the Consolidated Statement of Operations. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. A summary of long-lived asset impairment charges follows: Fiscal Years 2014 2013 2012 (Dollars in thousands) North American Value $ 11,714$ 5,031$ 2,892 North American Premium 5,014 3,042 3,174 International 1,599 151 570 Total $ 18,327$ 8,224$ 6,636 Income Taxes Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance. During fiscal year 2014, the impacts from the foundational initiatives implemented in the prior year continued to negatively impact the Company's financial performance. Due to recent negative financial performance and cumulative losses 35



--------------------------------------------------------------------------------

Table of Contents

incurred in recent years, the Company was no longer able to conclude that it was more likely than not the U.S. and U.K. deferred tax assets would be fully realized and established a valuation allowance on the U.S. and U.K. deferred tax assets. A summary of the activity for the deferred tax asset valuation allowance follows: Fiscal Year 2014 (Dollars in thousands) Balance, June 30, 2013 $ -



Establishment of valuation allowance against U.S. & U.K. deferred tax assets

84,391

Changes to deferred tax asset valuation allowance (469 ) Balance, June 30, 2014 $ 83,922 The Company will continue to assess its ability to realize its deferred tax assets on a quarterly basis and will reverse the valuation allowance and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of the deferred tax assets more likely than not. The Company reserves for potential liabilities related to anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. Contingencies We are involved in various lawsuits and claims that arise from time to time in the ordinary course of our business. Accruals are recorded for such contingencies based on our assessment that the occurrence is probable and can be reasonably estimated. Management considers many factors in making these assessments including past history and the specifics of each case. However, litigation is inherently unpredictable and excessive verdicts do occur, which could have a material impact on our Consolidated Financial Statements. During fiscal year 2014 and 2013, the Company incurred $3.3 million and $1.2 million of expense in conjunction with the derivative shareholder action. During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, specifically the revolving credit facility which bears interest at variable rates based on LIBOR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related changes in the Canadian dollar and British Pound. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation. The following details the Company's policies and use of financial instruments. Interest Rate Risk: The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration earnings implications associated with volatility in short-term interest rates. On occasion, the Company uses interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. In addition, access to variable rate debt is available through the Company's revolving credit facility. The Company reviews its policy and interest rate risk management quarterly and makes adjustments in accordance with market conditions and the Company's short and long-term borrowing needs. As of June 30, 2014, the Company did not have any outstanding variable rate debt as there were no amounts outstanding on the revolving credit facility. The Company had outstanding fixed rate debt balances of $293.5 and $174.8 million at June 30, 2014 and 2013, respectively. Foreign Currency Exchange Risk: Over 85% of the Company's revenue, expense and capital purchasing activities are transacted in United States dollars. However, because a portion of the Company's operations consists of activities outside of the United States, the Company has 36



--------------------------------------------------------------------------------

Table of Contents

transactions in other currencies, primarily the Canadian dollar and British pound. In preparing the Consolidated Financial Statements, the Company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into United States dollars. Different exchange rates from period to period impact the amounts of reported income and the amount of foreign currency translation recorded in accumulated other comprehensive income (AOCI). As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of June 30, 2014, the Company did not have any derivative instruments to manage its foreign currency risk. During fiscal years 2014, 2013 and 2012, the foreign currency gain included in net income was $0.1, $33.4 and $0.4 million, respectively. During fiscal year 2013, Company recognized a $33.8 million foreign currency translation gain in connection with the sale of Provalliance. 37



--------------------------------------------------------------------------------

Table of Contents

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements:

Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting

39 Report of Independent Registered Public Accounting Firm 40 Consolidated Balance Sheet as of June 30, 2014 and 2013 41



Consolidated Statement of Operations for each of the three years in the period ended June 30, 2014

42

Consolidated Statements of Comprehensive Loss for each of the three years in the period ended June 30, 2014

43

Consolidated Statements of Shareholders' Equity for each of the three years in the period ended June 30, 2014

44

Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 2014

45 Notes to Consolidated Financial Statements 46 38



--------------------------------------------------------------------------------

Table of Contents

Management's Statement of Responsibility for Financial Statements and

Report on Internal Control over Financial Reporting Financial Statements Management is responsible for preparation of the consolidated financial statements and other related financial information included in this annual report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, incorporating management's reasonable estimates and judgments, where applicable. Management's Report on Internal Control over Financial Reporting This report is provided by management pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder. Management, including the chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing effectiveness of internal control over financial reporting. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the Company's internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. Based on the assessment of the Company's internal control over financial reporting, management has concluded that, as of June 30, 2014, the Company's internal control over financial reporting was effective. The Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company's internal control over financial reporting as of June 30, 2014, as stated in their report which follows in Item 8 of this Form 10-K. 39



--------------------------------------------------------------------------------

Table of Contents

Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Regis Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Regis Corporation and its subsidiaries at June 30, 2014 and June 30, 2013, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Statement of Responsibility for Financial Statements and Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS LLPPricewaterhouseCoopers LLPMinneapolis, MinnesotaAugust 26, 2014 40



--------------------------------------------------------------------------------

Table of Contents REGIS CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share data) June 30, 2014 2013 ASSETS Current assets: Cash and cash equivalents $ 378,627$ 200,488 Receivables, net 25,808 33,062 Inventories 137,151 139,607 Deferred income taxes 133 24,145 Income tax receivable 6,461 33,346 Other current assets 65,086 57,898 Total current assets 613,266 488,546 Property and equipment, net 266,538 313,460 Goodwill 425,264 460,885 Other intangibles, net 19,812 21,496 Investment in affiliates 28,611 43,319 Other assets 62,458 62,786 Total assets $ 1,415,949$ 1,390,492 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt, current portion $ 173,501$ 173,515 Accounts payable 68,491 66,071 Accrued expenses 142,720 137,226 Total current liabilities 384,712 376,812 Long-term debt and capital lease obligations 120,002



1,255

Other noncurrent liabilities 190,454



155,011

Total liabilities 695,168



533,078

Commitments and contingencies (Note 8) Shareholders' equity: Common stock, $0.05 par value; issued and outstanding, 56,651,166 and 56,630,926 common shares at June 30, 2014 and 2013, respectively 2,833



2,832

Additional paid-in capital 337,837



334,266

Accumulated other comprehensive income 22,651 20,556 Retained earnings 357,460 499,760 Total shareholders' equity 720,781 857,414 Total liabilities and shareholders' equity $ 1,415,949



$ 1,390,492

The accompanying notes are an integral part of the Consolidated Financial

Statements. 41



--------------------------------------------------------------------------------

Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands, except per share data) Fiscal Years 2014 2013 2012 Revenues: Service $ 1,480,103$ 1,563,890$ 1,643,891 Product 371,454 415,707 440,048 Royalties and fees 40,880 39,116 38,288 1,892,437 2,018,713 2,122,227 Operating expenses: Cost of service 907,294 930,687 941,671 Cost of product 187,204 228,577 221,635 Site operating expenses 202,359 203,912 207,031 General and administrative 172,793 226,740 249,634 Rent 322,105 324,716 331,769 Depreciation and amortization 99,733 91,755 104,970 Goodwill impairment 34,939 - 67,684 Total operating expenses 1,926,427 2,006,387 2,124,394 Operating (loss) income (33,990 ) 12,326 (2,167 ) Other (expense) income: Interest expense (22,290 ) (37,594 ) (28,245 ) Interest income and other, net 1,952 35,366 5,098 (Loss) income from continuing operations before income taxes and equity in loss of affiliated companies (54,328 ) 10,098 (25,314 ) Income taxes (71,129 ) 10,024 4,430 Equity in loss of affiliated companies, net of income taxes (11,623 ) (15,956 ) (30,859 ) (Loss) income from continuing operations (137,080 ) 4,166 (51,743 ) Income (loss) from discontinued operations, net of taxes (Note 2) 1,353 25,028 (62,350 ) Net (loss) income $ (135,727 )$ 29,194$ (114,093 ) Net (loss) income per share: Basic and diluted: (Loss) income from continuing operations (2.43 ) 0.07 (0.91 ) Income (loss) from discontinued operations 0.02 0.44 (1.09 ) Net (loss) income per share, basic and diluted (1) $ (2.40 )$ 0.51$ (2.00 ) Weighted average common and common equivalent shares outstanding: Basic 56,482 56,704 57,137 Diluted 56,482



56,846 57,137 Cash dividends declared per common share $ 0.12$ 0.24$ 0.24

_______________________________________________________________________________

(1) Total is a recalculation; line items calculated individually may not sum to total due to rounding.



The accompanying notes are an integral part of the Consolidated Financial

Statements. 42



--------------------------------------------------------------------------------

Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Dollars in thousands) Fiscal Years 2014 2013 2012 Net (loss) income $ (135,727 )$ 29,194$ (114,093 ) Other comprehensive income (loss): Foreign currency translation adjustments: Foreign currency translation adjustments during the period 1,930 (1,349 ) (24,254 ) Reclassification adjustments for gains included in net (loss) income - (33,842 ) - Net current period foreign currency translation adjustments 1,930 (35,191 ) (24,254 ) Recognition of deferred compensation and other, net of tax expense of $411 and $644, in fiscal years 2013 and 2012, respectively 165 656



1,029

Change in fair market value of financial instruments designated as cash flow hedges, net of tax (benefit) expense of $0, $(12) and $210, respectively - (23 ) 393 Other comprehensive income (loss) 2,095 (34,558 ) (22,832 ) Comprehensive loss $ (133,632 )$ (5,364 )$ (136,925 )



The accompanying notes are an integral part of the Consolidated Financial

Statements. 43



--------------------------------------------------------------------------------

Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) Accumulated Common Stock Additional Other Paid-In Comprehensive Retained Shares Amount Capital Income Earnings Total Balance, June 30, 2011 57,710,811 $ 2,886$ 341,190$ 77,946$ 610,597$ 1,032,619 Net loss (114,093 ) (114,093 ) Foreign currency translation adjustments (24,254 ) (24,254 ) Proceeds from exercise of SARs & stock options 60 - - - Stock-based compensation 7,597 7,597 Shares issued through franchise stock incentive program 18,844 1 305 306 Recognition of deferred compensation and other, net of taxes (Note 10) 1,422 1,422 Net restricted stock activity (314,474 ) (16 ) (1,426 ) (1,442 ) Vested stock option expirations (723 ) (723 ) Cumulative minority interest (Note 1) 1,580 1,580 Dividends (13,855 ) (13,855 )



