10-K 1 a10-k.htm 10-K RGS-2014.06.30-10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2014
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)
Minnesota
State or other jurisdiction of
incorporation or organization
 
41-0749934
(I.R.S. Employer
Identification No.)
7201 Metro Boulevard, Edina, Minnesota
(Address of principal executive offices)
 
55439
(Zip Code)
(952) 947-7777
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.05 per share
 
New York Stock Exchange
Preferred Share Purchase Rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
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 ý    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 submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes o    No ý

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter, December 31, 2013, was approximately $670,414,816. The registrant has no non-voting common equity.
As of August 15, 2014, the registrant had 55,641,456 shares of Common Stock, par value $0.05 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the annual meeting of shareholders to be held on October 28, 2014 (the "2014 Proxy Statement") (to be filed pursuant to Regulation 14A within 120 days after the registrant's fiscal year-end of June 30, 2014) are incorporated by reference into Part III.
 



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain "forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the impact of significant initiatives, changes in our management and organizational structure and our ability to attract and retain our executive management team; negative same-store sales; the success of our stylists and our ability to attract, train and retain talented stylists; changes in regulatory and statutory laws; the effect of changes to healthcare laws; our ability to protect the security of sensitive information about our guests, employees, vendors or Company information; the Company's reliance on management information systems; the continued ability of the Company to implement cost reduction initiatives; reliance on external vendors; changes in distribution channels of manufacturers; compliance with debt covenants; financial performance of our franchisees; competition within the personal hair care industry; changes in economic conditions; failure to standardize operating processes across brands; the ability of the Company to maintain satisfactory relationships with certain companies and suppliers; financial performance of our investment with Empire Education Group; changes in interest rates and foreign currency exchange rates; changes in consumer tastes and fashion trends; or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A of this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-Q and 8-K and Proxy Statements on Schedule 14A.

2


REGIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2014
INDEX

 
 
 
Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3


PART I

Item 1.    Business
General:
Regis Corporation owns, franchises and operates beauty salons. The Company is listed on the NYSE under the ticker symbol "RGS." Unless the context otherwise provides, when we refer to the "Company," "we," "our," or "us," we are referring to Regis Corporation, the Registrant, together with its subsidiaries.
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 marketplace.
The major services supplied by the Company's salons are haircutting and styling (including shampooing and conditioning), hair coloring and other services. The percentage of company-owned service revenues in each fiscal year 2014, 2013 and 2012 attributable to haircutting and styling, hair coloring and other services were 72%, 19% and 9%, respectively.
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. The Company now reports its operations in three operating segments: North American Value, North American Premium and International. Prior to this change in organizational structure, the Company had two reportable operating segments: North American salons and International salons.
The Company's North American Value salon operations are comprised of 6,116 company-owned salons and 2,179 franchised salons operating in the United States, Canada, and Puerto Rico. The Company's North American Premium salon operations are comprised of 801 company-owned salons operating in the United States, Canada, and Puerto Rico. The Company's International operations are comprised of 360 company-owned salons in the United Kingdom. The Company's salons operate primarily under the trade names of SmartStyle, Supercuts, MasterCuts, Regis Salons, and Cost Cutters, and they generally serve two categories within the industry. SmartStyle, Supercuts, MasterCuts, Cost Cutters, and other regional trade names are generally within the value category, offering high quality, convenience, and affordably priced hair care and beauty services and retail products. Regis Salons, among other trade names, are in the premium category offering upscale hair care and beauty services and retail products. The Company's North American Value business is located mainly in strip center locations and Walmart Supercenters and the North American Premium business is primarily in mall based locations. During fiscal years 2014 and 2013, the number of guest visits at the Company's company-owned salons approximated 79 and 85 million, respectively. Concurrent with the change in reportable operating segments, the Company revised its prior period financial information to conform comparable financial information to the new segment structure. Historical financial information presented herein reflects this change.
Financial information about our segments and geographic areas for fiscal years 2014, 2013, and 2012 are included in Note 14 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Since fiscal year 2012, the Company has been evaluating its portfolio of assets, investments, and businesses, with the strategic objective of simplifying our business model, focusing on our core business of operating beauty salons, improving our long-term profitability and maximizing shareholder value. This evaluation led to several disposals during fiscal year 2013. In April 2013, the Company sold Hair Club for Men and Women (Hair Club) for $164.8 million. See Note 2 to the Consolidated Financial Statements for further discussion on Hair Club. In September 2012, the Company sold its 46.7% equity interest in Provalliance for $103.4 million. See Note 5 to the Consolidated Financial Statements for further discussion on Provalliance. As the Company continues this strategic evaluation, future sales of non-core assets could impact our operations by decreasing total revenues, operating expenses, and income or loss from equity method investments.
Industry Overview:
The hair salon market is highly fragmented, with the vast majority of locations independently owned and operated. However, the influence of salon chains, both franchised and company-owned, continues to grow within this market. Management believes that salon chains will continue to have significant influences on this market and will continue to increase their presence.
In every area in which the Company has a salon, there are competitors offering similar hair care services and products at similar prices. The Company faces competition from smaller chains of salons such as Great Clips, Fantastic Sams, and Sport Clips, independently owned salons and department store salons located within malls.

