REGIS CORP - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to      

 

Commission file number 1-12725

 

Regis Corporation

(Exact name of registrant as specified in its charter)

 

 

(952) 947-7777

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to be submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of April 30, 2013:

 

 

 

Table of Contents

 

REGIS CORPORATION

 

INDEX

 

Part I.	Financial Information
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheet as of March 31, 2013 and June 30, 2012	3
		Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2013 and 2012	4
		Condensed Consolidated Statement of Comprehensive (Loss) Income for the three and nine months ended March 31, 2013 and 2012	5
		Condensed Consolidated Statement of Cash Flows for the nine months ended March 31, 2013 and 2012	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25
Part II.	Other Information		26
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 6.	Exhibits	28
	Signatures		28

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(Dollars in thousands, except share data)

 

		March 31, 2013			June 30, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	180,309		$	111,943
Receivables, net		32,734			28,954
Inventories		148,493			142,276
Deferred income taxes		18,051			14,503
Income tax receivable		19,198			14,098
Other current assets		47,939			55,903
Current assets held for sale (Note 2)		17,222			17,000
Total current assets		463,946			384,677
Property and equipment, net		307,295			305,799
Goodwill		462,333			462,279
Other intangibles, net		22,154			23,395
Investment in and loans to affiliates		43,308			160,987
Other assets		61,747			59,488
Long-term assets held for sale (Note 2)		181,009			175,221
Total assets		$	1,541,792		$	1,571,846
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current portion		$	29,044		$	28,937
Accounts payable		67,721			47,890
Accrued expenses		133,265			157,026
Current liabilities related to assets held for sale (Note 2)		18,503			18,120
Total current liabilities		248,533			251,973
Long-term debt and capital lease obligations		239,593			258,737
Other noncurrent liabilities		162,252			143,972
Long-term liabilities related to assets held for sale (Note 2)		30,356			28,007
Total liabilities		680,734			682,689
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common stock, $0.05 par value; issued and outstanding 56,712,570 and 57,415,241 common shares at March 31, 2013 and June 30, 2012, respectively		2,836			2,871
Additional paid-in capital		333,920			346,943
Accumulated other comprehensive income		21,850			55,114
Retained earnings		502,452			484,229
Total shareholders’ equity		861,058			889,157
Total liabilities and shareholders’ equity		$	1,541,792		$	1,571,846

 

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

 

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REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three and Nine Months Ended March 31, 2013 and 2012

(Dollars and shares in thousands, except per share data amounts)

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2013			2012			2013			2012
Revenues:
Service		$	392,149		$	412,973		$	1,173,851		$	1,232,015
Product		103,222			113,153			313,742			332,826
Royalties and fees		9,566			9,775			28,869			28,544
		504,937			535,901			1,516,462			1,593,385
Operating expenses:
Cost of service		234,321			239,413			701,114			706,470
Cost of product		53,276			56,864			161,472			166,894
Site operating expenses		53,737			50,783			155,956			157,060
General and administrative		56,800			60,256			168,467			188,768
Rent		80,761			82,170			242,815			247,595
Depreciation and amortization		22,734			23,465			65,334			82,708
Total operating expenses		501,629			512,951			1,495,158			1,549,495
Operating income		3,308			22,950			21,304			43,890
Other income (expense):
Interest expense		(6,356		)	(6,790		)	(19,834		)	(21,353		)
Interest income and other, net		(62		)	121			35,151			4,090
(Loss) income before income taxes and equity in income (loss) of affiliated companies		(3,110		)	16,281			36,621			26,627
Income taxes		2,850			(4,946		)	(1,221		)	(6,698		)
Equity in income (loss) of affiliated companies, net of income taxes		1,156			(15,213		)	(15,976		)	(6,284		)
Income (loss) from continuing operations		896			(3,878		)	19,424			13,645
Income (loss) from discontinued operations, net of taxes		1,465			2,509			9,095			(64,104		)
Net income (loss)		$	2,361		$	(1,369	)	$	28,519		$	(50,459	)
Net income (loss) per share:
Basic:
Income (loss) from continuing operations		0.02			(0.07		)	0.34			0.24
Income (loss) from discontinued operations		0.03			0.04			0.16			(1.12		)
Net income (loss) per share, basic(1)		$	0.04		$	(0.02	)	$	0.50		$	(0.88	)
Diluted:
Income (loss) from continuing operations		0.02			(0.07		)	0.34			0.24
Income (loss) from discontinued operations		0.03			0.04			0.16			(1.12		)
Net income (loss) per share, diluted(1)		$	0.04		$	(0.02	)	$	0.50		$	(0.88	)
Weighted average common and common equivalent shares outstanding:
Basic		56,345			57,053			56,816			57,029
Diluted		56,500			57,053			56,928			57,236
Cash dividends declared per common share		$	0.06		$	0.06		$	0.18		$	0.18