Balance, June 30, 2012 57,415,241 2,871 346,943

55,114 484,229 889,157 Net income 29,194 29,194 Foreign currency translation adjustments (35,191 ) (35,191 ) Stock repurchase program (909,175 ) (45 ) (14,823 ) (14,868 ) Proceeds from exercise of SARs & stock options 3,051 - 41 41 Stock-based compensation 5,881 5,881 Shares issued through franchise stock incentive program 19,583 1 356 357 Recognition of deferred compensation and other, net of taxes (Note 10) 633 633 Net restricted stock activity 102,226 5 (2,728 ) (2,723 ) Vested stock option expirations (1,404 ) (1,404 ) Minority interest (Note 1) 45 45 Dividends (13,708 ) (13,708 )



Balance, June 30, 2013 56,630,926 2,832 334,266

20,556 499,760 857,414 Net loss (135,727 ) (135,727 ) Foreign currency translation adjustments 1,930 1,930 Proceeds from exercise of SARs & stock options 11 - - - Stock-based compensation 6,400 6,400 Shares issued through franchise stock incentive program 20,095 1 289 290 Recognition of deferred compensation (Note 10) 165 165 Net restricted stock activity 134 - (2,603 ) (2,603 ) Vested stock option expirations (515 ) (515 ) Minority interest (Note 1) 220 220 Dividends (6,793 ) (6,793 )



Balance, June 30, 2014 56,651,166 $ 2,833$ 337,837 $

22,651 $ 357,460$ 720,781



The accompanying notes are an integral part of the Consolidated Financial

Statements. 44



--------------------------------------------------------------------------------

Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Fiscal Years 2014 2013 2012 Cash flows from operating activities: Net (loss) income $ (135,727 )$ 29,194$ (114,093 ) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 81,406 84,018



111,435

Equity in loss of affiliated companies 11,623 15,328



30,043

Dividends received from affiliated companies - 1,095



4,047

Deferred income taxes 68,781 10,322 (14,171 ) Accumulated other comprehensive income reclassification adjustments (Note 5) - (33,842 ) - Gain from sale of discontinued operations - (17,827 ) - Loss on write down of inventories 854 12,557 - Goodwill impairment 34,939 - 146,110 Salon asset impairments 18,327 8,224 6,636 Note receivable bad debt recovery - (333 ) (805 ) Stock-based compensation 6,400 5,881



7,597

Amortization of debt discount and financing costs 8,152 7,346



6,696

Other noncash items affecting earnings 224 394 31 Changes in operating assets and liabilities(1): Receivables 5,681 (4,332 ) (4,502 ) Inventories 2,555 (10,745 ) 2,644 Income tax receivable 26,884 (23,421 ) 2,809 Other current assets (6,503 ) (8,064 ) (5,272 ) Other assets (103 ) 239 (841 ) Accounts payable 1,907 19,086 (4,856 ) Accrued expenses 3,505 (26,431 ) (8,657 ) Other noncurrent liabilities (11,502 ) 459 (11,151 ) Net cash provided by operating activities 117,403 69,148



153,700

Cash flows from investing activities: Capital expenditures (49,439 ) (105,857 ) (85,769 ) Proceeds from sale of assets 14 163,916 502 Salon acquisitions, net of cash acquired (15 ) - (2,587 ) Proceeds from loans and investments 5,056 131,581



11,995

Disbursements for loans and investments - - (15,000 ) Change in restricted cash - (24,500 ) - Net cash (used in) provided by investing activities (44,384 ) 165,140 (90,859 ) Cash flows from financing activities: Borrowings on revolving credit facilities - 5,200



471,500

Payments on revolving credit facilities - (5,200 ) (471,500 ) Proceeds from issuance of long-term debt, net of fees 118,058 - - Repayments of long-term debt and capital lease obligations (7,059 ) (118,223 ) (29,693 ) Repurchase of common stock - (14,868 ) - Dividends paid (6,793 ) (13,708 ) (13,855 ) Net cash provided by (used in) financing activities 104,206 (146,799 ) (43,548 ) Effect of exchange rate changes on cash and cash equivalents 914 1,056 (3,613 ) Increase in cash and cash equivalents 178,139 88,545 15,680 Cash and cash equivalents: Beginning of year 200,488 111,943 96,263 End of year $ 378,627$ 200,488$ 111,943



(1) Changes in operating assets and liabilities exclude assets acquired and

liabilities assumed through acquisitions.

The accompanying notes are an integral part of the Consolidated Financial

Statements. 45



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description: Regis Corporation (the Company) owns, operates and franchises hairstyling and hair care salons throughout the United States (U.S.), the United Kingdom (U.K.), Canada and Puerto Rico. Substantially all of the hairstyling and hair care salons owned and operated by the Company in the U.S., Canada and Puerto Rico are located in leased space in enclosed mall shopping centers, strip shopping centers or Walmart Supercenters. Franchised salons throughout the U.S. are primarily located in strip shopping centers. Company-owned salons in the U.K. are owned and operated in malls, leading department stores, mass merchants and high-street locations. During the second quarter of fiscal year 2014, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of restructuring the Company's North American field organization. Based on the way the Company now manages its business, it has three reportable segments: North American Value, North American Premium and International salons. Prior to this change, the Company had two reportable operating segments: North American salons and International salons. See Note 14 to the Consolidated Statement of Operations. Concurrent with the change in reportable operating segments, the Company revised its prior period financial information to conform to the new segment structure. Historical financial information presented herein reflects this change. Consolidation: The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidated variable interest entities where it has determined it is the primary beneficiary of those entities' operations. Variable Interest Entities: The Company has or has had interests in certain privately held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entity (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE. As of June 30, 2014, the Company has one VIE, Roosters MGC International LLC (Roosters), where the Company is the primary beneficiary. The Company owns a 60.0% ownership interest in Roosters. As of June 30, 2014, total assets, total liabilities and total shareholders' equity of Roosters were $6.5, $1.8 and $4.7 million, respectively. Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2014, 2013 and 2012. Shareholders' equity attributable to the non-controlling interest in Roosters was $1.8 million and $1.6 million as of June 30, 2014 and 2013 and recorded within retained earnings on the Consolidated Balance Sheet. The Company utilized consolidation of variable interest entities guidance to determine whether or not its investment in Empire Education Group, Inc. (EEG) was a 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. The Company accounts for EEG as an equity investment under the voting interest model, as the Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company's shares such that the other shareholder of EEG has voting control of 51.0% of EEG's common stock, as well as the right to appoint four of the five members of EEG's Board of Directors. Use of Estimates: The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, 46



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 2014 and 2013. The Company has restricted cash primarily related to contractual obligations to collateralize its self-insurance program. The restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit. The restricted cash balance is classified within other current assets on the Consolidated Balance Sheet. Receivables and Allowance for Doubtful Accounts: The receivable balance on the Company's Consolidated Balance Sheet primarily includes credit card receivables and accounts and notes receivable from franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. As of June 30, 2014 and 2013, the allowance for doubtful accounts was $0.9 and $0.6 million, respectively. Inventories: Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis. Physical inventory counts are performed annually in the fourth quarter of the fiscal year. Product and service inventories are adjusted based on the physical inventory counts. During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor and the cost of product used in salon services is determined by applying estimated percentage of total cost of service and product to service revenues. The estimated percentage related to service inventories is updated quarterly based on cycle count results and other factors that could impact the Company's margin rate estimates such as service sales mix, discounting and special promotions. Actual results compared to quarterly estimates have not historically resulted in material adjustments to our Statement of Operations. The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. Estimates of the future demand for the Company's inventory and anticipated changes in formulas and packaging are some of the other factors used by management in assessing the net realizable value of inventories. During fiscal year 2013, the Company recorded an inventory write-down of $12.6 million associated with standardizing plan-o-grams, eliminating retail products and consolidating from four own-branded product lines to one. Property and Equipment: Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (30 to 39 years for buildings, 10 years for improvements and three to ten years for equipment, furniture and software). Depreciation expense was $79.7, $81.8 and $96.4 million in fiscal years 2014, 2013 and 2012, respectively. The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Amortization expense related to capitalized software, included within depreciation expense disclosed above, was $7.5, $6.8 and $22.3 million in fiscal years 2014, 2013 and 2012, respectively, which has been determined based on an estimated useful lives ranging from five to seven years. The Company implemented a third party point-of-sale (POS) information system in fiscal year 2013. The Company recorded $16.2 million of accelerated amortization expense in fiscal year 2012 associated with a previously developed POS system that became fully depreciated as of June 30, 2012. Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related 47



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service. Long-Lived Asset Impairment Assessments, Excluding Goodwill: The Company assesses the impairment of long-lived assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets that do not recover the carrying values. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the assets' estimated fair value. The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including market data and salon level revenues and expenses. Long-lived asset impairment charges are recorded within depreciation and amortization in the Consolidated Statement of Operations. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. A summary of long-lived asset impairment charges follows: Fiscal Years 2014 2013 2012 (Dollars in thousands) North American Value $ 11,714$ 5,031$ 2,892 North American Premium 5,014 3,042 3,174 International 1,599 151 570 Total $ 18,327$ 8,224$ 6,636 Goodwill: Goodwill is tested for impairment annually during the Company's fourth fiscal quarter or at the time of a triggering event. In evaluating whether goodwill is impaired, the Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill, as a basis for determining if the Company needs to perform the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than the carrying value, the Company does not need to perform the two-step impairment test. Depending on certain factors, the Company may elect to proceed directly to the two-step impairment test. In the two-step goodwill impairment assessment, the Company compares the carrying value of each reporting unit, including goodwill, to the estimated fair value of the reporting unit. The Company's reporting units are its operating segments. In assessing qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company evaluates certain factors including, but not limited to, economic, market and industry conditions, cost factors and the overall financial performance 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. For the two-step goodwill impairment test, the Company calculates estimated fair values of the reporting units based on discounted future cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company periodically engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. 48