4


At the individual salon level, barriers to entry are low; however, barriers exist for chains to expand nationally due to the need to establish systems and infrastructure, to recruit experienced field and salon management and stylists, and to lease quality sites. The principal factors of competition in the hair care category are quality, consistency and convenience. The Company continually strives to improve its performance in each of these areas and to create additional points of differentiation versus the competition.
Mission and Strategies:
The Company's long-term mission is to create guests for life. To successfully achieve our mission and build a winning organization, we must help our stylists have successful and satisfying careers, which will drive great guest experiences and in turn, guests for life. Over the last year we simplified and focused the way we delineate our key strategies, our priorities and efforts around them remain the same and are well aligned, focusing on people, processes and metrics to drive execution and performance. Our key strategies follow:
1.
Earn the Hearts and Minds of Our Team
2.
Develop Positive, Professional and High Performing Salon Leaders
3.
Drive Guest Trial and Loyalty
4.
Standardize Operating Procedures Across Brands
Our stylists' ability to serve our guests in a professional, courteous, and friendly manner is the most critical element of our service model in cultivating strong guest relationships. Great stylists, coupled with high quality service, convenience, affordability, an inviting salon appearance and atmosphere, and comprehensive retail assortments create guests for life. We are committed to providing an outstanding guest experience that drives guest loyalty and repeat business. To that end, we are investing in a number of areas focused on delivering that promise and helping our stylists have successful careers, including investments in organization, training and technology.
Stylists
Creating an organization where stylists can have successful and satisfying careers leads to improved execution, and in turn, great guest experiences.
Field Leadership. In fiscal year 2014, we completed the reorganization of our field organization to enable localized mentoring and decision making, improve geographic proximity and increase local market efficiency. Development of our field leaders is a high priority because stylists depend on their salon and field leaders for coaching, mentoring and motivation. We developed training curriculum to serve as the foundation for ongoing leadership development. Role clarity and talent assessments help us identify ways to develop and upgrade field leadership. Execution disciplines are used to drive accountability, execution and business performance. Incentives are designed to align field interests with those of the Company's shareholders by rewarding behaviors focused on profitable revenue growth. This new organization structure also provides a clear career path for our people who desire to ascend within the Company.
Training. Our training program will become a key point of difference in attracting and retaining stylists. Stylists place a tremendous amount of importance in ongoing development of their craft. They deliver a superior experience for our guests when they are well trained technically and experiencially. We employ technical trainers who provide new hire training for stylists joining the Company from beauty schools and training for all stylists in current beauty care and styling trends. We supplement internal training with targeted vendor training and external trainers who bring specialized expertise to our stylists. We have begun to utilize training materials to help all levels of field employees navigate the running of a salon. Our experiential training program will provide stylists with essential elements of guest service training within the context of brand positions.
 Recruiting.     Ensuring we keep our salons fully staffed with great stylists is critical to our success. To that end, we are enhancing our recruiting efforts across all levels within our organization. We are in the process of proactively cultivating a pipeline of field leaders through succession planning and recruitment venues from within and outside the salon industry. We are also leveraging beauty school relationships and participating in job fairs and industry events.
Technology.    The recent installation of a new point-of-sale (POS) systems and salon workstations throughout North America enables communication with salons and stylists, delivery of online and digital training to stylists, real-time salon level analytics on guest retention, wait times, stylist productivity, and salon performance. We are also using technology to provide asset protection dashboards and analytics to help prioritize efforts against our most compelling opportunities to reduce loss in our salons.

5


Guests
Great stylists, coupled with high quality service, convenience, affordability, an inviting salon appearance and atmosphere, and comprehensive retail assortments, create guests for life.
Convenience.    Our different salon concepts enable our guests to select different service scheduling options based upon their preference. In the value category, the ability to serve walk-in appointments and minimize guest wait times is an essential element in delivering upon convenience. We have invested in staffing by increasing stylists' hours and have begun to optimize schedules and leverage recently installed point-of-sale systems to help us balance stylist hours with guest traffic and manage guest wait times. In the premium category, our salons generally schedule appointments in advance of service. Our salons are located in high-traffic strip centers, Walmart Supercenters and shopping malls, with guest parking and easy access, and are generally open seven days per week, offering guests a variety of convenient ways to fulfill their beauty needs.
Affordability.    The Company strives to offer an exceptional value for its services. In the value category, our guests expect outstanding service at affordable prices. These expectations are met with average service transactions ranging from $16 to $20. In the premium category, our guests expect upscale, full service beauty services at reasonable prices. Average service transactions approximate $45 in this category. Pricing decisions are considered on a market-by-market basis and established based on local conditions.
Salon Appearance and Atmosphere.    The Company's salons range from 500 to 5,000 square feet, with the typical salon approximating 1,200 square feet. Our salon repairs and maintenance program is designed to ensure we invest annually in salon cleanliness and safety, as well as in maintaining the normal operation of our salons. Our annual capital expenditures include funds to refresh the appeal and comfort of our salons.
Retail Assortments.    The Company's salons sell nationally recognized hair care and beauty products, as well as a complete assortment of own-branded products. Retail products offered by the Company are intended to be sold only through professional salons, and complement its salon services business. The Company's stylists are compensated and regularly trained to sell hair care and beauty products to their guests. Additionally, guests are encouraged to purchase products after stylists demonstrate their efficacy by using them in the styling of our guests' hair. The top selling brands within the Company's retail assortment include Biolage, Paul Mitchell, Regis designLINE, Redken, Nioxin, Tigi, It's a 10, Sexy Hair Concepts, Kenra, and Moroccanoil.
Technology.    The new POS systems increase our ability to collect guest and transactional data and enable the Company to invest in Guest Relationship Management, gaining insights into guest behavior, communicating with guests and incenting return visits. Leveraging this technology allows us to monitor guest retention and to survey our guests for feedback on improving the guest experience, and allows guests to use mobile apps to schedule appointments, view wait times and interact in other ways with salons.
Marketing.    The Company is focused on driving local traffic at the most efficient cost. This includes leveraging media, guest relationship management programs, digital channels, local tactical efforts (e.g., couponing) among other programs.  Traffic driving efforts are targeted vs. a one-size-fits all approach. Annual traffic plans are based on seasonality, consumer mindset, competitive positioning and return on investment. The Company continually reallocates marketing investments into vehicles with known, strong returns.  
Salon Support
Our corporate headquarters is referred to as Salon Support. This acknowledges that creating guests for life mandates a service-oriented, guest-focused mentality in supporting our field organization to grow our business profitably.
Organization.    In addition to investments made by the Company to reorganize the field organization and to help our stylists develop professionally, Salon Support and associated priorities are aligned to our new field structure to enhance the effectiveness and efficiency of the service provided to our field organization. During fiscal year 2014, we enhanced Salon Support capabilities in several areas. We created a human resources organization to help transform the Company into an organization where stylists can have successful and satisfying careers. We enhanced our asset protection capabilities by building a strong asset protection team and establishing standard operating procedures to support field and salon leaders.
Simplification.    Since fiscal year 2012, the Company has been evaluating its portfolio of assets, investments, and businesses, with the strategic objective of simplifying our business model, focusing on our core business of operating beauty salons and improving our long-term profitability and maximizing shareholder value. This evaluation led to the sale of our Hair Club and Provalliance businesses during fiscal year 2013. The Company also standardized retail plan-o-grams and eliminated products in an effort to simplify and manage our ongoing retail inventory assortment. Simplification and standardization reduces inventory management time in our salons and throughout our supply chain and enables distribution efficiencies.