(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 unaudited Condensed Consolidated Financial Statements.

 

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REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

For The Three and Nine Months Ended March 31, 2013 and 2012

(Dollars in thousands)

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2013			2012			2013			2012
Net income (loss)		$	2,361		$	(1,369	)	$	28,519		$	(50,459	)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments:
Foreign currency translation adjustments during the period		(4,259		)	6,967			601			(15,675		)
Reclassification adjustments for gains included in net income (loss) (Note 5)		—			—			(33,842		)	—
Net current period foreign currency translation adjustments		(4,259		)	6,967			(33,241		)	(15,675		)
Change in fair market value of financial instruments designated as cash flow hedges		—			(16		)	(23		)	341
Other comprehensive (loss) income		(4,259		)	6,951			(33,264		)	(15,334		)
Comprehensive (loss) income		$	(1,898	)	$	5,582		$	(4,745	)	$	(65,793	)

 

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

 

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REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Nine Months Ended March 31, 2013 and 2012

(Dollars in thousands)

 

		2013			2012
Cash flows from operating activities:
Net income (loss)		$	28,519		$	(50,459	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		65,823			92,510
Equity in loss of affiliated companies		15,348			5,688
Deferred income taxes		14,855			(4,981		)
Accumulated other comprehensive income reclassification adjustments (Note 5)		(33,842		)	—
Goodwill impairment		—			78,426
Stock-based compensation		4,723			6,065
Amortization of debt discount and financing costs		5,336			4,974
Other noncash items affecting earnings		1,500			925
Changes in operating assets and liabilities, excluding the effects of acquisitions		(20,522		)	(30,104		)
Net cash provided by operating activities		81,740			103,044
Cash flows from investing activities:
Capital expenditures		(72,554		)	(65,619		)
Proceeds from sale of assets		220			405
Asset acquisitions, net of cash acquired		—			(2,225		)
Proceeds from loans and investments		131,054			2,315
Restricted cash used to collateralize insurance reserves		(24,500		)	—
Net cash provided by (used in) investing activities		34,220			(65,124		)
Cash flows from financing activities:
Borrowings on revolving credit facilities		5,200			427,800
Payments on revolving credit facilities		(5,200		)	(427,800		)
Repayments of long-term debt and capital lease obligations		(22,985		)	(23,801		)
Repurchase of common stock		(14,868		)	—
Dividends paid		(10,310		)	(10,405		)
Net cash used in financing activities		(48,163		)	(34,206		)
Effect of exchange rate changes on cash and cash equivalents		569			(2,394		)
Increase in cash and cash equivalents		68,366			1,320
Cash and cash equivalents:
Beginning of period		111,943			96,263
End of period		$	180,309		$	97,583

 

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

 

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REGIS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                     BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of March 31, 2013 and for the three and nine months ended March 31, 2013 and 2012, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2013 and the consolidated results of its operations and its cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

 

The Condensed Consolidated Balance Sheet data for June 30, 2012 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2012 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

 

Reclassifications:

 

Beginning in the first quarter of fiscal year 2013, salon marketing and advertising expenses that were presented within cost of service and general and administrative operating expense line items in prior filings were reclassified to site operating expenses within the Condensed Consolidated Statement of Operations. The reclassifications were made to better present how management of the Company views the respective salon marketing and advertising expenses. The prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on operating income or net income.