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In situations where a reporting unit's carrying value exceeds its estimated 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 under the assumption of a taxable transaction. 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. As a result of our annual impairment test during the fourth quarter of 2014, fair values of the Company's reporting units were deemed to be greater than their respective carrying values. For the fiscal year 2014 annual impairment testing of goodwill, respective fair values of the Company's reporting units with goodwill exceeded carrying values by greater than 20.0%. During the second quarter of fiscal year 2014, the Company experienced two triggering events that resulted in the Company testing its goodwill for impairment. First, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of restructuring the Company's North American field organization. The field reorganization, which impacted all North American salons except for salons in the mass premium category, was announced in the fourth quarter of fiscal year 2013 and completed in the second quarter of fiscal year 2014. The Company did not completely operate under the realigned operating structure prior to the second quarter of fiscal year 2014. Second, the former Regis and Promenade reporting units reported lower than projected same-store sales that were unfavorable compared to the Company's projections used in the fiscal year 2013 annual goodwill impairment test. The disruptive impact of foundational initiatives announced in the fourth quarter of fiscal year 2013 on the first two fiscal quarters of 2014 was greater than anticipated. Pursuant to the change in operating segments and the lower than projected same-store sales, during the second quarter of fiscal year 2014, the Company performed interim goodwill impairment tests on its former Regis and Promenade reporting units. The impairment tests resulted in a $34.9 million non-cash goodwill impairment charge on the former Regis reporting unit and no impairment on the former Promenade reporting unit, as its estimated fair value exceeded its carrying value by approximately 12.0%. The impairment was only partly deductible for tax purposes resulting in a tax benefit of $6.3 million. See Note 9 to the Consolidated Financial Statements. In connection with the change in operating segment structure, the Company changed its North American reporting units from five reporting units: SmartStyle, Supercuts, MasterCuts, Regis and Promenade, to two reporting units: North American Value and North American Premium. Based on the changes to the Company's operating segment structure, goodwill has been reallocated to the new reporting units at June 30, 2014 and 2013. Analyzing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill. However, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. During fiscal years 2014 and 2012, the Company impaired $34.9 and $67.7 million, respectively, of goodwill associated with our North American Premium reporting unit. No goodwill impairment charges were recorded during fiscal year 2013. As of June 30, 2014, the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of 30.0%. 49



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

A summary of the Company's goodwill balance by reporting unit follows:

Fiscal Reporting Unit 2014 2013 (Dollars in thousands) North American Value $ 425,264$ 425,932 North American Premium - 34,953 Total $ 425,264$ 460,885

_______________________________________________________________________________ (1) As of June 30, 2014 and 2013, the International reporting unit had no goodwill. See Note 4 to the Consolidated Financial Statements. Investments In Affiliates: The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. 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 years 2013 and 2012, the Company recorded noncash impairments of $17.9 and $19.4 million, respectively, related to its investment in EEG. Due to economic, regulatory and other factors, the Company may be required to take additional noncash impairment charges related to its investments and such noncash impairments could be material to its consolidated balance sheet and results of operations. Based on EEG's annual goodwill impairment assessment during fiscal year 2014, the Company's portion of EEG's estimated fair value exceeds carrying value of its investment by approximately 10%. Any meaningful underperformance against plan or reduced outlook by EEG, changes to the carrying value of EEG or further erosion in valuations of the for-profit secondary educational market could lead to other than temporary impairments of the Company's investment in EEG. In addition, EEG may be required to record noncash impairment charges related to long-lived assets or establish valuation allowances against certain of its deferred tax assets and our share of such noncash impairment charges or valuation allowances could be material to the Company's consolidated balance sheet and results of operations. During fiscal years 2014, 2013 and 2012, the Company recorded its share, $21.2, $2.1 and $8.9 million, respectively, of noncash impairment charges recorded directly by EEG for goodwill and long-lived and intangible assets. As of June 30, 2014, EEG has no goodwill. As of June 30, 2014, our share of EEG's deferred tax assets was $7.8 million. See Note 5 to the Consolidated Financial Statements. Self-Insurance Accruals: The Company uses a combination of third party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date. The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors. Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2014, 2013 and 2012, the Company recorded (decreases) increases in expense from changes in estimates related to prior year open policy periods of $(2.0), $(1.1) and $0.9 million, respectively. A 10.0% change in the self-insurance reserve would affect income (loss) from continuing operations before income taxes and equity in (loss) income of affiliated companies by approximately $4.8 million for fiscal years 2014, 2013 and 2012. The Company updates loss projections twice each year and adjusts its recorded liability to reflect updated projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time. 50



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

As of June 30, 2014, the Company had $14.9 and $32.7 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals. As of June 30, 2013, the Company had $14.8 and $32.4 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals. Deferred Rent and Rent Expense: The Company leases most salon locations under operating leases. Rent expense is recognized on a straight-line basis over the lease term. Tenant improvement allowances funded by landlord incentives, rent holidays and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option). The difference between the rent due under the stated periods of the lease and the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the leased space to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of its intended use. Certain leases provide for contingent rents, which are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable. Revenue Recognition and Deferred Revenue: Company-owned salon revenues are recognized at the time when the services are provided. Product revenues are recognized when the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) until they are redeemed. Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is shipped to franchise locations. Franchise revenues primarily include royalties, initial franchise fees and net rental income. Royalties are recognized as revenue in the month in which franchisee services are rendered. The Company recognizes revenue from initial franchise fees at the time franchise locations are opened, as this is generally when the Company has performed all initial services required under the franchise agreement. See Note 8 to the Consolidated Financial Statements. Classification of Expenses: The following discussion provides the primary costs classified in each major expense category: Beginning in fiscal year 2014, costs associated with field leaders, excluding salons within the North American Premium segment, that were previously recorded within General and Administrative expense are now categorized within Cost of Service and Site Operating expense as a result of the field reorganization that took place in the fourth quarter of fiscal year 2013. Previously, field leaders did not work on the salon floor daily. As reorganized, field leaders now spend most of their time on the salon floor leading and mentoring stylists and serving guests. As a result, district and senior district leader labor costs are now reported within Cost of Service rather than General and Administrative expenses and their travel costs are reported within Site Operating expenses rather than General and Administrative expenses. Cost of service- labor costs related to salon employees, costs associated with our field supervision (fiscal year 2014) and the cost of product used in providing service. Cost of product- cost of product sold to guests, labor costs related to selling retail product and the cost of product sold to franchisees. Site operating- direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities, travel costs associated with our field supervision (fiscal year 2014) and janitorial costs. 51



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

General and administrative- costs associated with our field supervision (fiscal years 2013 and 2012), salon training and promotions, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations. Consideration Received from Vendors: The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. See Note 1 to the Consolidated Financial Statements. With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded. Shipping and Handling Costs: Shipping and handling costs are incurred to store, move and ship product from the Company's distribution centers to company-owned and franchise locations and include an allocation of internal overhead. Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handling costs related to shipping product to franchise locations totaled $3.2, $3.6 and $3.8 million during fiscal years 2014, 2013 and 2012, respectively and are included within general and administrative expenses on the Consolidated Statement of Operations. Any amounts billed to franchisees for shipping and handling are included in product revenues within the Consolidated Statement of Operations. Advertising: Advertising costs, including salon collateral material, are expensed as incurred. Advertising costs expensed and included in continuing operations in fiscal years 2014, 2013 and 2012 was $40.6, $39.2, $42.1 million, respectively. The Company participates in cooperative advertising programs under which vendors reimburse the Company for costs related to advertising its products. The Company records such reimbursements as a reduction of advertising expense when the expense is incurred. During fiscal years 2014, 2013 and 2012, no amounts were received in excess of the Company's related expense. Advertising Funds: The Company has various franchising programs supporting certain of its franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. The Company is required to participate in the advertising funds for company-owned locations under the same salon concept. The Company assists in the administration of the advertising funds. However, a group of individuals consisting of franchisee representatives has control over all of the expenditures and operates the funds in accordance with franchise operating and other agreements. The Company records advertising expense in the period the company-owned salon makes contributions to the respective advertising fund. During fiscal years 2014, 2013 and 2012, total contributions to the franchise advertising funds totaled $18.6, $19.0, $19.2 million, respectively. The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 2014 and 2013, approximately $26.8 and $20.8 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet. Stock-Based Employee Compensation Plans: The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses option pricing methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate. The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs. 52



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Preopening Expenses: Non-capital expenditures such as payroll, training costs and promotion incurred prior to the opening of a new location are expensed as incurred. Sales Taxes: Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations. Income Taxes: Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance. During fiscal year 2014, the impacts from foundational initiatives implemented late in the prior fiscal year continued to negatively impact the Company's financial performance. Due to recent negative financial performance and cumulative losses incurred in recent years, the Company was no longer able to conclude that it was more likely than not the U.S. and U.K. deferred tax assets would be fully realized and established a valuation allowance on the U.S. and U.K. deferred tax assets. A summary of the activity for the deferred tax asset valuation allowance follows: Fiscal Year 2014 (Dollars in thousands) Balance, June 30, 2013 $ -



Establishment of valuation allowance against U.S. & U.K. deferred tax assets

84,391

Changes to deferred tax asset valuation allowance (469 ) Balance, June 30, 2014 $ 83,922 The Company will continue to assess its ability to realize its deferred tax assets on a quarterly basis and will reverse the valuation allowance and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of the deferred tax assets more likely than not. The Company reserves for potential liabilities related to anticipated tax audit issues in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. Net (Loss) Income Per Share: The Company's basic earnings per share is calculated as net (loss) income divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company's dilutive earnings per share is calculated as net (loss) 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 diluted earnings per share will also reflect the assumed conversion under the Company's convertible debt if the impact is dilutive, along with the exclusion of related interest 53



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

expense, net of taxes. The impact of the convertible debt is excluded from the computation of diluted earnings per share when interest expense per common share obtainable upon conversion is greater than basic earnings per share. Comprehensive (Loss) Income: Components of comprehensive (loss) income include net (loss) income, foreign currency translation adjustments, changes in fair value of derivative instruments, recognition of deferred compensation and reclassification adjustments, net of tax within shareholders' equity. Foreign Currency Translation: Financial position, results of operations and cash flows of the Company's international subsidiaries are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each fiscal year end. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. During fiscal years 2014, 2013 and 2012, the foreign currency gain (loss) recorded within interest income and other, net in the Consolidated Statement of Operations was $0.1, $33.4 and $0.4 million, respectively. During fiscal year 2013, Company recognized a $33.8 million foreign currency translation gain in connection with the sale of Provalliance and subsequent liquidation of all foreign entities with Euro denominated operations within interest income and other, net in the Consolidated Statement of Operations. Accounting Standards Recently Issued But Not Yet Adopted by the Company: Revenue from Contracts with Customers In May 2014, the Financial Accounting Standards Board ("FASB") issued updated guidance for revenue recognition. The updated accounting guidance provides a comprehensive new revenue recognition model that requires a Company to recognize revenue to depict the exchange for goods or services to a customer at an amount that reflects the consideration it expects to receive for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This guidance will be effective in the first quarter of fiscal year 2018. This update permits the use of either the retrospective or simplified transition method. The Company does not expect the adoption of this update to have a material impact on the Company's consolidated financial statements and is evaluating the effect this guidance will have on its related disclosures. Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity In April 2014, the FASB updated the accounting guidance related to the definition of a discontinued operation and related disclosures. The updated accounting guidance defines a discontinued operation as a disposal of a component or a group of components that is to be disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2016 with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on the Company's consolidated financial statements. Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists In July 2013, the FASB issued new accounting requirements which provide guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward exists. The requirements are effective for the Company beginning in the first quarter of fiscal year 2015 with early adoption permitted. The Company does not expect the adoption of these requirements to have a material impact on the Company's consolidated financial statements. 2. DISCONTINUED OPERATIONS Hair Restoration Centers On April 9, 2013, the Company sold its Hair Club for Men and Women business (Hair Club), a provider of hair restoration services. The sale included the Company's 50.0% interest in Hair Club for Men, Ltd., which was previously accounted for under the equity method. At the closing of the sale, the Company received $162.8 million, which represented the purchase price of $163.5 million adjusted for the preliminary working capital provision. During fiscal year 2014, the Company collected $3.0 million of cash recorded as receivable as of June 30, 2013, of which $2.0 million was a result of the final 54