6


Ongoing simplification focuses on improving the way we plan and execute across our many brands. Standardizing processes and procedures around scheduling, day to day salon execution and reporting will make it easier to lead and execute in a multi-unit organization.
Our organization also remains focused on identifying and driving cost saving and profit enhancing initiatives.
Salon Concepts:
The Company's salon concepts focus on providing high quality hair care services and professional products, primarily to the mass market. A description of the Company's salon concepts are listed below:
SmartStyle.    SmartStyle salons offer a full range of custom styling, cutting, and hair coloring, as well as professional hair care products and are located exclusively in Walmart Supercenters. SmartStyle has a walk-in guest base with value pricing. Service revenues represent approximately 69% of total company-owned SmartStyle revenues. Additionally, the Company has 126 franchised Cost Cutters salons located in Walmart Supercenters.
Supercuts.    Supercuts salons provide consistent, high quality hair care services and professional products to its guests at convenient times and locations at value prices. This concept appeals to men, women, and children. Service revenues represent approximately 91% of total company-owned Supercuts revenues. Additionally, the Company has 1,213 franchised Supercuts locations.
MasterCuts.    MasterCuts salons are a full service, mall based salon group which focuses on the walk-in consumer who demands moderately priced hair care services. MasterCuts salons emphasize quality hair care services, affordable prices, and time saving services for the entire family. These salons offer a full range of custom styling, cutting and hair coloring services, as well as professional hair care products. Service revenues comprise approximately 82% of the concept's total revenues.
Other Value.    Other Value salons are made up of acquired regional company-owned salon groups operating under the primary concepts of Hair Masters, Cool Cuts for Kids, Style America, First Choice Haircutters, Famous Hair, Cost Cutters, BoRics, Magicuts, Holiday Hair, Head Start, Fiesta Salons, and TGF, as well as other concept names. Most concepts offer a full range of custom hairstyling, cutting and coloring services, as well as hair care products. Hair Masters offers moderately-priced services, while the other concepts primarily cater to time-pressed, value-oriented families. Service revenues represent approximately 90% of total company-owned Other Value salons revenues. Additionally, the Company has 840 franchised locations of Other Value salons. Other Value salons were previously referred to as Promenade salons.
Regis Salons.    Regis Salons are primarily mall based, full service salons providing complete hair care and beauty services aimed at moderate to upscale, fashion conscious consumers. At Regis Salons both appointments and walk-in guests are common. These salons offer a full range of custom styling, cutting and hair coloring services, as well as professional hair care products. Service revenues represent approximately 82% of the concept's total revenues. Regis Salons compete in their existing markets primarily by providing high quality services. Included within the Regis Salon concept are various other trade names, including Carlton Hair, Sassoon, Hair by Stewarts, Hair Excitement, and Renee Beauty.
International Salons.    The Company's International salons are comprised of company-owned salons operating in the United Kingdom primarily under the Supercuts, Regis, and Sassoon concepts. These salons offer similar levels of service as our North American salons. Sassoon is one of the world's most recognized names in hair fashion and appeals to women and men looking for a prestigious full service hair salon. Salons are usually located in prominent high-traffic locations and offer a full range of custom hairstyling, cutting and coloring services, as well as professional hair care products. Service revenues comprise approximately 75% of total company-owned international locations.
The tables on the following pages set forth the number of system wide locations (company-owned and franchised) and activity within the various salon concepts.

7


System-wide location counts(1)(2)
 
 
June 30,
 
 
2014
 
2013
 
2012
Company-owned salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
2,574

 
2,490

 
2,441

Supercuts
 
1,176

 
1,210

 
1,228

MasterCuts
 
505

 
532

 
569

Other Value
 
1,846

 
1,990

 
2,133

Regis
 
816

 
862

 
953

Total North American salons(3)
 
6,917


7,084


7,324

Total International salons(4)
 
360

 
351

 
398

Total, Company-owned salons
 
7,277


7,435


7,722

Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
126

 
123

 
122

Supercuts
 
1,213

 
1,116

 
1,040

Other Value
 
840

 
843

 
854

Total North American salons
 
2,179


2,082


2,016

Total International salons(4)
 

 

 

Total, Franchised salons
 
2,179


2,082


2,016

Ownership interest locations:
 
 
 
 
 
 
Equity ownership interest locations(5)
 
218

 
246

 
2,811

Grand Total, System-wide
 
9,674


9,763


12,549


Constructed Locations (net relocations)
 
 
Fiscal Years
 
 
2014
 
2013
 
2012
Company-owned salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
85

 
51

 
49

Supercuts
 
13

 
45

 
56

MasterCuts
 
1

 
3

 
2

Other Value
 
4

 
39

 
43

Regis
 
1

 
3

 
3

Total North American salons(3)
 
104


141


153

Total International salons(4)
 
23

 
12

 
13

Total, Company-owned salons
 
127


153


166

Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 
3

 
1

 
2

Supercuts
 
94

 
70

 
65

Other Value
 
37

 
47

 
37

Total North American salons
 
134


118


104

Total International salons(4)
 

 

 

Total, Franchised salons
 
134


118


104


8


Closed Locations
 
 
Fiscal Years
 
 
2014
 
2013
 
2012
Company-owned salons:
 
 

 
 

 
 

SmartStyle/Cost Cutters in Walmart stores
 
(1
)
 
(2
)
 
(1
)
Supercuts
 
(44
)
 
(49
)
 
(48
)
MasterCuts
 
(27
)
 
(40
)
 
(21
)
Other Value
 
(126
)
 
(179
)
 
(174
)
Regis
 
(47
)
 
(94
)
 
(73
)
Total North American salons(3)
 
(245
)

(364
)

(317
)
Total International salons(4)
 
(14
)
 
(59
)
 
(16
)
Total, Company-owned salons
 
(259
)

(423
)

(333
)
Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart Stores
 

 

 

Supercuts
 
(19
)
 
(11
)
 
(12
)
Other Value
 
(44
)
 
(58
)
 
(39
)
Total North American salons(3)
 
(63
)

(69
)

(51
)
Total International salons(4)
 

 

 

Total, Franchised salons
 
(63
)

(69
)

(51
)
Conversions (including net franchisee transactions)(6)
 
 
Fiscal Years
 
 
2014
 
2013
 
2012
Company-owned salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart stores
 

 

 

Supercuts
 
(3
)
 
(14
)
 
61

MasterCuts
 
(1
)
 

 

Other Value
 
(22
)
 
(3
)
 
(57
)
Regis
 

 

 

Total North American salons(3)
 
(26
)

(17
)

4

Total International salons(4)
 

 

 

Total, Company-owned salons
 
(26
)

(17
)

4

Franchised salons:
 
 
 
 
 
 
SmartStyle/Cost Cutters in Walmart Stores
 

 

 

Supercuts
 
22

 
17

 

Other Value
 
4

 

 
(4
)
Total North American salons(3)
 
26


17


(4
)
Total International salons(4)
 

 

 

Total, Franchised salons
 
26


17


(4
)
_______________________________________________________________________________

(1)
In April 2013, the Company sold Hair Club, which operated 98 locations as of June 30, 2012. These locations are excluded from system-wide location counts presented.

(2)
During fiscal 2012, the Company acquired two locations that were categorized within the Supercuts (one location) and International (one location) salon concepts and a franchise network of 31 locations that was categorized within the Other Value salon concept. No salons were acquired in fiscal 2013 and 2014.


9


(3)
The North American Value operating segment is comprised primarily of the SmartStyle, Supercuts, MasterCuts and Other Value salon brands. The North American Premium operating segment is comprised primarily of the Regis salon brands.

(4)
Canadian and Puerto Rican salons are included in the North American salon totals.