 

The table below presents the impact of the reclassifications to the three and nine months ended March 31, 2012:

 

		For the Three Months Ended, March 31, 2012
		Prior Presentation(1)			Reclassification			As Presented
		(Dollars in thousands)
Cost of service		$	239,524		$	(111	)	$	239,413
Site operating expenses		47,148			3,635			50,783
General and administrative		63,780			(3,524		)	60,256

 

		For the Nine Months Ended, March 31, 2012
		Prior Presentation(1)			Reclassification			As Presented
		(Dollars in thousands)
Cost of service		$	707,162		$	(692	)	$	706,470
Site operating expenses		144,944			12,116			157,060
General and administrative		200,192			(11,424		)	188,768

(1)  Prior presentation amounts exclude amounts related to discontinued operations.  See Note 2 to the Condensed Consolidated Statement of Operations.

 

In addition, expenses associated with our distribution centers were reclassified from unallocated corporate costs to our North America reportable segment. The reclassifications were made to better present how management of the Company views the respective distribution centers’ expenses.  This reclassification had no impact on our Condensed Consolidated Statement of Operations. The prior period amounts have been reclassified to conform to the current year presentation.  The table below presents the impact of the reclassification of expenses between the Company’s unallocated corporate and North America reportable segment:

 

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		For the Three Months Ended, March 31, 2012
		North America									Unallocated Corporate
		Prior Presentation			Reclassification			As Presented(2)			Prior Presentation(1)			Reclassification			As Presented(2)
		(Dollars in thousands)									(Dollars in thousands)
Operating Income (Loss)		$	61,753		$	(6,131	)	$	55,622		$	(39,405	)	$	6,131		$	(33,274	)

		For the Nine Months Ended, March 31, 2012
		North America									Unallocated Corporate
		Prior Presentation			Reclassification			As Presented(2)			Prior Presentation(1)			Reclassification			As Presented(2)
		(Dollars in thousands)									(Dollars in thousands)
Operating Income (Loss)		$	176,041		$	(19,312	)	$	156,729		$	(133,509	)	$	19,312		$	(114,197	)

(1)         Prior presentation amounts exclude amounts related to discontinued operations. See Note 2 to the Condensed Consolidated Statement of Operations.

 

(2)         See Note 11 to the Condensed Consolidated Statement of Operations for presentation of segment information.

 

Stock-Based Employee Compensation:

 

During the nine months ended March 31, 2013, the Company granted 118,062 restricted stock awards (RSAs), 231,820 restricted stock units (RSUs), 596,157 equity-based stock appreciation rights (SARs), and 199,041 performance share units (PSUs). The Company did not have significant grants for the three months ended March 31, 2013. All grants relate to stock incentive plans that have been approved by the shareholders of the Company.

 

Total compensation cost for stock-based payment arrangements totaled $1.4 million for each of the three months ended March 31, 2013 and 2012, and $4.7 and $6.1 million for the nine months ended March 31, 2013 and 2012, respectively, recorded within general and administrative expense on the Condensed Consolidated Statement of Operations.

 

Goodwill:

 

For the fiscal year 2012 annual impairment testing of goodwill, the estimated fair value of the Promenade salon concept and Hair Restoration Centers reporting units exceeded their carrying values by approximately 14.0 and 12.0 percent, respectively. The respective fair values of the Company’s remaining reporting units exceeded their carrying values by greater than 20.0 percent. While the Company has determined that the estimated fair value of Promenade is appropriate based on the historical level of revenue growth, operating income and cash flows, it is reasonably likely that Promenade may experience additional impairment in future periods. The term “reasonably likely” refers to an occurrence that is more than remote but less than probable in the judgment of the Company. Because some of the inherent assumptions and estimates used in determining the fair value of each reporting unit are outside the control of management, changes in these underlying assumptions can adversely impact fair value. Potential impairment of a portion or all of the carrying value of goodwill for the Promenade salon concept is dependent on many factors and cannot be predicted with certainty. See Note 2 to the Condensed Consolidated Financial Statements for details on the completion of the sale of Hair Restoration Centers subsequent to March 31, 2013.