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2. DISCONTINUED OPERATIONS (Continued)

working capital provision, resulting in a final purchase price of $164.8 million and $1.0 million was excess cash from the transaction completion date. The Company recorded an after-tax gain of $17.8 million upon the sale of Hair Club and incurred $5.4 million in professional and transaction fees during fiscal year 2013 associated with the sale. The Company classified the results of operations of Hair Club as discontinued operations for all periods presented in the Consolidated Statement of Operations. There was no significant continuing involvement by the Company in the operations of Hair Club after the disposal. The following summarizes the results of operations of our discontinued Hair Club operations for the periods presented: Fiscal Years 2013 2012 (Dollars in thousands) Revenues $ 115,734$ 151,552



Income (loss) from discontinued operations, before income taxes $ 28,643$ (65,114 ) Income tax (provision) benefit on discontinued operations

(4,242 ) 849 Equity in income of affiliated companies, net of tax 627 816



Income (loss) from discontinued operations, net of income taxes $ 25,028$ (63,449 )

Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance. Depreciation and amortization ceased during fiscal year 2013 in accordance with accounting for discontinued operations. Hair Club depreciation and amortization expense for fiscal year 2012 was $13.1 million. During fiscal year 2012, the Company performed an interim impairment test of goodwill related to Hair Club during the three months ended December 31, 2011 and recorded a $78.4 million impairment charge for the excess of the carrying value of goodwill over the implied fair value. Trade Secret On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret). The Company reported Trade Secret as a discontinued operation. During fiscal years 2014 and 2012, the Company recorded tax benefits of $1.4 and $1.1 million, respectively, in discontinued operations related to the release of tax reserves associated with the disposition of Trade Secret. 55



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



3. OTHER FINANCIAL STATEMENT DATA

The following provides additional information concerning selected balance sheet accounts: June 30, 2014 2013 (Dollars in thousands) Other current assets: Prepaids $ 36,951$ 29,629 Restricted cash 27,500 27,500 Notes receivable 635 769 $ 65,086$ 57,898 Property and equipment: Land $ 3,864$ 3,864 Buildings and improvements 48,108 47,842 Equipment, furniture and leasehold improvements 797,757



789,737

Internal use software 122,826



118,093

Equipment, furniture and leasehold improvements under capital leases 77,223



81,489

1,049,778



1,041,025

Less accumulated depreciation and amortization (718,959 ) (665,924 ) Less amortization of equipment, furniture and leasehold improvements under capital leases (64,281 )



(61,641 )

$ 266,538 $



313,460

Accrued expenses: Payroll and payroll related costs $ 69,319$ 74,940 Insurance 18,710 19,035 Other 54,691 43,251 $ 142,720$ 137,226 Other noncurrent liabilities: Deferred income taxes $ 83,201$ 36,399 Deferred rent 36,958 39,389 Insurance 25,965 29,378 Deferred benefits 32,728 32,435 Other 11,602 17,410 $ 190,454$ 155,011 56



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



3. OTHER FINANCIAL STATEMENT DATA (Continued)

The following provides additional information concerning other intangibles, net: June 30, 2014 2013 Weighted Weighted Average Average Amortization Accumulated Amortization Accumulated Periods (1) Cost Amortization Net Periods (1) Cost Amortization Net (In years) (Dollars in thousands) (In years) (Dollars in thousands)

Amortized intangible assets: Brand assets and trade names 32 $ 9,203$ (3,510 )$ 5,693 32 $ 9,310$ (3,226 )$ 6,084 Franchise agreements 19 11,063 (7,163 ) 3,900 19 11,187 (6,839 ) 4,348 Lease intangibles 20 14,775 (7,326 ) 7,449 20 14,754 (6,582 ) 8,172 Other 20 5,074 (2,304 ) 2,770 20 4,815 (1,923 ) 2,892 22 $ 40,115$ (20,303 )$ 19,812 22 $ 40,066$ (18,570 )$ 21,496



_______________________________________________________________________________

(1) All intangible assets have been assigned an estimated finite useful life

and are amortized on a straight-line basis over the number of years that

approximate their expected period of benefit (ranging from one to 40

years).

Total amortization expense related to intangible assets during fiscal years 2014, 2013 and 2012 was approximately $1.7, $1.8 and $1.9 million, respectively. As of June 30, 2014, future estimated amortization expense related to intangible assets is estimated to be: (Dollars in Fiscal Year thousands) 2015 $ 1,710 2016 1,644 2017 1,589 2018 1,575 2019 1,575 Thereafter 11,719 Total $ 19,812



The following provides supplemental disclosures of cash flow activity:

Fiscal Years 2014 2013 2012 (Dollars in thousands) Cash paid (received) for: Interest $ 21,173$ 38,990 (1) $ 28,448 Income taxes, net (16,266 ) 1,088 14,754

_______________________________________________________________________________

(1) Includes $10.6 million of cash paid for make-whole associated with prepayment of senior notes. 57



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



4. GOODWILL

The table below contains details related to the Company's recorded goodwill: June 30, 2014 2013 Gross Gross Carrying Accumulated Carrying Accumulated Value Impairment (1) Net (2) Value Impairment (1) Net (Dollars in thousands) Goodwill $ 678,925$ (253,661 )$ 425,264$ 679,607$ (218,722 )$ 460,885



_______________________________________________________________________________

(1) The table below contains additional information regarding accumulated

impairment losses:

Fiscal Year Impairment Charge Reporting Unit (3) (Dollars in thousands) 2009 $ (41,661 ) International 2010 (35,277 ) North American Premium 2011 (74,100 ) North American Value 2012 (67,684 ) North American Premium 2014 (4) (34,939 ) North American Premium Total $ (253,661 )



_______________________________________________________________________________

(2) Remaining net goodwill relates to the Company's North American Value

reporting unit.

(3) See Notes 1 and 14 to the Consolidated Financial Statements.

(4) See Note 1 to the Consolidated Financial Statements.

The table below contains details related to the Company's recorded goodwill: North American Value North American Premium Consolidated (Dollars in thousands) Goodwill, net at June 30, 2012 $ 427,287 $ 34,992 $ 462,279 Translation rate adjustments (1,355 ) (39 ) (1,394 ) Goodwill, net at June 30, 2013 425,932 34,953 460,885 Goodwill impairment - (34,939 ) (34,939 ) Goodwill acquired 130 - 130 Translation rate adjustments (798 ) (14 ) (812 ) Goodwill, net at June 30, 2014 $ 425,264 $



- $ 425,264

5. INVESTMENTS IN AFFILIATES The table below presents the carrying amount of investments in affiliates: June 30, 2014 2013 (Dollars in thousands) Empire Education Group, Inc. $ 28,398$ 43,098 MY Style 213 221 $ 28,611$ 43,319 58



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



5. INVESTMENTS IN AFFILIATES (Continued)

The table below presents summarized financial information of equity method investees based on audited results.

Greater Than 50 Percent Owned (1) Less Than 50 Percent Owned (2) 2014 2013 2012 2014 2013 2012 (Dollars in thousands) Summarized Balance Sheet Information: Current assets $ 54,774$ 35,900$ 56,516 $ - $ - $ 84,700 Noncurrent assets 57,803 91,847 96,639 - - 316,282 Current liabilities 24,797 25,317 61,074 - - 106,995 Noncurrent liabilities 33,004 21,560 13,947 - - 78,815 Summarized Statement of Operations Information: Gross revenue $ 166,540$ 170,964$ 182,326 $ - $ - $ 305,515 Gross profit 52,440 58,457 67,201 - - 132,647 Operating (loss) income (33,526 ) 4,981 (1,335 ) - - 35,569 Net (loss) income (26,699 ) 2,359 (7,211 ) - - 24,067



_______________________________________________________________________________

(1) Represents the summarized financial information of EEG. As EEG is a

significant subsidiary for the fiscal year 2014 financial statements, the

separate financial statements of EEG are included subsequent to the Company's financial statements. Gross profit includes depreciation and amortization expense of $5.8, $7.4, and $7.5 million for fiscal years 2014, 2013 and 2012, respectively.



(2) The Company previously owned a 46.7% equity interest in Provalliance.

During fiscal year 2013, the Company completed the sale of its investment

in Provalliance.