(5)
On September 27, 2012, the Company sold its equity interest in Provalliance.

(6)
During fiscal years 2014, 2013, and 2012, the Company acquired two, zero, and 11 salon locations, respectively, from franchisees. During fiscal years 2014, 2013, and 2012, the Company sold 28, 17, and seven salon locations, respectively, to franchisees.
Salon Franchising Program:
General.    The Company has various franchising programs supporting its 2,179 franchised salons as of June 30, 2014, consisting mainly of Supercuts, Cost Cutters, First Choice Haircutters, and Magicuts. These salons have been included in the discussions regarding salon counts and concepts.
The Company provides its franchisees with a comprehensive system of business training, stylist education, site approval and lease negotiation, construction management services, professional marketing, promotion, and advertising programs, and other forms of support designed to help the franchisee build a successful business.
Standards of Operations.    The Company does not control the day to day operations of its franchisees, including employment, benefits and wage determination, establishing prices to charge for products and services, business hours, personnel management, and capital expenditure decisions. However, the franchise agreements afford certain rights to the Company, such as the right to approve locations, suppliers and the sale of a franchise. Additionally, franchisees are required to conform to the Company's established operational policies and procedures relating to quality of service, training, salon design and decor, and trademark usage. The Company's field personnel make periodic visits to franchised salons to ensure that they are operating in conformity with the standards for each franchising program. All of the rights afforded to the Company with regard to franchised operations allow the Company to protect its brands, but do not allow the Company to control the franchise operations or make decisions that have a significant impact on the success of the franchised salons. The Company’s franchise agreements do not give the Company any right, ability or potential to determine or otherwise influence any terms and/or conditions of employment of franchisees’ employees (except for those, if any, that are specifically related to quality of service, training, salon design, decor, and trademark usage), including, but not limited to, franchisees’ employees’ wages, employee benefits, hours of work, scheduling, leave programs, seniority rights, promotional or transfer opportunities, layoff/recall arrangements, grievance and dispute resolution procedures, uniforms, and/or discipline and discharge.
Franchise Terms.    Pursuant to a franchise agreement with the Company, each franchisee pays an initial fee for each store and ongoing royalties to the Company. In addition, for most franchise concepts, the Company collects advertising funds from franchisees and administers the funds on behalf of the concept. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures, equipment, supplies, inventory, payroll costs and certain other items, including initial working capital. The majority of franchise agreements provide the Company a right of first refusal if the store is to be sold and the franchisee must obtain the Company's approval in all instances where there is a sale of a franchise location.
Additional information regarding each of the major franchised brands is listed below:
Supercuts
Supercuts franchise agreements have a perpetual term, subject to termination of the underlying lease agreement or termination of the franchise agreement by either the Company or the franchisee. All new franchisees enter into development agreements, which give them the right to enter into a defined number of franchise agreements. These franchise agreements are site specific. The development agreement provides limited territorial protection for the stores developed under those franchise agreements. Older franchisees have grandfathered expansion rights which allow them to develop stores outside of development agreements and provide them with greater territorial protections in their markets. The Company has a comprehensive impact policy that resolves potential conflicts among Supercuts franchisees and/or the Company's Supercuts locations regarding proposed store sites.
Cost Cutters, First Choice Haircutters, and Magicuts
The majority of existing Cost Cutters franchise agreements have a 15 year term with a 15 year option to renew (at the option of the franchisee), while the majority of First Choice Haircutters franchise agreements have a ten year term with a five year option to renew. The majority of Magicuts franchise agreements have a term equal to the greater of five years or the

10


current initial term of the lease agreement with an option to renew for two additional five year periods. The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide limited territorial protection.
Franchisee Training.    The Company provides new franchisees with training, focusing on the various aspects of store management, including operations, personnel management, marketing fundamentals, and financial controls. Existing franchisees receive training, counseling and information from the Company on a continuous basis. The Company provides store managers and stylists with extensive technical training for Supercuts franchises.
Salon Markets and Marketing:
Company-Owned Salons
The Company utilizes various marketing vehicles for its salons, including traditional advertising, guest relationship management, digital channels and promotional/pricing based programs. A predetermined allocation of revenue is used for such programs. Most marketing vehicles including radio, print, online and television advertising are developed and supervised at the Company's Salon Support headquarters; however, the majority of advertising is created for our local markets. The Company reviews its brand strategy with the intent to create more clear communication platforms, identities and differentiation points for our brands to drive consumer preference.
Franchised Salons
Most franchise concepts maintain separate advertising funds that provide comprehensive marketing and sales support for each system. The Supercuts advertising fund is the Company's largest advertising fund and is administered by a council consisting of primarily franchisee representatives. The council has overall control of the advertising fund's expenditures and operates in accordance with terms of the franchise operating and other agreements. All stores, company-owned and franchised, contribute to the advertising funds, the majority of which are allocated to the contributing market for media placement and local marketing activities. The remainder is allocated for the creation of national advertising and system-wide activities.
Affiliated Ownership Interests:
The Company maintains ownership interests in beauty schools and salons. The primary ownership interest is a 54.5% interest in Empire Education Group, Inc. (EEG), which is accounted for as an equity method investment. See Note 1 to the Consolidated Financial Statements. EEG operates accredited cosmetology schools. Contributing the Company's beauty schools in fiscal year 2008 to EEG leveraged EEG's management expertise, while enabling the Company to maintain a vested interest in the beauty school industry. Additionally, we utilize our EEG relationship to recruit stylists straight from beauty school.
In addition, the Company has a 27.1% ownership interest in MY Style, which is accounted for as a cost method investment. MY Style operates salons in Japan.
Corporate Trademarks:
The Company holds numerous trademarks, both in the United States and in many foreign countries. The most recognized trademarks are "SmartStyle," "Supercuts," "MasterCuts," "Regis Salons," "Cost Cutters," "Hair Masters," "First Choice Haircutters," and "Magicuts."
"Sassoon" is a registered trademark of Procter & Gamble. The Company has a license agreement to use the Sassoon name for existing salons and academies and new salon development.
Corporate Employees:
During fiscal year 2014, the Company had approximately 49,000 full and part-time employees worldwide, of which approximately 43,000 employees were located in the United States. None of the Company's employees is subject to a collective bargaining agreement and the Company believes that its employee relations are amicable.