 

As of March 31, 2013, the Company’s estimated fair value, as determined by the sum of our reporting units’ fair value, reconciled to within a reasonable range of our market capitalization which included an assumed control premium. The Company concluded that there were no triggering events requiring the Company to perform an interim goodwill impairment test between the previous annual impairment test and March 31, 2013.

 

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A summary of the Company’s goodwill balance as of March 31, 2013 and June 30, 2012 by reporting unit is as follows:

 

Reporting Unit		As of March 31, 2013			As of June 30, 2012
		(Dollars in thousands )
Regis		$	34,994		$	34,992
MasterCuts		4,652			4,652
SmartStyle		49,483			49,476
Supercuts		129,621			129,621
Promenade		243,583			243,538
Total		$	462,333		$	462,279

 

Recent Accounting Standards Adopted by the Company:

 

Comprehensive Income

 

In June 2011, and as subsequently amended in December 2011, the FASB issued final guidance on the presentation of comprehensive income. Under this guidance, net income and comprehensive income may only be presented either as one continuous statement or in two separate, but consecutive statements. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2013, with comprehensive income shown as a separate statement immediately following the Condensed Consolidated Statements of Operations.

 

Reclassifications Out of Accumulated Other Comprehensive Income

 

In February 2013, the FASB issued guidance on the reporting of reclassifications out of accumulated other comprehensive income. The updated accounting guidance requires an entity to provide information about the amounts reclassified out of accumulated comprehensive income by component. The Company adopted this guidance in the third quarter of fiscal year 2013 by disclosing the components reclassified out of accumulated comprehensive income on the Condensed Consolidated Statement of Comprehensive (Loss) Income.

 

Accounting Standards Recently Issued But Not Yet Adopted by the Company:

 

Testing Indefinite-Lived Intangible Assets for Impairment

 

In July 2012, the FASB updated the accounting guidance related to annual and interim indefinite-lived intangible asset impairment testing. The updated accounting guidance allows entities to first assess qualitative factors before performing a quantitative assessment of the fair value of indefinite-lived intangible assets. If it is determined on the basis of qualitative factors that the fair value of indefinite-lived intangible assets is more likely than not less than the carrying amount, the existing quantitative impairment test is required. Otherwise, no further impairment testing is required. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2014 with early adoption permitted under certain circumstances. The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

 

Accounting for Cumulative Translation Adjustment upon Derecognition of Foreign Entities

 

In March 2013, the FASB updated the accounting guidance related to the release of cumulative translation adjustments.  The updated accounting guidance clarified when to release cumulative translation adjustments into net income.  The updated guidance is 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 this update to have a material impact on the Company’s consolidated financial statements.

 

2.                                     DISCONTINUED OPERATIONS:

 

Hair Restoration Centers

 

On July 13, 2012, the Company entered into an agreement to sell its Hair Club for Men and Women business (Hair Club), a provider of hair restoration services, for cash of $163.5 million to Aderans Co., Ltd. The agreement includes a working capital adjustment provision that impacts the final sale price.  The sale includes the Company’s 50.0 percent interest in Hair Club for Men, Ltd. accounted for by the Company under the equity method. On April 9, 2013, the Company completed the sale of Hair Club. At the closing of the sale, the Company received $162.8 million, which was the purchase price of $163.5 million adjusted for the preliminary working capital provision. The Company anticipates recognizing an after-tax gain during the fourth quarter of fiscal year 2013 on the sale of Hair Club.

 

The Company classified the results of operations of Hair Club as discontinued operations for all periods presented in the Condensed Consolidated Statement of Operations.  The assets and liabilities of this business met the criteria to be classified as held for sale and have been aggregated and reported as current assets held for sale, long-term assets held for sale, current liabilities related to assets held for sale and long-term liabilities related to assets held for sale in the Condensed Consolidated

 

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Balance Sheet for all periods presented. The operations and cash flows of Hair Club will be eliminated from ongoing operations of the Company, which was previously recorded as the Hair Restoration reporting segment. There will be no significant continuing involvement by the Company in the operations of Hair Club after disposal.