Investment in Empire Education Group, Inc. As of June 30, 2014 and 2013, the Company's ownership interest in Empire Education Group, Inc. (EEG) was 54.5%. EEG operates accredited cosmetology schools and is managed by the Empire Beauty School executive team. The Company accounts for EEG as an equity investment under the voting interest model. During fiscal years 2014, 2013 and 2012 the Company recorded its share of pretax noncash impairment charges recorded by EEG for goodwill and fixed and intangible asset impairments of $21.2, $2.1 and $8.9 million, respectively. In addition, during fiscal years 2013 and 2012, the Company recorded other than temporary impairment charges of its investment in EEG of $17.9 and $19.4 million, respectively, to account for the negative business impacts resulting from regulatory changes including declines in enrollment, revenue and profitability in the for-profit secondary educational market. The Company did not receive a tax benefit on these impairment charges. Due to economic, regulatory and other factors, including declines in enrollment, revenue and profitability in the for-profit secondary educational market, the Company may be required to record additional noncash impairment charges related to its investment in EEG and such noncash impairments could be material to the Company's consolidated balance sheet and results of operations. Based on EEG's annual goodwill impairment assessment during fiscal year 2014, the Company's portion of EEG's estimated fair value exceeds carrying value of its investment by approximately 10%. Any meaningful underperformance against plan or reduced outlook by EEG, changes to the carrying value of EEG or further erosion in valuations of the for-profit secondary educational market could lead to other than temporary impairments of the Company's investment in EEG. In addition, EEG may be required to record noncash impairment charges related to long-lived assets or establish valuation allowances against certain of its deferred tax assets and our share of such noncash impairment charges or valuation allowances could be material to the Company's consolidated balance sheet and results of operations. EEG does not have any goodwill recorded as of June 30, 2014. As of June 30, 2014, our share of EEG's deferred tax assets was $7.8 million. During fiscal years 2014, 2013 and 2012, the Company recorded $(14.5), $1.3 and $(4.0) million, respectively, of equity (loss) earnings related to its investment in EEG. The Company previously provided EEG with a $15.0 million revolving credit facility and outstanding loan, both of which matured during fiscal year 2013. At June 30, 2012, there was $15.0 and $11.4 million outstanding on the revolving credit facility and loan outstanding, respectively. The Company received $15.0 million in payments on the revolving credit facility 59



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



5. INVESTMENTS IN AFFILIATES (Continued)

during the fiscal year 2013. The Company received $11.4 and $10.0 million in principal payments on the loan during the fiscal years 2013 and 2012, respectively. During fiscal years 2013 and 2012, the Company recorded less than $0.1 and $0.5 million, respectively, of interest income related to the loan and revolving credit facility. Investment in Provalliance On September 27, 2012, the Company sold its 46.7% equity interest in Provalliance for $103.4 million. The Company previously had a right (Provalliance Equity Put), which if exercised, would require the Company to purchase an additional ownership interest in Provalliance between specified dates in 2010 to 2018. The Provalliance Equity Put was classified as a Level 3 fair value measurement as the fair value was determined based on unobservable inputs that could not be corroborated by observable market data. During fiscal year 2013, the Company recorded a $0.6 million decrease in the fair value of the Provalliance Equity Put that automatically terminated upon the sale. In connection with the sale of Provalliance, the Company recorded a $37.4 million other than temporary impairment charge during fiscal year 2012. In addition, the fair value of the Provalliance Equity Put decreased by $20.2 to $0.6 million as of June 30, 2012. The other than temporary impairment charge and reduction in the fair value of the Provalliance Equity Put resulted in a net impairment charge of $17.2 million that is recorded within the equity in (loss) income of affiliated companies during fiscal year 2012. Regis did not receive a tax benefit on the net impairment charge. During fiscal year 2012, the Company recorded $9.8 million of equity earnings and received $2.8 million of cash dividends related to its investment in Provalliance. Due to the sale of the Company's investment in Provalliance, the Company liquidated its foreign entities with Euro denominated operations. Amounts previously classified within accumulated other comprehensive income that were recognized in earnings were foreign currency translation rate gain adjustments of $43.4 million, a cumulative tax-effected net loss of $7.9 million associated with a cross-currency swap that was settled in fiscal year 2007 that hedged the Company's European operations, and a $1.7 million net loss associated with cash repatriation, which netted to $33.8 million for fiscal year 2013, recorded within interest income and other, net on the Consolidated Statement of Operations. Investment in MY Style The Company accounts for its 27.1% ownership interest in MY Style as a cost method investment. The Company previously had an outstanding note with MY Style, which matured during fiscal year 2013. The Company recorded less than $0.1 million in interest income related to the note during fiscal years 2013 and 2012. During fiscal year 2014, MY Style's parent company, Yamano Holdings Corporation (Yamano), redeemed its Class A and Class B Preferred Stock for $3.1 million. During fiscal year 2011, the Company had estimated the fair values of the Yamano Class A and Class B Preferred Stock to be negligible and recorded an other than temporary non-cash impairment. The Company reported the gain associated with Yamano's redemption within equity in loss of affiliated companies on the Consolidated Statement of Operations. 6. FAIR VALUE MEASUREMENTS Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis The Company's financial instruments include cash, cash equivalents, receivables, accounts payable and debt. The fair values of cash and cash equivalents, receivables, accounts payable and debt approximated the carrying values as of June 30, 2014. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of the Company's 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. 60



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



6. FAIR VALUE MEASUREMENTS (Continued)

Level 3 Fair Value Measurements During fiscal year 2014, goodwill of the Regis salon concept reporting unit with a carrying value of $34.9 million was written down to its implied fair value of zero, resulting in a non-cash impairment charge of $34.9 million. See Notes 1 and 4 to the Consolidated Financial Statements. During fiscal year 2013, the Company's investment in EEG with a carrying value of $59.9 million was written down to its implied fair value of $42.0 million, resulting in an impairment charge of $17.9 million. See Note 5 to the Consolidated Financial Statements. 7. FINANCING ARRANGEMENTS The Company's long-term debt consists of the following: Interest rate % Fiscal Years June 30, Maturity Dates 2014 2013 2014 2013 (fiscal year) (Dollars in thousands) Convertible senior notes(1)(2) 2015 5.00% 5.00% $ 172,246$ 166,454 Senior term notes 2018 5.75 - 120,000 - Revolving credit facility 2018 - - - - Equipment and leasehold notes payable 2015 - 2016 4.90 - 8.75 4.90 - 8.75



1,257 8,316

293,503 174,770 Less current portion (1) (173,501 ) (173,515 ) Long-term portion $



120,002 $ 1,255

_______________________________________________________________________________

(1) As of June 30, 2013, the Company included the convertible senior notes within long-term debt, current portion on the Consolidated Balance Sheet



as the holders of the senior convertible notes had the option to convert

at any time after April 15, 2014.

(2) In July 2014, the Company settled the convertible senior notes with $172.5

million in cash.

The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, certain restricted payments and transactions with affiliates. In addition, the Company must adhere to specified fixed charge coverage and leverage ratios. The Company was in compliance with all covenants and other requirements of our financing arrangements as of June 30, 2014. Aggregate maturities of long-term debt, including associated capital lease obligations of $1.3 million at June 30, 2014, are as follows: Fiscal year (Dollars in thousands) 2015 $ 173,501 2016 2 2017 - 2018 120,000 2019 - Thereafter - $ 293,503 Convertible Senior Notes In July 2009, the Company issued $172.5 million aggregate principal amount of 5.0% convertible senior notes due July 2014. The notes were unsecured, senior obligations of the Company and interest was payable semi-annually in arrears on January 15 and July 15 of each year at a rate of 5.0% per year. As of June 30, 2014, the notes were convertible at a conversion 61



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



7. FINANCING ARRANGEMENTS (Continued)

rate of 65.6019 shares of the Company's common stock per $1,000 principal amount of notes, representing a conversion price of approximately $15.24 per share of the Company's common stock. At the time of issuance, the Company had the choice of net-cash settlement, settlement in its own shares or a combination thereof and concluded the conversion option was indexed to its own stock. As a result, the Company allocated $24.7 million of the $172.5 million principal amount of the convertible senior notes to equity, which resulted in a $24.7 million debt discount. The $24.7 million debt discount was amortized over the period the convertible senior notes were expected to be outstanding, which was five years, as additional non-cash interest expense. The combined debt discount amortization and the contractual interest coupon resulted in an effective interest rate on the convertible debt of 8.9%. The following table provides equity and debt information for the convertible senior notes: June 30, 2014 2013 (Dollars in thousands)



Principal amount on the convertible senior notes $ 172,500$ 172,500 Unamortized debt discount

(254 ) (6,046 ) Net carrying amount of convertible debt $ 172,246 $



166,454

The following table provides interest rate and interest expense amounts related to the convertible senior notes:

Fiscal Years 2014 2013 (Dollars in thousands)



Interest cost related to contractual interest coupon-5.0% $ 8,625

$ 8,625 Interest cost related to amortization of the discount 5,792 5,320 Total interest cost $ 14,417$ 13,945 Senior Term Notes In November 2013, the Company issued $120.0 million aggregate principal amount of 5.75% senior unsecured notes due December 2017 (Senior Term Notes). Net proceeds from the issuance of the Senior Term Notes were $118.1 million. Interest on the Senior Term Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on June 1, 2014. The Senior Term Notes rank equally with the Company's existing senior unsecured debt. The Senior Term Notes are unsecured and not guaranteed by any of the Company's subsidiaries or any third party. The Senior Term Notes contain maintenance covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, certain restricted payments and transactions with affiliates, none of which are more restrictive than those under the Company's revolving credit facility. Revolving Credit Facility The Company has a $400.0 million unsecured revolving credit facility agreement, that expires in June 2018. The revolving credit facility has rates tied to a LIBOR credit spread and a quarterly facility fee on the average daily amount of the facility (whether used or unused). Both the LIBOR credit spread and the facility fee are based on the Company's debt to EBITDA ratio at the end of each fiscal quarter. In addition, the Company may request an increase in revolving credit commitments under the facility of up to $200.0 million under certain circumstances. Events of default under the credit agreement include change of control of the Company and the Company's default with respect to other debt exceeding $10.0 million. As of June 30, 2014 and 2013, the Company had no outstanding borrowings under this revolving credit facility. Additionally, the Company had outstanding standby letters of credit under the revolving credit facility of $2.2 million at June 30, 2014 and 2013, respectively, primarily related to its self-insurance program. Unused available credit under the facility at June 30, 2014 and 2013 was $397.8 million, respectively. Equipment and Leasehold Notes Payable The equipment and leasehold notes payable are primarily comprised of capital lease obligations. In September 2011, the Company entered into an agreement to refinance existing capital leases to a three year term with a contract rate of 4.9%. As of 62



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



7. FINANCING ARRANGEMENTS (Continued)

June 30, 2014 the capital lease balance was $1.3 million and will be amortized at the historical rate of 9.2%. There was no gain or loss recorded on the refinance. The Company entered into the refinancing to reduce cash interest payments. Private Shelf Agreement During fiscal year 2013, the Company prepaid $89.3 million of unsecured, fixed rate, senior term notes outstanding under a private shelf agreement. As a result of the prepayment, the Company incurred a make-whole payment of $10.6 million that was recorded in interest expense within the Consolidated Statement of Operations. 8. COMMITMENTS AND CONTINGENCIES Operating Leases: The Company leases most of its company-owned salons and some of its corporate facilities and distribution centers under operating leases. The original terms of the salon leases range from one to 20 years, with many leases renewable for additional five to ten year terms at the option of the Company. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Rent expense for the Company's international department store salons is based primarily on a percentage of sales. The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees. Sublease income was $29.5, $29.1 and $28.3 million in fiscal years 2014, 2013 and 2012, respectively. Rent expense on premises subleased was $29.1, $28.7 and $27.9 million in fiscal years 2014, 2013 and 2012, respectively. Rent expense and related rental income on sublease arrangements with franchisees is netted within the rent expense line item on the Consolidated Statement of Operations. In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net income (loss). However, in limited cases, the Company charges a 10.0% mark-up in its sublease arrangements. The net rental income resulting from such arrangements totaled $0.4 million for each fiscal year 2014, 2013 and 2012 and was classified in the royalties and fees caption of the Consolidated Statement of Operations. The Company has a sublease arrangement for a leased building the Company previously occupied. Rent expense of $0.9 million and related sublease income of $0.6 million for this arrangement is netted within the rent expense line on the Consolidated Statement of Operations. The aggregate amount of lease payments to be made over the remaining lease term are approximately $2.5 million. The Company also guarantees approximately 10 operating leases associated with the Company's former Trade Secret concept. As the Company has not experienced and does not expect any material loss to result from these arrangements, the Company has determined the exposure to the risk of loss on these guarantees to be immaterial to the financial statements. Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following: Fiscal Years 2014 2013 2012 (Dollars in thousands) Minimum rent $ 246,687$ 246,787$ 250,487 Percentage rent based on sales 7,164 7,566 8,938