11


Executive Officers:
Information relating to Executive Officers of the Company follows:
Name
 
Age
 
Position
Daniel Hanrahan
 
57

 
President and Chief Executive Officer
Eric Bakken
 
47

 
Executive Vice President, Chief Administrative Officer and General Counsel
Jim Lain
 
50

 
Executive Vice President, Chief Operating Officer
Steven Spiegel
 
52

 
Executive Vice President and Chief Financial Officer
Heather Passe
 
43

 
Senior Vice President and Chief Marketing Officer
Doug Reynolds
 
58

 
Senior Vice President and Chief Information Officer
Carmen Thiede
 
47

 
Senior Vice President and Chief Human Resources Officer
Daniel Hanrahan has served as President and Chief Executive Officer since August 2012. He most recently served as President of Celebrity Cruises, a subsidiary of Royal Caribbean Cruises Ltd., from February 2005 to July 2012, and as its President and Chief Executive Officer since September 2007. Mr. Hanrahan has served on the Board of Directors of Cedar Fair, L.P., an amusement-resort operator, since 2012 and is a member of its Audit Committee and Compensation Committee.
Eric Bakken has served as Executive Vice President, Chief Administrative Officer and General Counsel since April 2013. He served as Executive Vice President, General Counsel and Business Development and Interim Corporate Chief Operating Officer from 2012 to April 2013, and performed the function of principal executive officer between July 2012 and August 2012, Executive Vice President from 2010 to 2012, Senior Vice President from 2006 to 2009, General Counsel from 2004 to 2006, as Vice President, Law from 1998 to 2004 and as a lawyer to the Company from 1994 to 1998.
Jim Lain has served as Executive Vice President and Chief Operating Officer since November 2013.
Steven Spiegel has served as Executive Vice President and Chief Financial Officer since December 2012.
Heather Passe has served as Senior Vice President and Chief Marketing Officer since July 2012.
Doug Reynolds has served as Senior Vice President and Chief Information Officer since May 2012.
Carmen Thiede has served as Senior Vice President and Chief Human Resources Officer since October 2013.
Governmental Regulations:
The Company is subject to various federal, state, local and provincial laws affecting its business as well as a variety of regulatory provisions relating to the conduct of its beauty related business, including health and safety.
In the United States, the Company's franchise operations are subject to the Federal Trade Commission's Trade Regulation Rule on Franchising (the FTC Rule) and by state laws and administrative regulations that regulate various aspects of franchise operations and sales. The Company's franchises are offered to franchisees by means of an offering circular/disclosure document containing specified disclosures in accordance with the FTC Rule and the laws and regulations of certain states. The Company has registered its offering of franchises with the regulatory authorities of those states in which it offers franchises and in which such registration is required. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states and, in certain cases, apply substantive standards to this relationship. Such laws may, for example, require that the franchisor deal with the franchisee in good faith, may prohibit interference with the right of free association among franchisees and may limit termination of franchisees without payment of reasonable compensation. The Company believes that the current trend is for government regulation of franchising to increase over time. However, such laws have not had, and the Company does not expect such laws to have, a significant effect on the Company's operations.
In Canada, the Company's franchise operations are subject to franchise laws and regulations in the provinces of Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island. The offering of franchises in Canada occurs by way of a disclosure document, which contains certain disclosures required by the applicable provincial laws. The provincial franchise laws and regulations primarily focus on disclosure requirements, although each requires certain relationship requirements such as a duty of fair dealing and the right of franchisees to associate and organize with other franchisees.
The Company believes it is operating in substantial compliance with applicable laws and regulations governing all of its operations.

12


The Company maintains an ownership interest in EEG. Beauty schools derive a significant portion of their revenue from student financial assistance originating from the U.S. Department of Education's Title IV Higher Education Act of 1965. For the students to receive financial assistance at the school, the beauty schools must maintain eligibility requirements established by the U.S. Department of Education.
Financial Information about Foreign and North American Operations
Financial information about foreign and North American markets is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 and segment information in Note 14 to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.
Available Information
The Company is subject to the informational requirements of the Securities and Exchange Act of 1934 (Exchange Act). The Company therefore files periodic reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports may be obtained by visiting the Public Reference Room of the SEC at 100 F Street NE, Washington, DC 20549, or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information.
Financial and other information can be accessed in the Investor Information section of the Company's website at www.regiscorp.com. The Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

Item 1A.    Risk Factors
The significant initiatives we have implemented and recent changes in our management and organizational structure may continue to adversely impact our operating results.
During fiscal year 2013, the Company began executing upon a number of significant foundational initiatives to support and focus on its business strategies to return the Company to sustainable long-term growth and profitability. The Company has since rolled out new POS systems and salon workstations in all of its North American salons, restructured the Company’s North American field organization, standardized plan-o-grams and simplified its retail product assortments, and enhanced its asset protection capabilities. In addition, the Company’s management engaged in a strategic review of non-core assets to focus on our core business of operating beauty salons, improving long-term profitability and maximizing shareholder value.
These initiatives correspond with changes in our executive management team over the last two years. These changes have driven change in our business and our mid-level leadership, which will take time to produce consistent results. In addition, now that our new executive management team is substantially in place, it could be disruptive to our business if one of our executive management members left the Company with little notice.
During fiscal year 2014, our operating results were negatively impacted as a result of the foundational changes the Company implemented in the fourth quarter of fiscal year 2013. During the twelve months ended June 30, 2014, our same-store sales declined 4.8% from the comparable prior period. During the fiscal year ended June 30, 2014, we recorded a non-cash goodwill impairment charge of $34.9 million associated with the Regis salon concept, non-cash long-lived asset impairment charges of $18.3 million and $84.4 million of non-cash charges to establish a valuation allowance against the United States (U.S.) and United Kingdom (U.K.) deferred tax assets. If we are unable to reverse these trends and effectively execute upon our foundational initiatives, our financial results may continue to be negatively affected and we may be required to take future impairment charges. Such impairments could be material to our consolidated balance sheet and results of operations.
If we continue to have negative same-store sales our business and results of operations may be affected.
Our success depends, in part, upon our ability to improve sales, as well as both cost of service and product and operating margins. Comparable same-store sales are affected by average ticket and same-store guest visits. A variety of factors affect same-store guest visits, including the guest experience, fashion trends, competition, current economic conditions, changes in our product assortment, the effectiveness of marketing programs and weather conditions. These factors may cause our comparable same-store sales to differ materially from prior periods and from our expectations. Our comparable same-store sales results for fiscal year 2014 declined 4.8% compared to fiscal year 2013. If negative same-store sales continue and we are unable to offset the impact with operational savings, our financial results may be further affected and we may be required to take impairment charges. Such impairments could be material to our consolidated balance sheet and results of operations. During fiscal years 2014 and 2012, we recorded goodwill impairment charges of $34.9 and $67.7 million, respectively, both