 

The Company also reclassified $0.5 million for the three and nine months ended March 31, 2012 of professional fees related to the sale of Hair Club, that were previously included in unallocated corporate costs, to discontinued operations.

 

The following summarizes the results of operations of our discontinued Hair Club operations for the periods presented:

 

		For the Periods Ended March 31,
		Three Months						Nine Months
		2013			2012			2013			2012
		(Dollars in thousands)
Revenues		$	38,424		$	37,683		$	115,604		$	112,226
Income (loss) from discontinued operations, before income taxes		2,247			2,252			14,113			(67,227		)
Income tax (provision) benefit on discontinued operations		(956		)	(1,054		)	(5,632		)	1,428
Equity in income of affiliated companies, net of tax		174			212			614			596
Income (loss) from discontinued operations, net of income taxes		$	1,465		$	1,410		$	9,095		$	(65,203	)

 

Income taxes have been allocated to continuing and discontinued operations based on the methodology required by interim reporting and accounting for income taxes guidance.  Depreciation and amortization ceased during the three and nine months ended March 31, 2013 in accordance with accounting for discontinued operations. Hair Club depreciation and amortization expense for the three and nine months ended March 31, 2012 was $3.2 and $9.8 million, respectively. During the three months ended December 31, 2011, the Company performed an interim impairment test of goodwill related to Hair Club 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 the three and nine months ended March 31, 2012, the Company recorded a $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret.

 

3.                                     INVESTMENT IN AND LOANS TO AFFILIATES:

 

Investment in and loans to affiliates

 

The table below presents the carrying amount of investments in and loans to affiliates as of March 31, 2013 and June 30, 2012:

 

		March 31, 2013			June 30, 2012
		(Dollars in thousands)
Empire Education Group, Inc.		$	43,078		$	59,683
Provalliance		—			101,304
MY Style		230			—
		$	43,308		$	160,987

 

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The table below presents the notes receivable from affiliates as of March 31, 2013 and June 30, 2012 recorded within other current assets on the Condensed Consolidated Balance Sheet:

 

		March 31, 2013			June 30, 2012
		(Dollars in thousands)
Empire Education Group, Inc.		$	—		$	26,412
MY Style		567			2,251
		$	567		$	28,663

 

Empire Education Group, Inc.

 

On August 1, 2007, the Company contributed its 51 wholly-owned accredited cosmetology schools to Empire Education Group, Inc. (EEG) in exchange for a 49.0 percent equity interest in EEG. In January 2008, the Company’s effective ownership interest increased to 55.1 percent. EEG operates 109 accredited cosmetology schools.

 

During the three months ended December 31, 2012, to reflect the continuation of declining enrollment, revenue and profitability in the for-profit secondary educational market, EEG updated its budgeted financial projections for future periods. As a result, the Company recorded a $17.9 million other than temporary impairment charge on its investment in EEG. The Company did not receive a tax benefit on the impairment charge. The exposure to loss related to the Company’s involvement with EEG is the carrying value of the investment.  The Company did not impair its investment in EEG during the three months ended March 31, 2013 as EEG’s operating performance exceeded the financial projections utilized in the December 2012 impairment analysis. Due to economic, regulatory and other factors, 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. In addition, EEG may be required to record noncash impairment charges related to long-lived assets and goodwill, and our share of such noncash impairment charges could be material to the Company’s consolidated balance sheet and results of operations.  The Company’s share of EEG’s goodwill balances as of March 31, 2013 is approximately $16 million. Based on the Company’s work associated with the investment impairment recorded during the three months ended December 31, 2012, the Company’s estimate of EEG’s fair value exceeds carrying value by 5 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 a goodwill impairment charge recorded by EEG for which the Company would record 55.1 percent of the impairment given the Company’s present ownership.