Real estate taxes and other expenses 68,254 70,363 72,344

$ 322,105$ 324,716$ 331,769 63



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



8. COMMITMENTS AND CONTINGENCIES (Continued)

As of June 30, 2014, future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases with remaining terms of greater than one year are as follows: Corporate Franchisee Guaranteed Fiscal Year leases leases leases (Dollars in thousands) 2015 $ 246,000$ 52,663$ 404 2016 193,779 44,600 310 2017 138,255 34,371 195 2018 90,605 24,387 85 2019 49,327 14,197 34 Thereafter 51,392 11,392 14 Total minimum lease payments $ 769,358$ 181,610$ 1,042 The Company continues to negotiate and enter into leases and commitments for the acquisition of equipment and leasehold improvements related to future salon locations. Contingencies: The Company is self-insured for most workers' compensation, employment practice liability and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis. Litigation and Settlements: The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. In addition, the Company was a nominal defendant, and nine current and former directors and officers of the Company were named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder action alleged that the individual defendants breached their fiduciary duties to the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. The Board of Directors appointed a Special Litigation Committee to investigate the claims and allegations made in the derivative action, and to decide on behalf of the Company whether the claims and allegations should be pursued. In April 2014, the Special Litigation Committee issued a report and concluded the claims and allegations should not be pursued, and in June 2014 the Special Litigation Committee filed a motion requesting the court dismiss the shareholder derivative action. See Note 9 for discussion regarding certain issues that have resulted from the IRS' audit of fiscal year 2010 and 2011. During fiscal year 2014 and 2013, the Company incurred $3.3 and $1.2 million of expense in conjunction with the derivative shareholder action. During fiscal year 2012, the Company was awarded $1.1 million in conjunction with a class-action lawsuit. 64



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



9. INCOME TAXES

The components of (loss) income before income taxes are as follows:

Fiscal Years 2014 2013 2012 (Dollars in thousands) (Loss) income before income taxes: U.S. $ (51,866 )$ (25,177 )$ (35,430 ) International (2,462 ) 35,275 10,116 $ (54,328 )$ 10,098$ (25,314 )



The provision (benefit) for income taxes consists of:

Fiscal Years 2014 2013 2012 (Dollars in thousands) Current: U.S. $ 1,460$ (21,053 )$ (1,095 ) International 890 707 2,261 Deferred: U.S. 67,992 10,405 (5,519 ) International 787 (83 ) (77 ) $ 71,129$ (10,024 )$ (4,430 ) The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to earnings (loss) before income taxes, as a result of the following: Fiscal Years 2014 2013 2012 U.S. statutory rate (benefit) (35.0 )% 35.0 % (35.0 )% State income taxes, net of federal income tax benefit (0.2 ) 3.6



3.5

Valuation allowance (1) 160.8 -



-

Tax effect of goodwill impairment 11.5 -



47.7

Foreign income taxes at other than U.S. rates 1.4 4.1 (0.5 ) Tax effect of foreign currency translation gain - (107.0 )



-

Work Opportunity and Welfare-to-Work Tax Credits (5.3 ) (42.8 )

(19.4 ) Other, net (2.3 ) 7.8 (13.8 ) 130.9 % (99.3 )% (17.5 )%



_______________________________________________________________________________

(1) See Note 1 to the Consolidated Financial Statements. The (2.3)% of Other, net in fiscal year 2014 does not include the rate impact of any items in excess of 5% of computed tax. The 7.8% of Other, net in fiscal year 2013 includes the rate impact of meals and entertainment expense disallowance, donated inventory, unrecognized tax benefits and miscellaneous items of 4.9%, (3.4)%, 5.5% and 0.8%, respectively. The (13.8)% of Other, net in fiscal year 2012 includes the rate impact of meals and entertainment expense disallowance, unrecognized tax benefits and miscellaneous items of 2.1%, (9.1)% and (6.8)%, respectively. 65



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



9. INCOME TAXES (Continued)

The components of the net deferred tax assets and liabilities are as follows: June 30, 2014 2013 (Dollars in thousands) Deferred tax assets: Deferred rent $ 12,625$ 12,953 Payroll and payroll related costs 24,857 34,073 Net operating loss carryforwards 17,180 2,484 Tax credit carryforwards 20,134 4,366 Inventories 2,926 7,920 Allowance for doubtful accounts/notes 216 7,004 Insurance 6,195 6,106 Other 8,815 14,353 Subtotal $ 92,948$ 89,259 Valuation allowance (83,922 ) - Total deferred tax assets $ 9,026$ 89,259 Deferred tax liabilities: Depreciation $ (8,086 )$ (20,684 ) Amortization of intangibles (77,650 ) (72,635 ) Other (5,689 ) (7,206 )



Total deferred tax liabilities $ (91,425 )$ (100,525 ) Net deferred tax (liability) asset $ (82,399 )$ (11,266 )

At June 30, 2014, the Company has tax effected federal, state and U.K. net operating loss carryforwards of approximately $12.4, $3.7 and $1.1 million, respectively. The federal loss carryforward expires in 2034. The state loss carryforwards expire from 2016 to 2034. The U.K. loss carryforward has no expiration. The Company's tax credit carryforward of $20.1 million consists of $18.6 million that will expire from 2031 to 2034. The remaining $1.5 million carryforward has no expiration date. As of June 30, 2014, undistributed earnings of international subsidiaries of approximately $23.7 million were considered to have been reinvested indefinitely and, accordingly, the Company has not provided for U.S. income taxes on such earnings. It is not practicable for the Company to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings. The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K. and Luxembourg as well as states, cities, and provinces within these jurisdictions. In the U.S., fiscal years 2010 and beyond remain open for federal tax audit. The Company's U.S. federal income tax returns for the fiscal years 2010 and 2011 are currently under examination by the Internal Revenue Service (IRS). The IRS has identified certain issues that may result in audit adjustments. The Company is reviewing the issues identified to date. In anticipation of resolution of the issues identified, the Company made a payment of $9.5 million to the IRS during the fourth quarter ended June 30, 2014. The majority of the amount paid relates to timing differences and will be recovered by claiming future tax deductions and by receiving a benefit when the Company's U.S. deferred tax asset valuation allowance is reversed. Final resolution of these issues is not expected to have a material impact on the Company's financial statements. The Company is currently under audit in a number of states in which the statute of limitations has been extended for fiscal years 2007 and forward. For state tax audits, the statute of limitations generally spans three to four years, resulting in a number of states remaining open for tax audits dating back to fiscal year 2009. Internationally, including Canada, the statute of limitations for tax audits varies by jurisdiction, but generally ranges from three to five years. 66



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



9. INCOME TAXES (Continued)

A rollforward of the unrecognized tax benefits is as follows:

Fiscal Years 2014 2013 2012 (Dollars in thousands) Balance at beginning of period $ 10,015$ 4,381$ 13,493 (Reductions)/additions based on tax positions related to the current year (2,114 ) 44 482 (Reductions)/additions based on tax positions of prior years (505 ) 7,132 (7 ) Reductions on tax positions related to the expiration of the statute of limitations (994 ) (1,403 ) (1,571 ) Settlements (4,934 ) (139 ) (8,016 ) Balance at end of period $ 1,468$ 10,015$ 4,381 If the Company were to prevail on all unrecognized tax benefits recorded, a benefit of approximately $1 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the fiscal years 2014, 2013 and 2012, we recorded interest and penalties of approximately $0.1, $0.7 and $(1.2) million, respectively, as additions to the accrual net of the respective reversal of previously accrued interest and penalties. As of June 30, 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of $1.1 million. This amount is not included in the gross unrecognized tax benefits noted above. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time. 10. BENEFIT PLANS Regis Retirement Savings Plan: The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (Code) and is subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). The 401(k) portion of the RRSP is cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service. The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are employed at Salon Support, distribution centers, as field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0% vested after completing two years of service with vesting increasing 20.0% for each additional year of service, and with participants becoming fully vested after six full years of service. Nonqualified Deferred Salary Plan: The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers and all other employees who are highly compensated as defined by the Code. The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participants interest becomes 20.0% vested after completing two years of service with vesting increasing 20.0% for each additional year of service, and with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company. 67



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



10. BENEFIT PLANS (Continued)

Stock Purchase Plan: The Company has an employee stock purchase plan (ESPP) available to qualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0% of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $11.8 million. As of June 30, 2014, the Company's cumulative contributions to the ESPP totaled $9.6 million. Deferred Compensation Contracts: The Company has unfunded deferred compensation contracts covering certain current and former key executives. Prior to June 30, 2012, deferred compensation benefits were based on the executive's years of service and compensation for the 60 months preceding the executive's termination date. Effective June 30, 2012, these contracts were amended and the benefits were frozen as of June 30, 2012. Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled $0.9, $1.6 and $5.9 million for fiscal years 2014, 2013 and 2012, respectively. The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet: June 30, 2014 2013 (Dollars in thousands)