13


associated with our Regis salon concept. During fiscal years 2014, 2013 and 2012, we recorded fixed asset impairment charges of $18.3, $8.2 and $6.6 million, respectively.
Our business is based on the success of our salons which is driven by the success of our stylists. It is important for us to attract, train and retain talented stylists.
Guest loyalty is highly dependent upon the stylist who is providing services to our guests. Our main objective is to have our guests leave feeling satisfied and wanting to return. To ensure our guests are receiving the best possible care, we need to focus on attracting, training and retaining highly qualified stylists. To continue to be successful in the future we will need to continue to offer competitive wages, benefits and education and training programs to attract and retain talented stylists. Any shortcomings by stylists or the training and guidance they receive, particularly an issue affecting the quality of the guest service experience or compliance with safety and health regulations, may be attributed to the Company as a whole, thus damaging our reputation and brand equity and potentially affecting our results of operations.
Changes in regulatory and statutory laws, such as increases in the minimum wage and changes that make collective bargaining easier, may result in increased costs to our business.
With 9,674 locations and approximately 49,000 employees worldwide, our financial results can be adversely impacted by regulatory or statutory changes in laws. Due to the number of people we employ, laws that increase minimum wage rates, employment taxes or increase costs to provide employee benefits may result in additional costs to our Company.
A number of states and cities in which we do business have recently increased or are considering increasing the minimum wage, with increases generally phased over several years depending upon the size of the employer. Minimum wage rate increases could significantly increase our costs, and our ability to offset increases in minimum wage rates through price increases is limited. In addition, changes in labor laws could increase the likelihood of some or all of our employees being subjected to greater organized labor influence. If a significant portion of our employees were to become unionized, it could have an adverse effect on our business and financial results.
Increases in the minimum wage and unionization could also have an adverse effort on the performance of our franchisees, especially if our franchisees are treated as a "joint employer" with us by the National Labor Relations Board (NLRB) or as a large employer under minimum wage statues because of their affiliation with us. With respect to the NLRB, it is anticipated that its current standard for joint employer relationships may become more lenient and, as such,we may face an increased risk of being alleged to be a joint employer with our franchisees. In addition, we must comply with state employment laws, including the California Labor Code, which has stringent requirements and penalties for non-compliance.
We are also subject to the federal laws and regulations affecting public companies and governing the franchisor-franchisee relationship, among others. Compliance with new, complex and changing laws may cause our expenses to increase. In addition, any non-compliance with laws or regulations could result in penalties, fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products, which could adversely affect our business, financial condition and results of operations.
Changes to healthcare laws in the U.S. may increase the number of employees who participate in our healthcare plans, which may significantly increase our healthcare costs and negatively impact our operating results.
We offer comprehensive healthcare coverage to eligible employees in the United States. Historically, a majority of our eligible employees do not participate in our healthcare plans. Due to recent changes to healthcare laws in the United States pursuant to the Affordable Care Act (ACA), it is possible that enrollment in the Company’s healthcare plans may increase as a result of provisions regarding automatic enrollment of new eligible employees. Furthermore, potential fees and or penalties may be assessed as a result of individuals either not being offered healthcare coverage within a limited timeframe or if coverage offered does not meet minimum care and affordability standards. An increase in the number of employees who elect to participate in our healthcare plans or if the Company fails to comply with one or more provisions of ACA may significantly increase our healthcare-related costs and negatively impact our operating results.
If we fail to protect the security of sensitive information about our guests, employees, vendors or company, we could be subject to negative publicity, costly government enforcement actions or private litigation and our reputation could suffer.
The nature of our business involves processing, transmission and storage of personal information about our guests as well as employees, vendors and our Company. Cyber-attacks designed to gain access to sensitive information by breaching mission critical systems of large organizations are constantly evolving, and high profile electronic security breaches leading to unauthorized release of sensitive guest information have occurred recently at a number of large U.S. companies. Our efforts to protect sensitive guest and employee information may not be successful in preventing a breach in our systems. As a result of a breach in our systems, our guests could lose confidence in our ability to protect their personal information, which could cause

14


them to stop visiting our salons altogether. Such events could lead to lost future sales and adversely affect our results of operations. In addition, as the regulatory environment relating to retailers and other companies' obligation to protect sensitive data becomes stricter, a material failure on our part to comply with applicable regulations could subject us to fines or other regulatory sanctions and potentially to lawsuits. These laws are changing rapidly and vary between jurisdictions. In addition, while our franchisees are independently responsible for data security at franchised locations, a breach of guest or vendor data at a franchised location could also negatively affect public perception of our brands.
We rely heavily on our management information systems. If our systems fail to perform adequately or if we experience an interruption in their operation, our results of operations may be affected.
The efficient operation of our business is dependent on our management information systems. We rely heavily on our management information systems to collect daily sales information and guest demographics, generate payroll information, monitor salon performance, manage salon staffing and payroll costs, inventory control and other functions. Certain of our management information systems are developed and maintained by external vendors, including our POS system. The failure of our management information systems to perform as we anticipate, or to meet the continuously evolving needs of our business, could disrupt our business and may adversely affect our operating results.
Failure to control costs may adversely affect our operating results.
We must continue to control our expense structure. Failure to manage our cost of product, labor and benefit rates, advertising and marketing expenses, operating lease costs, other store expenses or indirect spending could delay or prevent us from achieving increased profitability or otherwise adversely affect our operating results.
We rely on external vendors.
We rely on various external vendors for products and services critical to our operations. Our dependence on vendors exposes us to reputational, financial, and compliance risk. Our vendors are also responsible for the security of certain Company data. In the event that one of our key vendors becomes unable to continue to provide products and services, or their systems fail or are compromised, we may suffer operational difficulties and financial loss.
Changes in manufacturers' choice of distribution channels may negatively affect our revenues.
The retail products we sell are licensed to be carried exclusively by professional salons. The products we purchase for sale in our salons are purchased pursuant to purchase orders, as opposed to long-term contracts and generally can be terminated by the producer without much advance notice. Should our product manufacturers decide to utilize other distribution channels, such as large discount retailers, it could negatively impact product sales revenue. In addition as e-commerce evolves and expands, our product sales could negatively be impacted if we are unable to sell retail products in a similar fashion.
If we fail to comply with any of the covenants in our financing arrangements, we may not be able to access our existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness.
We have several financing arrangements that contain financial and other covenants. If we fail to comply with any of the covenants, it may cause a default under one or more of our financing arrangements, which could limit our ability to obtain additional financing under our existing credit facility, require us to pay higher levels of interest or accelerate our obligations to repay our indebtedness.
Our continued success depends in part on the success of our franchisees, who operate independently.
As of June 30, 2014, approximately 23% of our salons are franchised locations. We derive revenues associated with our franchised locations from royalties, service fees and product sales to franchised locations. Our financial results are therefore dependent in part upon the operational and financial success of our franchisees. As we increase our focus on our franchise business, our dependence on our franchisees grows.
We have limited control over how our franchisees’ businesses are run. Though we have established operational standards and guidelines, they own, operate and oversee the daily operations of their salon locations. If franchisees do not successfully operate their salons in compliance with our standards, our brand reputation and image could be harmed and our financial results could be affected.
In addition, our franchises are subject to the same general economic risks as our Company, and their results are influenced by competition, market trends, and disruptions in their markets due to severe weather and other external events. They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially since many of them are small businesses with much more limited access to financing than our Company, or by the limited supply of favorable real estate for new salon locations. A deterioration in the financial results of our franchisees, or a failure of our