 

During the three months ended March 31, 2013 and 2012, the Company recorded $1.2 and $1.5 million, respectively, of equity earnings related to its investment in EEG. During the nine months ended March 31, 2013 and 2012, the Company recorded $1.3 and $4.0 million, respectively, of equity 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 the three months ended December 31, 2012.  The Company received $26.4 million in principal payments on the loan and revolving credit facility during the nine months ended March 31, 2013. During the three months ended March 31, 2012, the Company recorded $0.1 million of interest income related to the loan and revolving credit facility. During the nine months ended March 31, 2013 and 2012, the Company recorded less than $0.1 and $0.4 million, respectively, of interest income related to the loan and revolving credit facility.

 

The table below presents the summarized Statement of Operations information for EEG for the nine months ended March 31, 2013 and 2012:

 

		March 31, 2013			March 31, 2012
		(Dollars in thousands)
Gross revenues		$	126,399		$	139,180
Gross profit		41,664			50,769
Operating income		4,752			13,256
Net income		2,267			7,460

 

Provalliance

 

On September 27, 2012, the Company sold its 46.7 percent equity interest in Provalliance to the Provost Family for a purchase price of €80 million. During the three months ended September 30, 2012 the Company recorded a $0.6 million decrease in the fair value of the Provalliance Equity Put that automatically terminated upon closing of the share purchase agreement. Due to the sale of the Company’s investment in Provalliance, the Company liquidated its foreign entities with Euro denominated operations.  During the three months ended September 30, 2012, the Company recognized $33.8 million

 

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from accumulated other comprehensive income into earnings, primarily representing a non-taxable foreign currency gain as a result of the liquidated Euro denominated operations.

 

4.                                     EARNINGS PER SHARE:

 

The Company’s basic earnings per share is calculated as net income (loss) divided by weighted average common shares outstanding, excluding unvested outstanding RSAs, RSUs and PSUs. The Company’s dilutive earnings per share is calculated as net income (loss) divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock based compensation plans. 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 dilutive 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 interest 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.

 

The following table sets forth a reconciliation of the net income (loss) from continuing operations available to common shareholders and the net income (loss) from continuing operations for diluted earnings per share under the if-converted method:

 

		For the Periods Ended March 31,
		Three Months						Nine Months
		2013			2012			2013			2012
		(Dollars in thousands)
Net income (loss) from continuing operations available to common shareholders		$	896		$	(3,878	)	$	19,424		$	13,645
Effect of dilutive securities:
Interest on convertible debt, net of taxes		—			—			—			—
Net income (loss) from continuing operations for diluted earnings per share		$	896		$	(3,878	)	$	19,424		$	13,645

 

The following table sets forth a reconciliation of shares used in the computation of basic and diluted earnings per share:

 

		For the Periods Ended March 31,
		Three Months				Nine Months
		2013		2012		2013		2012
		(Shares in thousands)
Weighted average shares for basic earnings per share		56,345		57,053		56,816		57,029
Effect of dilutive securities:
Dilutive effect of stock-based compensation (1)		155		—		112		207
Dilutive effect of convertible debt		—		—		—		—
Weighted average shares for diluted earnings per share		56,500		57,053		56,928		57,236

 

(1)         For the three months ended March 31, 2012, 237,041, common stock equivalents of potentially dilutive common stock were not included in the diluted earnings per share calculation because to do so would have been anti-dilutive.

 

The computation of weighted average shares outstanding, assuming dilution, excluded 1,514,325 and 1,697,834 of equity-based compensation awards during the three months ended March 31, 2013 and 2012, respectively, and 1,619,322 and 1,721,534 of equity-based compensation awards during the nine months ended March 31, 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 11,267,057 and 11,217,188 of shares from convertible debt for the three months ended March 31, 2013 and 2012, respectively, and 11,253,490 and 11,201,455 of shares from convertible debt for the nine months ended March 31, 2013 and 2012, respectively. These amounts were excluded as they were not dilutive.

 

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5.                                     SHAREHOLDERS’ EQUITY:

 

Additional Paid-In Capital:

 

The $13.0 million decrease in additional paid-in capital during the nine months ended March 31, 2013 was due to repurchases of common stock partially offset by stock-based compensation.