Current portion (included in Accrued liabilities) $ 2,913 $

3,532

Long-term portion (included in Other noncurrent liabilities) 7,677 9,446 $ 10,590$ 12,978 The tax-affected accumulated other comprehensive income (loss) for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $0.3 and $0.1 million at June 30, 2014 and 2013, respectively. The Company had previously agreed to pay the former Vice Chairman an annual amount of $0.6 million, adjusted for inflation to $0.9 million in fiscal years 2014 and 2013, for the remainder of his life. Additionally, the Company has a survivor benefit plan for the former Vice Chairman's spouse at a rate of one half of his deferred compensation benefit, adjusted for inflation, for the remaining life of his spouse. In October 2013, the former Vice Chairman passed away and the Company began paying survivor benefits to his spouse. At this time, the Company reduced the accrual for future obligations to account for the reduction in benefits to the survivor. In connection with the passing of the former Vice Chairman, the Company received $5.8 million in life insurance proceeds. The Company recorded a gain of $1.0 million recorded in general and administrative in the Consolidated Statement of Operations associated with the proceeds. Estimated associated costs included in general and administrative expenses on the Consolidated Statement of Operations totaled $(2.1), $0.7 and $0.8 million for fiscal years 2014, 2013 and 2012, respectively. Related obligations totaled $2.5 and $5.7 million at June 30, 2014 and 2013, respectively, with $0.5 and $0.9 million within accrued expenses at June 30, 2014 and 2013, respectively and the remainder included in other noncurrent liabilities in the Consolidated Balance Sheet. In connection with the former Chief Executive Officer's deferred compensation contract, the Company paid the former Chief Executive Officer $15.1 million in fiscal year 2013. Associated compensation expense included in general and administrative expenses on the Consolidated Statement of Operations totaled $3.7 million for fiscal year 2012. 68



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



10. BENEFIT PLANS (Continued)

Compensation expense included in (loss) income before income taxes and equity in loss of affiliated companies related to the aforementioned plans, excluding amounts paid for expenses and administration of the plans included the following:

Fiscal Years 2014 2013 2012 (Dollars in thousands) Executive Plan (including profit sharing) $ 203$ 311 $



394

ESPP 347 441



449

Deferred compensation contracts 1,641 2,370 10,452 11. EARNINGS PER SHARE Net (loss) income from continuing operations available to common shareholders and net (loss) income from continuing operations for the diluted earnings per share under the if-converted method was the same for all periods presented. Interest on the convertible debt was excluded from net (loss) income from continuing operations for diluted earnings per share as the convertible debt was not dilutive. The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share: Fiscal Years 2014 2013 2012 (Shares in thousands)



Weighted average shares for basic earnings per share 56,482 56,704

57,137

Effect of dilutive securities: Dilutive effect of stock-based compensation(1) - 142



-

Weighted average shares for diluted earnings per share 56,482 56,846

57,137

_______________________________________________________________________________

(1) For fiscal year 2014 and 2012, 119,750 and 182,270 common stock

equivalents of potentially dilutive common stock were not included in the

diluted earnings per share calculation due to the net loss from continuing

operations.

The computation of weighted average shares outstanding, assuming dilution, excluded 1,799,352, 1,593,228 and 1,987,784 of equity-based compensation awards during the fiscal years 2014, 2013 and 2012, respectively. These amounts were excluded because they were not dilutive under the treasury stock method. The computation of weighted average shares outstanding, assuming dilution also excluded 11,307,605, 11,260,261 and 11,208,552 of shares from convertible debt for fiscal years 2014, 2013 and 2012, respectively. These amounts were excluded as they were not dilutive. 12. STOCK-BASED COMPENSATION The Company grants long-term equity-based awards under the Amended and Restated 2004 Long Term Incentive Plan (the "2004 Plan"). The 2004 Plan provides for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), restricted stock awards (RSAs), restricted stock units (RSUs) and stock-settled performance share units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 2004 Plan, a maximum of 6,750,000 shares were approved for issuance. In October 2013, the 2004 Plan was amended to limit the number of future full value awards (awards other than stock options and SARs) to 3,465,701. Shares issued under the 2004 Plan are issued from new shares. As of June 30, 2014 there were 3,905,483 partial shares or 3,029,874 full shares available for grant under the 2004 Plan. All unvested awards are subject to forfeiture in the event of termination of employment, unless accelerated. SAR and RSU awards granted subsequent to July 1, 2012 generally include various acceleration terms for participants aged sixty-two years or older and employees aged fifty-five or older and have fifteen years of continuous service. The Company also has outstanding stock options under the 2000 Stock Option Plan (the "2000 Plan), although the plan terminated in 2010 and no additional awards have since been or will be made under the 2000 Plan. The 2000 Plan allowed the Company to grant both incentive and nonqualified stock options and replaced the Company's 1991 Stock Option Plan. 69



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



12. STOCK-BASED COMPENSATION (Continued)

Under the 2004 Plan and the 2000 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2014, 2013 and 2012 were as follows: 2014 2013 2012



Stock options & SARs $ 6.00$ 6.63 N/A RSAs & RSUs

15.50 17.40 $ 16.94 PSUs 15.73 18.33 N/A The fair value of stock options and SARs granted prior to June 30, 2013 was estimated on the date of grant using a lattice option valuation model. Effective July 1, 2013, the Company changed from the lattice option valuation model to the Black-Scholes-Merton (BSM) option valuation model for valuing SARs. The Company elected to make the change in valuation methodology because the Company's historical grants of SARs lacked complex vesting conditions or maximum payout limitations on the value of the awards. The Company does not expect a material difference in future valuations as a result of the change in models. The fair value of market-based RSUs granted during fiscal year 2013 was estimated on the date of grant using a Monte Carlo simulation model. The significant assumptions used in determining the estimated fair value of stock options, SARs and market-based RSUs granted during fiscal years 2014, 2013 and 2012 were as follows: 2014 2013 2012



Risk-free interest rate 1.67 - 1.96% 0.66 - 0.87% N/A Expected term (in years)

6.00 6.00 N/A Expected volatility 44.00% 44.00 - 47.00% N/A



Expected dividend yield 1.52 - 1.61% 1.33 - 1.46% N/A

The risk free rate of return is determined based on the U.S. Treasury rates approximating the expected life of the stock options and SARs granted. Expected volatility is established based on historical volatility of the Company's stock price. Estimated expected life was based on an analysis of historical stock options granted data which included analyzing grant activity including grants exercised, expired and canceled. The expected dividend yield is determined based on the Company's annual dividend amount as a percentage of the strike price at the time of the grant. The Company uses historical data to estimate pre-vesting forfeiture rates. Stock-based compensation expense, recorded within General and Administrative expense in the Consolidated Statement of Operations, was as follows: 2014 2013 2012 SARs & stock options $ 2,145$ 1,986$ 1,447 RSAs, RSUs, & PSUs 4,255 3,895 6,150 Total stock-based compensation expense 6,400 5,881



7,597

Less: Income tax benefit - (2,235 )



(2,898 ) Total stock-based compensation expense, net of tax $ 6,400$ 3,646$ 4,699

Stock Appreciation Rights & Stock Options: SARs and stock options granted under the 2004 Plan and 2000 Plan generally vest ratably over a three to five years period on each of the annual grant date anniversaries and expire ten years from the grant date. SARs granted subsequent to fiscal year 2012 vest ratably over a three year period. 70



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



12. STOCK-BASED COMPENSATION (Continued)

Activity for all of our outstanding SARs and stock options is as follows:

Shares Weighted- (in thousands) Weighted Average Aggregate Stock Average Remaining Intrinsic Value SARs Options Exercise Price Contractual Life (in thousands)

Outstanding balance at June 30, 2013 860 429 $ 25.26 Granted 470 - 15.74 Forfeited/Expired (189 ) (177 ) 30.06 Exercised (1 ) - 16.60 Outstanding balance at June 30, 2014 1,140 252 $ 20.80 6.8 - Exercisable at June 30, 2014 383 246 $ 25.85 4.5 - Unvested options, net of estimated forfeitures 686 6 $ 16.68 8.7 - The total intrinsic value, cash proceeds and income tax benefit associated with the exercise of SARs and stock options during fiscal years 2014, 2013 and 2012 were immaterial. As of June 30, 2014, there was $2.9 million of unrecognized expense related to SARs and stock options that is to be recognized over a weighted-average period of 1.8 years. Restricted Stock Awards & Restricted Stock Units: RSAs and RSUs granted to employees under the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a three or five year period. In addition, the Company has an outstanding RSU grant to its Chief Executive Officer that vests upon the achievement of a specified value for the Company's stock over a specified period of time. RSUs granted to non-employee directors under the 2004 Plan generally vest in equal monthly amounts over a one year period from the Company's previous annual shareholder meeting date. Distributions on vested RSUs granted to non-employee directors are deferred until the director's board service ends. Activity for all of our RSAs and RSUs is as follows: Weighted Aggregate Shares/Units Average Intrinsic (in thousands) Grant Date Value RSAs RSUs Fair Value (in thousands) Outstanding balance at June 30, 2013 315 250 $ 17.46 Granted - 362 15.50 Forfeited (26 ) (19 ) 17.05 Vested (103 ) (81 ) 17.92 Outstanding balance at June 30, 2014 186 512 $ 16.34$ 9,817 Vested at June 30, 2014 - 81 $ 16.42$ 1,145 Unvested awards, net of estimated forfeitures 179 361 $



16.40 $ 7,602

As of June 30, 2014, there was $6.6 million of unrecognized expense related to RSAs and RSUs that is expected to be recognized over a weighted-average period of 2.2 years. Performance Share Units: PSUs represent shares potentially issuable in the future. Issuance is based upon the relative achievement of the Company's performance goals. PSUs granted to employees under the 2004 Plan generally cliff vest after two years following a one year performance period. For certain PSUs granted in the fiscal years 2014 and 2013, the performance goals related to the Company achieving specified levels of same-store sales and earnings before interest, taxes, depreciation and amortization, adjusted ("adjusted EBITDA") for certain items impacting comparability for fiscal years 2014 and 2013. As the Company did not achieve thresholds related to performance goals for fiscal years 2014 and 2013, no PSUs were earned during fiscal years 2014 and 2013 for these awards. 71