15


franchisees to renew their franchise agreements, could adversely affect our operating results through decreased royalty payments, fees and product revenues.   
If we are not able to successfully compete in our business markets, our financial results may be affected.
Competition on a market by market basis remains challenging as many smaller chain competitors are franchise systems with local operating strength in certain markets. Therefore, our ability to attract guests, raise prices and secure suitable locations in certain markets can be adversely impacted by this competition. If we are not able to successfully compete, our ability to grow same-store sales and increase our revenue and earnings may be impaired.
Changes in the general economic environment may impact our business and results of operations.
Changes to the U.S., Canadian and United Kingdom economies have an impact on our business. General economic factors that are beyond our control, such as interest rates, exchange rates, recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, extreme weather patterns, other casualty events and other matters that influence consumer confidence and spending, may impact our business. In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.
Failure to simplify and standardize our operating processes across our brands could have a negative impact on our financial results.
Standardization of operating processes across our brands, marketing and products will enable us to simplify our operating model and decrease our costs. Failure to do so could adversely impact our ability to grow revenue and realize further efficiencies within our results of operations.
Changes in our key relationships may adversely affect our operating results.
We maintain key relationships with certain companies, including Walmart. In particular, we have 2,700 SmartStyle/Cost Cutters salons within Walmart locations, including 88 salons opened during fiscal year 2014. The continued operation and growth of this business is dependent on our relationship with Walmart. In addition, our company-owned locations are concentrated with leases with certain major regional and national landlords. Termination or modification of any of these relationships could significantly reduce our revenues and have a material and adverse impact on our business, our operating results and our ability to grow.
If our investment with Empire Education Group is unsuccessful, our financial results may be affected.
We have a joint venture arrangement with Empire Education Group (EEG), an operator of accredited cosmetology schools. If EEG is unwilling or unable to devote their financial resources or marketing and operational capabilities to our joint venture, or if our joint venture is terminated, we may not be able to realize anticipated profits and our business could be materially adversely affected. In addition, regulatory changes in the for-profit secondary educational market have had negative business impacts including declines in enrollment, revenues and profitability. If our joint venture arrangement with EEG is not successful, we may have a limited ability to terminate or modify this arrangement. If our joint venture with EEG is terminated, there can be no assurance that we will be able to attract new joint venture partners to continue the activities or to operate that business independently.
During fiscal years 2013 and 2012, we recorded noncash impairments of $17.9 and $19.4 million, respectively, related to our investment in EEG. Due to economic, regulatory and other factors, including declines in enrollment, revenue and profitability in the for-profit secondary educational market, we may be required to take additional noncash impairment charges related to our investments and such noncash impairments could be material to our consolidated balance sheet and results of operations. During fiscal years 2014, 2013, and 2012, we recorded our share of pre-tax noncash impairment charges recorded by EEG for goodwill and fixed and intangible assets of $21.2, $2.1 and $8.9 million, respectively. EEG may be required to take additional noncash impairment charges related to long-lived assets and goodwill 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 our 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.
Changes to interest rates and foreign currency exchange rates may impact our results from operations.
Changes in interest rates and foreign currency exchange rates will have an impact on our expected results from operations. Historically, we have managed the risk related to fluctuations in these rates through the use of fixed rate debt instruments and other financial instruments.
Changes in fashion trends may impact our revenue.

16


Changes in consumer tastes and fashion trends can have an impact on our financial performance.
Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
The Company's corporate offices are headquartered in a 170,000 square foot, three building complex in Edina, Minnesota that is owned by the Company.
The Company also operates small offices in Edina, Minnesota; New York, New York; Toronto, Canada; Coventry and London, England; and Chattanooga, Tennessee. These offices are occupied under long-term leases.
The Company owns distribution centers located in Chattanooga, Tennessee and Salt Lake City, Utah. The Chattanooga facility currently utilizes 230,000 square feet while the Salt Lake City facility utilizes 210,000 square feet. The Salt Lake City facility can be expanded to 290,000 square feet to accommodate future growth.
The Company operates all of its salon locations under leases or license agreements. Substantially all of its North American locations in regional malls are operating under leases with an original term of at least ten years. Salons operating within strip centers and Walmart Supercenters have leases with original terms of at least five years, generally with the ability to renew, at the Company's option, for one or more additional five year periods. Salons operating within department stores in Canada and Europe operate under license agreements, while freestanding or shopping center locations in those countries have real property leases comparable to the Company's North American locations.
The Company also leases the premises in which approximately 80% of our franchisees operate and has entered into corresponding sublease arrangements with the franchisees. These leases have a five year initial term and one or more five year renewal options. All lease costs are passed through to the franchisees. Remaining franchisees who do not enter into sublease arrangements with the Company negotiate and enter into leases on their own behalf.
None of the Company's salon leases are individually material to the operations of the Company and the Company expects that it will be able to renew its leases on satisfactory terms as they expire or identify and secure other suitable locations. See Note 8 to the Consolidated Financial Statements.
Item 3.    Legal Proceedings
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.
Item 4.    Mine Safety Disclosures
Not applicable.

PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchase of Equity Securities
Regis common stock is listed and traded on the New York Stock Exchange under the symbol "RGS."

17


The accompanying table sets forth the high and low closing bid quotations for each quarter during fiscal years 2014 and 2013 as reported by the New York Stock Exchange (under the symbol "RGS"). The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
As of August 12, 2014, Regis shares were owned by approximately 17,000 shareholders based on the number of record holders and an estimate of individual participants in security position listings. The common stock price was $14.46 per share on August 12, 2014.
 
 
Fiscal Years
 
 
2014
 
2013
Fiscal Quarter
 
High
 
Low
 
High
 
Low
1st Quarter
 
$
17.97

 
$
14.50

 
$
19.54

 
$
16.26

2nd Quarter
 
16.15

 
13.99

 
19.59

 
15.79

3rd Quarter
 
14.64

 
11.48

 
18.69

 
16.34

4th Quarter
 
14.20

 
12.62

 
19.14

 
16.04

The Company paid dividends of $0.06 per share per quarter during fiscal year 2013 and the first and second quarters of fiscal year 2014. 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.
The following graph compares the cumulative total shareholder return on the Company's stock for the last five years with the cumulative total return of the Standard and Poor's 500 Stock Index and the cumulative total return of a peer group index (the Peer Group) constructed by the Company. In addition, the Company has included the Standard and Poor's 400 Midcap Index and the Dow Jones Consumer Services Index in this analysis because the Company believes these two indices provide a comparative correlation to the cumulative total return of an investment in shares of Regis Corporation.
The Peer Group consists of the following companies: Advance Auto Parts, Inc., Boyd Gaming Corp., Brinker International, Inc., Outerwall, Inc. (formerly Coinstar, Inc.), Cracker Barrel Old Country Store, DineEquity, Inc., Fossil Group, Inc., Fred's, Inc., Keurig Green Mountain, Inc., H&R Block, Inc., Jack in the Box, Inc., Panera Bread Co., Penn National Gaming, Inc., Revlon, Inc., Sally Beauty Holdings, Inc., Service Corporation International, The Cheesecake Factory, Inc. and Ulta Salon, Cosmetics & Fragrance Inc. The Peer Group is a self-constructed peer group of companies that have comparable annual revenues, the guest service element is a critical component to the business and a target of moderate guests in terms of income and style, excluding apparel companies. The Peer Group is the same group of companies the Company utilized as its peer group for executive compensation purposes in fiscal years 2014 and 2013. Information regarding executive compensation will be set forth in the 2014 Proxy statement.
The comparison assumes the initial investment of $100 in the Company's Common Stock, the S&P 500 Index, the Peer Group, the S&P 400 Midcap Index and the Dow Jones Consumer Services Index on June 30, 2009 and that dividends, if any, were reinvested.

18


Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
June 2014

 
 
June 30,
 
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Regis
 
$
100.00

 
$
90.29

 
$
89.85

 
$
106.87

 
$
99.03

 
$
85.58

S & P 500
 
100.00

 
114.43

 
149.55

 
157.70

 
190.18

 
236.98

S & P 400 Midcap
 
100.00

 
124.93

 
174.13

 
170.07

 
212.90

 
266.63

Dow Jones Consumer Service Index
 
100.00

 
122.92

 
169.26

 
191.77

 
246.31

 
301.09

Peer Group
 
100.00

 
117.07

 
210.96

 
189.19

 
275.21

 
329.90

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, 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.

19


The Company repurchased the following common stock through its share repurchase program:
 
 
Fiscal Years
 
 
2014
 
2013
 
2012
Repurchased shares
 

 
909,175

 

Average Price (per share)
 
$

 
$16.32

 
$

Price range (per share)
 
$

 
$15.99 - $16.84

 
$

Total
 
$

 
$14.9 million

 
$


Item 6.    Selected Financial Data
Beginning with the period ended September 30, 2012 the Hair Restoration Centers operations were accounted for as discontinued operations. All periods presented reflect the Hair Restoration Centers as discontinued operations.
The following table sets forth selected financial data derived from the Company's Consolidated Financial Statements in Part II, Item 8. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 8, "Financial Statements and Supplementary Data", of this Report on Form 10-K.
 
 
Fiscal Years
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(Dollars in thousands, except per share data)
Revenues
 
$
1,892,437

 
$
2,018,713

 
$
2,122,227

 
$
2,180,181

 
$
2,216,648

Operating (loss) income(a)
 
(33,990
)
 
12,326

 
(2,167
)
 
(14,282
)
 
76,881

(Loss) income from continuing operations(a)
 
(137,080
)
 
4,166

 
(51,743
)
 
(20,939
)
 
25,728

(Loss) income from continuing operations per diluted share
 
(2.43
)
 
0.07

 
(0.91
)
 
(0.37
)
 
0.46

Dividends declared, per share
 
0.12

 
0.24

 
0.24

 
0.20

 
0.16

 
 
 
June 30,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(Dollars in thousands)
Total assets, including discontinued operations
 
$
1,415,949

 
$
1,390,492

 
$
1,571,846

 
$
1,805,753

 
$
1,919,572

Long-term debt and capital lease obligations, including current portion
 
293,503

 
174,770

 
287,674

 
313,411

 
440,029

_______________________________________________________________________________
(a)
The following significant items affected operating (loss) income and (loss) income from continuing operations:

During fiscal year 2014, the Company experienced significant disruption as result of foundational initiatives implemented at the end of fiscal year 2013 to turn around our business. As a result, the Company's financial performance during fiscal year 2014 was negatively impacted. The Company believes these initiatives have laid the foundation for the Company to execute its turnaround and position the Company for long-term growth and profitability. Management's focus continues to be on reversing the negative impact of the disruption caused by these initiatives and expects our business performance to stabilize and improve over time. During fiscal year 2014, the Company recorded a goodwill impairment charge of $34.9 million associated with Company's Regis salon concept, fixed asset impairment charges of $18.3 million, $15.9 million, net of tax for the Company's share of goodwill and fixed asset impairment charges recorded by EEG and an $83.9 million valuation allowance against the U.S. and U.K. deferred tax assets.

During fiscal year 2013, the Company made significant investments in strategies to turn around our business and drive improved long-term sustainable growth and profitability. These included investing in stylist hours, rolling out a new a POS system and salon workstations in our North American salons, restructuring our North American Value field organization and standardizing plan-o-grams and eliminating retail products. As a result, during fiscal year 2013, the Company recorded

20


$7.4 million in restructuring charges and a $12.6 million inventory write-down. In addition, the Company recognized a net $33.8 million foreign currency translation gain in connection with the sale of Provalliance, recorded net other than temporary impairment charges of $17.9 million associated with the Company's investment in Empire Education Group and incurred a $10.6 million make-whole payment in connection with the prepayment of $89.3 million of senior term notes in June 2013.

During fiscal year 2012, the Company recorded a goodwill impairment charge of $67.7 million associated with the Company's Regis salon concept, incremental amortization expense of $16.2 million associated with an adjustment to the useful life of the Company's previously internally developed POS system, $14.4 million for senior management and other restructuring charges, $8.9 million for the Company's share of intangible and fixed asset impairments recorded by Empire Education Group and $36.6 million of other than temporary impairment charges associated with the Company's investments in affiliated companies.

During fiscal year 2011, the Company recorded a goodwill impairment charge of $74.1 million associated with the Company's former Promenade salon concept, a $31.2 million valuation reserve related to a note receivable with the purchaser of Trade Secret and $9.2 million of other than temporary impairment charges associated with the Company's investment in MY Style.

During fiscal year 2010, the Company recorded a goodwill impairment charge of $35.3 million associated with the Company's Regis salon concept, $18.0 million for make-whole and other fees associated with the repayment of private placement debt and $5.2 million of expense related to the settlement of two legal claims regarding certain guest and employee matters.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
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


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
 
 
(Dollars in millions)
 
% of Total Revenues
 
Basis Point
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


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


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


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


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


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


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


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


$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


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:
As of June 30,
 
Debt to
Capitalization
 
Basis Point
Increase
(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
 
Contractual Obligations
 
Total
 
Within
1 year
 
1 - 3 years
 
3 - 5 years
 
More than
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


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


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


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


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


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


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


Item 8.    Financial Statements and Supplementary Data

38


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


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 LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 26, 2014

40


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


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


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