 

In May 2000, the Company’s Board of Directors approved a stock repurchase program. To date, a total of $300.0 million has been authorized to be expended for the repurchase of the Company’s stock. All repurchased shares become authorized but unissued shares of the Company. This repurchase program has no stated expiration date.  During the three months ended December 31, 2012, the Company repurchased 909,175 shares for $14.9 million. There were no share repurchases during the three months ended March 31, 2013. At March 31, 2013, $58.7 million remains outstanding on the approved stock repurchase program.

 

Accumulated Other Comprehensive Income:

 

The Company completed the sale of its investment in Provalliance during the quarter ended September 30, 2012 and subsequently liquidated all 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 the nine months ended March 31, 2013, recorded within interest income and other, net on the Condensed Consolidated Statement of Operations.

 

6.           INCOME TAXES:

 

During the three and nine months ended March 31, 2013, the Company recognized tax (benefit) expense of $(2.9) and $1.2 million, respectively, with corresponding effective tax rates of (91.6) and 3.3 percent utilizing the estimated annual effective tax rate method. This is compared to tax expense of $4.9 and $6.7 million with corresponding effective tax rates of 30.4 and 25.2 percent in the comparable periods of the prior year utilizing the year-to-date method.

 

The effective income tax rate for the three months ended March 31, 2013 is higher than the effective income tax rate for the three months ended March 31, 2012 primarily due to the benefit of Work Opportunity Tax Credits including the impact of the enactment of the American Taxpayer Relief Act of 2012 that retroactively extended the Work Opportunity Tax Credits. These credits had a greater impact on the tax rate this quarter due to the amount of pretax loss reported this quarter.

 

The effective income tax rate for the nine months ended March 31, 2013 is lower than the effective income tax rate for the comparable period of the prior year due to the recognition of a $33.8 million foreign currency translation gain in the current period which was primarily non-taxable.

 

The Company’s United States federal income tax returns for the fiscal years 2010 and 2011 are currently under audit. All earlier tax years are closed to examination. The Company is currently under audit in a number of states in which the statute of limitations has been extended for fiscal years 2008 and forward.

 

7.                                      COMMITMENTS AND CONTINGENCIES:

 

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. In addition, the Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder derivative action in Minnesota state court. The derivative shareholder alleges 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. A Special Litigation Committee has been appointed by the Board to investigate and act on the claims.  The presiding judge has stayed the action while the Special Litigation Committee is at work.  The Company is working with outside counsel and is cooperating with the investigation. 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.

 

The exposure to loss related to the Company’s involvement with Trade Secret is the guarantee of

 

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certain operating leases that have future minimum rents of approximately $1.6 million. The Company has determined the exposure to the risk of loss on the guarantee of the operating leases to be immaterial to the financial statements.

 

8.           GOODWILL AND OTHER INTANGIBLES:

 

The table below contains details related to the Company’s recorded goodwill as of March 31, 2013 and June 30, 2012:

 

		March 31, 2013									June 30, 2012
		Gross									Gross
		Carrying  Value			Accumulated Impairment (1)			Net (2)			Carrying  Value			Accumulated Impairment (1)			Net (2)
		(Dollars in thousands)
Goodwill		$	759,181		$	(296,848	)	$	462,333		$	759,127		$	(296,848	)	$	462,279

(1)     The table below contains additional information regarding the Company’s $296.8 million accumulated impairment losses:

 

Fiscal Year		Impairment Charge			Reporting Unit
		(Dollars in thousands)
2009		$	41,661		International
2009		78,126			Trade Secret
2010		35,277			Regis
2011		74,100			Promenade
2012		67,684			Regis
2013 (through 3.31.13)		N/A			N/A
Total		$	296,848

 

(2) Remaining net goodwill at March 31, 2013 and June 30, 2012 relates to the Company’s North American operations.

 

The table below presents other intangible assets as of March 31, 2013 and June 30, 2012:

 

		March 31, 2013									June 30, 2012
					Accumulated									Accumulated
		Cost			Amortization (1)			Net			Cost			Amortization (1)			Net
		(Dollars in thousands)
Amortized intangible assets:
Brand assets and trade names		$	9,501		$	(3,208	)	$	6,293		$	9,494		$	(2,960	)	$	6,534
Franchise agreements		11,406			(6,859		)	4,547			11,398			(6,494		)	4,904
Lease intangibles		14,782			(6,411		)	8,371			14,796			(5,862		)	8,934
Non-compete agreements		207			(143		)	64			207			(117		)	90
Other		4,597			(1,718		)	2,879			4,533			(1,600		)	2,933
		$	40,493		$	(18,339	)	$	22,154		$	40,428		$	(17,033	)	$	23,395

 

(1)     Balance sheet accounts are converted at the applicable exchange rates effective as of the reported balance sheet dates, while income statement accounts are converted at the average exchange rates for the year-to-date periods presented.

 

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9.           FINANCING ARRANGEMENTS:

 

The Company’s long-term debt as of March 31, 2013 and June 30, 2012 consisted of the following:

 

						Amounts outstanding
		Maturity Dates		Interest Rate		March 31, 2013			June 30, 2012
		(fiscal year)				(Dollars in thousands)
Senior term notes (1)		2013 - 2018		6.69 - 8.50%		$	93,571		$	111,429
Convertible senior notes		2015		5.00		165,081			161,134
Revolving credit facility (1)		2016		—		—			—
Equipment and leasehold notes payable		2015 - 2016		4.90 - 8.75		9,985			14,780
Other notes payable		2013		5.75 - 8.00		—			331
						268,637			287,674
Less current portion						(29,044		)	(28,937		)
Long-term portion						$	239,593		$	258,737

 

(1)         During the three months ended December 31, 2012 the Company amended its debt agreements to remove covenants related to specified minimum net worth levels.  The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three months ended March 31, 2013.

 

Private Shelf Agreement

 

At March 31, 2013 and June 30, 2012, the Company had $93.6 and $111.4 million, respectively, in unsecured, fixed rate, senior term notes outstanding under a Private Shelf Agreement, of which $22.1 million were classified as part of the current portion of the Company’s long-term debt at March 31, 2013 and June 30, 2012. The notes require quarterly payments, and final maturity dates range from June 2013 through December 2017.

 

Convertible Senior Notes

 

In July 2009, the Company issued $172.5 million aggregate principal amount of 5.0 percent convertible senior notes due July 2014. The notes are unsecured, senior obligations of the Company and interest is payable semi-annually in arrears on January 15 and July 15 of each year at a rate of 5.0 percent per year. At issuance, the notes were convertible, subject to certain conditions further described below, at an initial conversion rate of 64.6726 shares of the Company’s common stock per $1,000 principal amount of notes (representing an initial conversion price of approximately $15.46 per share of the Company’s common stock). As of March 31, 2013, the conversion rate was 65.3632 shares of the Company’s common stock per $1,000 principal amount of notes (representing a conversion price of approximately $15.30 per share of the Company’s common stock). Interest expense related to the 5.0 percent contractual interest coupon was $6.5 million during the nine months ended March 31, 2013 and 2012.  Interest expense related to the amortization of the debt discount was $3.9 and $3.6 million during the nine months ended March 31, 2013 and 2012, respectively.

 

Revolving Credit Facility

 

As of March 31, 2013 and June 30, 2012, the Company had no outstanding borrowings under this facility. Additionally, the Company had outstanding standby letters of credit under the facility of $2.2 and $26.1 million at March 31, 2013 and June 30, 2012, respectively, primarily related to its self-insurance program. Unused available credit under the facility at March 31, 2013 and June 30, 2012 was $397.8 and $373.9 million, respectively.  The decrease in the outstanding standby letters of credit was due to the Company using $24.5 million of restricted cash to collateralize its self insurance program during the three months ended March 31, 2013, enabling the Company to reduce the fees associated with the standby letters of credit.  This restricted cash as of March 31, 2013 is classified within other current assets on the Condensed Consolidated Balance Sheet.

 

10.                              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).

 

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