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



12. STOCK-BASED COMPENSATION (Continued)

In addition, during fiscal year 2014, the Company granted 0.1 million shares at target with a weighted average grant date fair value of $15.72 for performance goal of achieving a cumulative adjusted EBITDA during a three year period. As of June 30, 2014, the Company does not expect any of these units to be earned. Therefore, there is no unrecognized expense related to PSUs as of June 30, 2014. Future compensation expense for the unvested awards could reach a maximum of $1.9 million to be recognized over 2.2 years, assuming the Company expects the target performance metric is earned. 13. SHAREHOLDERS' EQUITY Authorized Shares and Designation of Preferred Class: The Company has 100 million shares of capital stock authorized, par value $0.05, of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common. In addition, 250,000 shares of authorized capital stock have been designated as Series A Junior Participating Preferred Stock (preferred stock). None of the preferred stock has been issued. Shareholders' Rights Plan: The Company has a shareholders' rights plan pursuant to which one preferred share purchase right is held by shareholders for each outstanding share of common stock. The rights become exercisable only following the acquisition by a person or group, without the prior consent of the Board of Directors, of 20.0% or more of the Company's voting stock, or following the announcement of a tender offer or exchange offer to acquire an interest of 20.0% or more. If the rights become exercisable, they entitle all holders, except the takeover bidder, to purchase one one-thousandth of a share of preferred stock at an exercise price of $140, subject to adjustment, or in lieu of purchasing the preferred stock, to purchase for the same exercise price common stock of the Company (or in certain cases common stock of an acquiring company) having a market value of twice the exercise price of a right. Share Repurchase Program: In May 2000, the Company's Board of Directors (Board) approved a stock repurchase program. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $100.0 million in August 2003, to $200.0 million on May 3, 2005, and to $300.0 million on April 26, 2007. The timing and amounts of any repurchases will depend on many factors, including the market price of the common stock and overall market conditions. Historically, the repurchases to date have been made primarily to eliminate the dilutive effect of shares issued in conjunction with acquisitions, restricted stock grants and stock option exercises. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date. As of June 30, 2014, a total accumulated 7.7 million shares have been repurchased for $241.3 million. As of June 30, 2014, $58.7 million remained outstanding under the approved stock repurchase program. Accumulated Other Comprehensive Income: The components of accumulated other comprehensive income are as follows: June 30, 2014 2013 (Dollars in thousands) Foreign currency translation $ 22,364$ 20,434 Unrealized gain on deferred compensation contracts 287



122

Accumulated other comprehensive income $ 22,651$ 20,556 14. SEGMENT INFORMATION Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes. During the second quarter of fiscal year 2014, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of the restructuring of the Company's North American field organization. The field reorganization, which impacted all North American salons except for salons in the mass premium category, was announced in the fourth quarter of fiscal year 2013 and completed in the second quarter of fiscal year 2014. The Company now reports its operations in three operating segments: North American Value, North 72



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



14. SEGMENT INFORMATION (Continued)

American Premium and International. The Company's operating segments are its reportable operating segments. Prior to this change in organizational structure, the Company had two reportable operating segments: North American salons and International salons. The Company did not completely operate under the realigned operating segments structure prior to the second quarter of fiscal year 2014. The North American Value reportable operating segment is comprised of 8,295 company-owned and franchised salons located mainly in strip center locations and Walmart Supercenters. North American Value salons offer high quality, convenient and value priced hair care and beauty services and retail products. SmartStyle, Supercuts, MasterCuts, Cost Cutters and other regional trade names operating in the United States, Canada and Puerto Rico are generally within the North American Value segment. The North American Premium reportable operating segment is comprised of 801 company-owned salons primarily in mall-based locations. North American Premium salons offer upscale hair care and beauty services and retail products at reasonable prices. This segment operates in the United States, Canada and Puerto Rico and primarily includes the Regis salons concept, among other trade names. The International reportable operating segment is comprised of 360 company-owned salons located in malls, department stores and high-traffic locations. International salons offer a full range of custom hair care and beauty services and retail products. This segment operates in the United Kingdom primarily under the Supercuts, Regis and Sassoon concepts. Financial information concerning the Company's reportable operating segments is shown in the following table: Fiscal Years 2014 2013 2012 (Dollars in thousands) Revenues(1): North American Value salons $ 1,430,083$ 1,515,581$ 1,570,542 North American Premium salons 333,858 373,820 410,563 International salons 128,496 129,312 141,122 $ 1,892,437$ 2,018,713$ 2,122,227 Depreciation and amortization expense(1): North American Value salons $ 66,038$ 56,364$ 55,317 North American Premium salons 15,859 15,893 15,936 International salons 5,227 5,222 5,297 Total segment depreciation and amortization expense 87,124 77,479 76,550 Unallocated Corporate 12,609 14,276 28,420 $ 99,733$ 91,755$ 104,970 Operating (loss) income(1): North American Value salons $ 118,935$ 141,103$ 197,478 North American Premium salons(2) (46,274 ) (13,850 ) (57,504 ) International salons (3,356 ) (1,380 ) 2,505 Total segment operating income 69,305 125,873 142,479 Unallocated Corporate (103,295 ) (113,547 ) (144,646 ) Operating (loss) income(1) $ (33,990 )$ 12,326$ (2,167 ) Interest expense (22,290 ) (37,594 ) (28,245 ) Interest income and other, net 1,952 35,366 5,098 (Loss) income from continuing operations before income taxes and equity in loss of affiliated companies $ (54,328 ) $



10,098 $ (25,314 )

_______________________________________________________________________________

(1) See Note 2 to the Consolidated Financial Statements for discussion of the

classification of the results of operations of Hair Club as discontinued

operations. 73



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



14. SEGMENT INFORMATION (Continued)

(2) Included in the North American Premium salons segment's operating loss for

fiscal years 2014 and 2012 are goodwill impairment charges of $34.9 and $67.7 million, respectively. The Company's chief operating decision maker does not evaluate reportable segments using assets and capital expenditure information. Total revenues and property and equipment, net associated with business operations in the U.S. and all other countries in aggregate were as follows: June 30, 2014 2013 2012 Total Property and Total Property and Total Property and Revenues Equipment, Net Revenues



Equipment, Net Revenues Equipment, Net

(Dollars in



thousands)

U.S. $ 1,626,794$ 240,460$ 1,737,517$ 285,111$ 1,815,797$ 274,711 Other countries 265,643 26,078 281,196 28,349 306,430 31,088 Total $ 1,892,437$ 266,538$ 2,018,713$ 313,460$ 2,122,227$ 305,799 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 in this Form 10-K for explanations of items, which impacted fiscal years 2014 and 2013 revenues, operating and net (loss) income. Summarized quarterly data for fiscal years 2014 and 2013 follows: Quarter Ended September 30(e) December 31 March 31 June 30 Year Ended (Dollars in thousands, except per share amounts) 2014 Revenues $ 468,583$ 468,367$ 471,561$ 483,926$ 1,892,437 Cost of service and product revenues, excluding depreciation and amortization 269,039 273,874 272,490 279,095 1,094,498 Operating income (loss)(a) 1,429 (34,660 ) (3,221 ) 2,462 (33,990 ) (Loss) income from continuing operations(a)(b) (136 ) (109,085 ) (10,093 ) (17,766 ) (137,080 ) Income from discontinued operations(c) - - 609 744 1,353 Net (loss) income (a)(b)(c) (136 ) (109,085 ) (9,484 ) (17,022 ) (135,727 ) (Loss) income from continuing operations per share, basic and diluted(d) - (1.93 ) (0.18 ) (0.31 ) (2.43 ) Income from discontinued operations per share, basic and diluted - - 0.01 0.01 0.02 Net (loss) income per basic and diluted share(d) - (1.93 ) (0.17 ) (0.30 ) (2.40 ) Dividends declared per share 0.06 0.06

- - 0.12 74



--------------------------------------------------------------------------------

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



15. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)

Quarter Ended September 30 December 31 March 31



June 30(e) Year Ended

(Dollars in thousands, except



per share amounts)

2013 Revenues $ 505,360$ 506,165$ 504,937$ 502,251$ 2,018,713 Cost of service and product revenues, excluding depreciation and amortization 285,660 289,329 287,597 296,678 1,159,264 Operating income (loss)(a) 9,273 8,723 3,308 (8,978 ) 12,326 Income (loss) from continuing operations(a)(b) 34,647 (16,119 ) 896 (15,258 ) 4,166 Income (loss) from discontinued operations(c) 3,777 3,853 1,465 15,933 25,028 Net income (loss)(a)(b)(c) 38,424 (12,266 ) 2,361 675 29,194 Income (loss) from continuing operations per share, basic 0.60 (0.28 ) 0.02 (0.27 ) 0.07 Income (loss) from discontinued operations per share, basic(d) 0.07 0.07 0.03 0.28 0.44 Net income (loss) per basic share(d) 0.67 (0.22 ) 0.04 0.01 0.51 Income (loss) from continuing operations per share, diluted 0.54 (0.28 ) 0.02 (0.27 ) 0.07 Income (loss) from discontinued operations per share, diluted 0.06 0.07 0.03 0.28 0.44 Net income (loss) per diluted share(d) 0.59 (0.22 ) 0.04 0.01 0.51 Dividends declared per share 0.06 0.06 0.06 0.06 0.24



_______________________________________________________________________________

(a) During the second quarter of fiscal year 2014, the Company recorded a

goodwill impairment charge of $34.9 million, an $84.4 million non-cash

charge to establish a valuation allowance against the Company's U.S. and U.K. deferred tax assets and non-cash salon asset impairment charge of $4.7 million. During the third quarter of fiscal 2014, the Company



recorded non-cash salon impairment of $8.9 million. During the fourth

quarter of fiscal year 2013, the Company recorded a $12.6 million ($7.7

million net of tax) inventory write-down associated with the Company's

implementation of standardized plan-o-grams. (b) During the fourth quarter of fiscal year 2014, the Company recorded a



$12.6 million charge representing its share of goodwill impairment charges

recorded by EEG. During the first quarter of fiscal year 2013, the Company

recorded a $32.2 million net of tax foreign currency gain associated with the sale of Provalliance. During the second quarter of fiscal year 2013,



the Company recorded a $17.9 million impairment charge net of tax related

to the impairment of EEG. During the fourth quarter of fiscal year 2013,

the Company incurred $6.7 million net of tax of expense for a make-whole

payment associated with the prepayment of debt. (c) During the fourth quarter of fiscal year 2013, the Company recorded a



$15.4 million gain, net of professional and transaction fees and taxes,

associated with the disposition of Hair Club.

(d) Total is an annual recalculation; line items calculated quarterly may not

sum to total. (e) During the fourth quarter of fiscal year 2013, the Company recorded a cumulative adjustment to correct prior period errors that related to an



understatement of interest expense and certain uncertain tax positions.

The impact of these items on the Company's Consolidated Statement of

Operations increased interest expense by $0.4 million, increased income

tax expense by $0.3 million and decreased net income by $0.7 million.

During first quarter of fiscal year 2014, the Company recorded adjustments

to correct errors related to the fourth quarter of fiscal year 2013 for an

overstatement of inventory and self-insurance accruals and an

understatement of cash. The impact of these items on the Company's

Consolidated Statement of Operations decreased Site Operating expenses by

$1.3 million, increased Cost of Product by $0.3 million and decreased net

loss by $0.6 million. Because these errors were not material to the Company's consolidated financial statements for any prior periods, the respective quarter, or respective fiscal year, the Company recorded adjustments to correct the errors during each respective quarter. 75



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters