UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2007

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 0-11230

Regis Corporation
(Exact name of registrant as specified in its charter)

 

(952) 947-7777

(Registrant’s telephone number, including area code)

N/A

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act).

Yes  o    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of May 3, 2007:

 

REGIS CORPORATION

INDEX

Part I.		Financial Information
		Item 1.		Condensed Consolidated Financial Information:
				Condensed Consolidated Balance Sheet as of March 31, 2007 and June 30, 2006
				Condensed Consolidated Statement of Operations for the three months ended March 31, 2007 and 2006
				Condensed Consolidated Statement of Operations for the nine months ended March 31, 2007 and 2006
				Condensed Consolidated Statement of Cash Flows for the nine months ended March 31, 2007 and 2006
				Notes to Condensed Consolidated Financial Information
				Review Report of Independent Registered Public Accounting Firm
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk
		Item 4.		Controls and Procedures
Part II.		Other Information
		Item 1.		Legal Proceedings
		Item 1A.		Risk Factors
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
		Item 4.		Submission of Matters to a Vote of Security Holders
		Item 5.		Other Information
		Item 6.		Exhibits and Reports on Form 8-K
		Signatures

 

2

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Information

REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
as of March 31, 2007 and June 30, 2006
(In thousands, except share data)

		March 31, 2007			June 30, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	186,175		$	135,397
Receivables, net		71,684			62,558
Inventories		195,892			193,999
Deferred income taxes		17,993			16,224
Other current assets		60,835			33,588
Total current assets		532,579			441,766
Property and equipment, net		490,196			483,764
Goodwill		781,175			778,228
Other intangibles, net		213,649			216,831
Other assets		66,368			61,475
Total assets		$	2,083,967		$	1,982,064
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current portion		$	177,090		$	101,912
Accounts payable		71,508			70,807
Accrued expenses		241,983			230,236
Total current liabilities		490,581			402,955
Long-term debt		490,942			520,357
Other noncurrent liabilities		192,067			187,345
Total liabilities		1,173,590			1,110,657
Commitments and contingencies
Shareholders’ equity:
Preferred stock, authorized 250,000 shares at March 31, 2007 and June 30, 2006		—			—
Common stock, $.05 par value; issued and outstanding 44,925,706 and 45,303,459 common shares at March 31, 2007 and June 30, 2006, respectively		2,247			2,266
Additional paid-in capital		212,963			232,284
Accumulated other comprehensive income		66,490			58,066
Retained earnings		628,677			578,791
Total shareholders’ equity		910,377			871,407
Total liabilities and shareholders’ equity		$	2,083,967		$	1,982,064

 

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

 

3

REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

for the three months ended March 31, 2007 and 2006
(In thousands, except per share data)

		2007			2006
Revenues:
Service		$	449,548		$	407,064
Product		185,462			177,907
Royalties and fees		20,024			19,076
		655,034			604,047
Operating expenses:
Cost of service		254,621			231,869
Cost of product		93,685			93,549
Site operating expenses		51,462			49,874
General and administrative		83,298			70,839
Rent		95,259			87,176
Depreciation and amortization		30,442			28,061
Goodwill impairment		23,000			―
Terminated acquisition expenses		―			5,687
Total operating expenses		631,767			567,055
Operating income		23,267			36,992
Other income (expense):
Interest		(10,355		)	(8,937		)
Other, net		1,075			1,633
Income before income taxes		13,987			29,688
Income taxes		(8,659		)	(11,094		)
Net income		$	5,328		$	18,594
Net income per share:
Basic		$	0.12		$	0.41
Diluted		$	0.12		$	0.40
Weighted average common and common equivalent shares outstanding:
Basic		44,703			45,366
Diluted		45,564			46,602
Cash dividends declared per common share		$	0.04		$	0.04

 

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

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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

for the nine months ended March 31, 2007 and 2006
(In thousands, except per share data)

		2007			2006
Revenues:
Service		$	1,324,445		$	1,197,311
Product		567,139			539,767
Royalties and fees		59,683			57,821
		1,951,267			1,794,899
Operating expenses:
Cost of service		749,759			680,666
Cost of product		288,078			277,944
Site operating expenses		162,235			149,702
General and administrative		242,662			216,081
Rent		280,594			255,057
Depreciation and amortization		90,396			81,216
Goodwill impairment		23,000			―
Terminated acquisition expenses		―			5,687
Total operating expenses		1,836,724			1,666,353
Operating income		114,543			128,546
Other income (expense):
Interest		(30,864		)	(25,861		)
Other, net		3,468			3,002
Income before income taxes		87,147			105,687
Income taxes		(31,852		)	(37,624		)
Net income		$	55,295		$	68,063
Net income per share:
Basic		$	1.23		$	1.51
Diluted		$	1.21		$	1.47
Weighted average common and common equivalent shares outstanding:
Basic		44,807			45,149
Diluted		45,712			46,460
Cash dividends declared per common share		$	0.12		$	0.12

 

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

5

REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

for the nine months ended March 31, 2007 and 2006
(In thousands)

		2007			2006
Cash flows from operating activities:
Net income		$	55,295		$	68,063
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		81,233			72,463
Amortization		9,163			8,753
Deferred income taxes		(462		)	3,824
Goodwill impairment		23,000			―
Excess tax benefits from stock-based compensation plans		(4,135		)	(3,644		)
Stock-based compensation		3,505			3,906
Other noncash items affecting earnings		2,636			282
Changes in operating assets and liabilities:
Receivables		(8,353		)	(2,245		)
Inventories		1,200			(11,142		)
Other current assets		(20,327		)	(1,843		)
Other assets		1,673			(953		)
Accounts payable		6,041			8,032
Accrued expenses		16,072			19,203
Other noncurrent liabilities		10,232			13,818
Net cash provided by operating activities		176,773			178,517
Cash flows from investing activities:
Capital expenditures		(66,611		)	(93,149		)
Proceeds from sale of assets		223			640
Purchase of salon, school and hair restoration center net assets, net of cash acquired		(34,171		)	(93,760		)
Proceeds from loans and investments		5,250			—
Disbursements for loans and investments		(19,984		)	—
Net investment hedge settlement		(8,897		)	—
Net cash used in investing activities		(124,190		)	(186,269		)
Cash flows from financing activities:
Borrowings on revolving credit facilities		5,015,956			2,152,230
Payments on revolving credit facilities		(4,976,950		)	(2,119,980		)
Proceeds from issuance of long-term debt		25,000			3,075
Repayments of long-term debt		(32,861		)	(19,559		)
Excess tax benefits from stock-based compensation plans		4,135			3,644
Other, primarily decrease in negative book cash balances		(4,976		)	(2,055		)
Repurchase of common stock		(41,298		)	—
Proceeds from issuance of common stock		12,312			10,528
Dividends paid		(5,411		)	(5,435		)
Net cash (used in) provided by financing activities		(4,093		)	22,448
Effect of exchange rate changes on cash and cash equivalents		2,288			(624		)
Increase in cash and cash equivalents		50,778			14,072
Cash and cash equivalents:
Beginning of period		135,397			102,718
End of period		$	186,175		$	116,790

 

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

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REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)

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

The unaudited interim Condensed Consolidated Financial Information of Regis Corporation (the Company) as of March 31, 2007 and for the three and nine months ended March 31, 2007 and 2006, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2007 and the consolidated results of its operations and its cash flows for the interim periods presented.  Adjustments consist only of normal recurring items, except for any discussed in the notes below.  The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

The Consolidated Balance Sheet data for June 30, 2006 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP).  The unaudited interim Condensed Consolidated Financial Information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2006 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

With respect to the unaudited condensed financial information of the Company for the three and nine month periods ended March 31, 2007 and 2006 included in this Form 10-Q, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information.  However, their separate report dated May 10, 2007 appearing herein, states that they did not audit and they do not express an opinion on that unaudited financial information.  Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a “report” or a “part” of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

Inventories:

Inventories consist principally of hair care products held either for use in services or for sale. Inventories are stated at the lower of cost or market with cost determined on a weighted average basis. Cost of product used in salon services is determined by applying estimated gross profit margins to service revenues, which are based on historical factors including product pricing trends and estimated shrinkage. In addition, the estimated gross profit margin is adjusted based on the results of physical inventory counts performed at least semi-annually. Cost of product sold to salon customers is determined based on the weighted average cost of product to the Company, adjusted for an estimated shrinkage factor.  Product and service inventories are adjusted based on the results of physical inventory counts performed at least semi-annually.

Stock-Based Employee Compensation:

Stock-based awards are granted under the terms of the 2004 Long Term Incentive Plan and the 2000 Stock Option Plan. Additionally, the Company has outstanding stock options under its 1991 Stock Option Plan, although the Plan terminated in 2001.  Under these plans, four types of stock-based compensation awards are granted:  stock options, equity-based stock appreciation rights (SARS), restricted stock and restricted stock units.  These stock-based awards expire within ten years from the grant date.  The Company utilizes the lattice (binomial) option-pricing model to estimate the fair value of options at their grant date and recognizes compensation expense for these awards on a straight-line basis over the five-year vesting period.  Awards granted do not contain acceleration of vesting terms for retirement eligible recipients.

A summary of outstanding and exercisable options as of March 31, 2007, and changes during the three and nine months ended March 31, 2007 is presented below:

 

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An additional 411,529 shares are expected to vest with a $34.13 weighted average exercise price and a weighted average remaining contractual term of 7.5 years. The total intrinsic value of options exercised during the nine months ended March 31, 2007 and 2006, was $15.9 and $14.1 million, respectively.

As of March 31, 2007, 182,300 unvested restricted stock shares with a weighted average grant-date fair value of $36.95 were outstanding, of which 192,855 were outstanding at June 30, 2006.  Additionally, 165,000 restricted stock units with a weighted average grant-date fair value of $40.99 were granted during the three months ended March 31, 2007.  These restricted stock units were unvested as of March 31, 2007.

As of March 31, 2007, 219,350 SARS with a weighted average grant-date fair value of $37.23 were outstanding, of which 231,250 were outstanding at June 30, 2006.

The Company’s primary employee stock-based compensation grant occurs during the fourth quarter. The total unrecognized compensation cost related to stock-based compensation arrangements was $16.8 million at March 31, 2007 and the related weighted average period over which it is expected to be recognized is approximately 3.8 years.

Recent Accounting Pronouncements:

On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 (i.e., the Company’s first quarter of fiscal year 2008), and the provisions are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 must be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company is currently evaluating the impact of FIN 48 on its Consolidated Financial Statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measures (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (i.e., the beginning of the Company’s fiscal year 2009). The Company is currently evaluating the impact of SFAS No. 157 on its Consolidated Financial Statements.

 

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In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 amends SFAS No. 87, Employers’ Accounting for Pensions (SFAS No. 87), SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits (SFAS No. 88), SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (SFAS No. 106) and SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132(R)).  SFAS No. 158 requires balance sheet recognition of the funded status for all pension and postretirement benefit plans as of the end of the Company’s current fiscal year (i.e., in the Company’s fiscal year 2007 Annual Report on Form 10-K). The impact of initial adjustment will be recorded as an adjustment of the ending balance of accumulated other comprehensive income. Subsequent changes in funded status will be recognized as a component of other comprehensive income to the extent they have not yet been recognized as a component of net periodic benefit cost pursuant to SFAS No. 87, SFAS No. 88 or SFAS No. 106. The Company has unfunded deferred compensation contracts covering key executives based on their accomplishments within the Company which will be subject to the provisions of SFAS No. 158.  The Company intends to fund its future obligations under these contracts through company-owned life insurance policies on the participants.  The Company is currently evaluating the impact of SFAS No. 158 on its Consolidated Financial Statements.

2.             SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME:

Additional Paid-In Capital

The decrease in additional paid-in capital during the nine months ended March 31, 2007 was due to the following:

 

Comprehensive Income

Components of comprehensive income for the Company include net income, changes in fair market value of financial instruments designated as hedges of interest rate or foreign currency exposure and foreign currency translation charged or credited to the cumulative translation account within shareholders’ equity. Comprehensive income for the three and nine months ended March 31, 2007 and 2006 was as follows:

Components of Comprehensive Income		For the Periods Ended March 31,
		Three Months						Nine Months
(Dollars in thousands)		2007			2006			2007			2006
Net income		$	5,328		$	18,594		$	55,295		$	68,063
Other comprehensive income (loss):
Changes in fair market value of financial instruments designated as cash flow hedges of interest rate exposure, net of taxes		(82		)	922			(771		)	924
Change in cumulative foreign currency translation, net of taxes		1,784			1,229			9,195			349
Total comprehensive income		$	7,030		$	20,745		$	63,719		$	69,336

 

3.                                      NET INCOME PER SHARE:

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

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Restricted stock awards, including restricted stock units, of 347,300 and 139,400 shares as of March 31, 2007 and 2006, respectively, were excluded from the computation of basic weighted average shares outstanding as such shares were not yet vested at these dates.

4.             GOODWILL AND OTHER INTANGIBLES:

The table below contains details related to our recorded goodwill as of March 31, 2007 and June 30, 2006:

 

Goodwill acquired includes adjustments to prior year acquisitions, primarily representing the finalization of purchase price allocations.

Goodwill is tested for impairment annually or at the time of a triggering event in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Fair values are estimated based on the Company’s best estimate of the expected present value of future cash flows and compared with the corresponding carrying value of the reporting unit, including goodwill.  Where available and as appropriate comparative market multiples are used to corroborate the results of the present value method. The Company considers its various concepts to be reporting units when it tests for goodwill impairment because that is where the Company believes goodwill resides.  The Company’s policy is to perform its annual goodwill impairment test during its third quarter of each fiscal year ending June 30.

During the three months ended March 31, 2007 and 2006, the Company performed its annual goodwill impairment analysis on its reporting units.  Based on the Company’s testing, a $23.0 million impairment charge was recorded during the three months ended March 31, 2007.  No impairment of goodwill was recorded during the three months ended March 31, 2006.

The recent performance challenges and necessary investments in information technology platforms and management that are required to effectively operate the Company’s beauty schools led the Company to exploring strategic alternatives pertaining to its beauty school operating segment.  Subsequent to the quarter end, the Company entered into an agreement to merge its 51 accredited cosmetology schools into Empire Education Group, Inc., creating the largest beauty school operator in North America.  This transaction leverages Empire Education Group, Inc.’s management expertise, while enabling the Company to maintain a vested interest in the beauty school industry.  The terms of the transaction indicated that the estimated fair value of the accredited cosmetology schools was less than

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the current carrying value of this reporting unit’s net assets, including goodwill.  Thus, a $23.0 million pre-tax, non-cash impairment loss was recorded during the quarter ended March 31, 2007.

The table below presents details of our other intangible assets as of March 31, 2007 and June 30, 2006:

		March 31, 2007									June 30, 2006
					Accumulated									Accumulated
(Dollars in thousands)		Cost			Amortization			Net			Cost			Amortization			Net
Amortized intangible assets:
Brand assets and trade names		$	111,552		$	(9,344	)	$	102,208		$	110,087		$	(7,019	)	$	103,068
Customer list		48,743			(9,970		)	38,773			48,743			(7,598		)	41,145
Franchise agreements		26,682			(6,997		)	19,685			24,907			(5,967		)	18,940
Product license agreements		16,760			(2,774		)	13,986			15,784			(2,221		)	13,563
School-related licenses		25,428			(1,088		)	24,340			24,818			(613		)	24,205
Non-compete agreements		664			(611		)	53			674			(603		)	71
Other		20,446			(5,842		)	14,604			19,325			(3,486		)	15,839
		$	250,275		$	(36,626	)	$	213,649		$	244,338		$	(27,507	)	$	216,831

 

All intangible assets have been assigned an estimated finite useful life and are amortized over the number of years that approximate their respective useful lives (ranging from three to 40 years). The Company follows the straight-line method of amortization, which approximates the economic benefit obtained in that reporting period by the Company from the intangible asset. The weighted average amortization periods, in total and by major intangible asset class, are as follows:

		Weighted Average
		Amortization Period
		(in years)
Amortized intangible assets:
Brand assets and trade names		39
Customer list		10
Franchise agreements		21
Product license agreements		30
School-related licenses		40
Non-compete agreements		6
Other		19
Total		29

 

Total amortization expense related to amortizable intangible assets was approximately $3.0 and $2.8 million during the three months ended March 31, 2007 and 2006, respectively, and $8.7 and $8.3 million during the nine months ended March 31, 2007 and 2006, respectively.   As of March 31, 2007, future estimated amortization expense related to amortizable intangible assets is estimated to be:

(Dollars in thousands)
Fiscal Year
Remainder of 2007		$	2,915
2008		11,544
2009		11,280
2010		11,074
2011		10,902

 

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5.             ACQUISITIONS, LOANS AND INVESTMENTS:

Acquisitions

During the nine months ended March 31, 2007 and 2006, the Company made numerous acquisitions and the purchase prices have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition.  Operations of the acquired companies have been included in the operations of the Company since the date of the respective acquisition.

The components of the aggregate purchase prices of the acquisitions made during the three and nine months ended March 31, 2007 and 2006 and the allocation of the purchase prices were as follows:

 

The majority of the purchase price in salon acquisitions is accounted for as residual goodwill rather than identifiable intangible assets. This stems from the value associated with the walk-in customer base of the acquired salons, which is not recorded as an identifiable intangible asset under current accounting guidance, as well as the limited value and customer preference associated with the acquired hair salon brand. Key factors considered by consumers of hair salon services include personal relationships with individual stylists, service quality and price point competitiveness. These attributes represent the “going concern” value of the salon.

Residual goodwill further represents the Company’s opportunity to strategically combine the acquired business with the Company’s existing structure to serve a greater number of customers through its expansion strategies. In the acquisitions of international salons, beauty schools and hair restoration centers, the residual goodwill primarily represents the growth prospects that are not captured as part of acquired tangible or identified intangible assets. Generally, the goodwill recognized in the North American salon transactions and certain beauty school transactions is expected to be fully deductible for tax purposes and the goodwill recognized in the international salon transactions is non-deductible for tax purposes. Goodwill generated in certain acquisitions, such as Hair Club, is not deductible for tax purposes due to the acquisition structure of the transaction.

During the nine months ended March 31, 2007 and 2006, the Company purchased salon operations from its franchisees. The Company evaluated the effective settlement of the preexisting franchise contracts and associated rights afforded by those contracts in accordance with Emerging Issues Task Force (EITF) No. 04-1, Accounting for Preexisting Relationships Between the Parties to a Business Combination. The Company determined that the effective settlement of the preexisting franchise contracts at the date of the acquisition did not result in a gain or loss, as the agreements were neither favorable nor unfavorable when compared to similar current market transactions, and no settlement provisions exist in the preexisting contracts. Therefore, no settlement gain or loss was recognized with respect to the Company’s franchise buybacks.

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Loans and Investments

During the three months ended September 30, 2006, the Company invested $5.3 million in the preferred stock of a privately held entity. This investment was recorded within other assets in the Condensed Consolidated Balance Sheet and as an investing activity within the Condensed Consolidated Statement of Cash Flows.  During the three months ended December 31, 2006, the preferred stock was redeemed for the original investment amount of $5.3 million.  The Company received $93.0 thousand of preferred dividends from this investment prior to its redemption.

The Company holds a 19.9 percent interest in the voting common stock of another privately held entity. The Company is accounting for this investment under the equity method. During the three and nine months ended March 31, 2007, the Company recorded a loss of $0.6 and $1.1 million, respectively related to this equity investment. As of March 31, 2007 and June 30, 2006, the Company had $10.0 and $6.0 million of current and long-term notes receivable, respectively, outstanding under a credit agreement with the entity that is the majority corporate investor in this investment. The notes receivable are included within other current assets at March 31, 2007 and in other assets at June 30, 2006 in the Condensed Consolidated Balance Sheet and as investing activities within the Condensed Consolidated Statement of Cash Flows. Refer to Note 3 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2006 Annual Report on Form 10-K for additional details.

In October 2006, the Company invested $9.9 million to form a new limited liability company called Intelligent Nutrients, LLC. The Company holds a 50 percent interest in the newly formed LLC. The Company is accounting for this investment under the equity method. Intelligent Nutrients, LLC currently carries a wide variety of organic, harmonically grown™ products, including dietary supplements, coffees, teas and aromatics.  Additionally, a full line of professional hair-care and personal care products is in development and is expected to be available later in calendar year 2007.  These products will be offered at the Company’s corporate and franchise salons, and eventually in other independently owned salons.  During the three and nine months ended March 31, 2007, the Company recorded a loss of $0.6 and $1.2 million, respectively, related to this equity investment.

6.             LITIGATION:

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 wage and hour violations. Estimated recorded reserve amounts are not significant; however, litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. Although company counsel believes that the Company has valid defenses in these matters, it 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.

7.             DERIVATIVE FINANCIAL INSTRUMENTS:

During September 2006, the Company’s cross-currency swap (which had a notional amount of $21.3 million and hedged a portion of the Company’s net investment in its foreign operations) was settled, resulting in a cash outlay of $8.9 million.  This cash outlay was recorded within investing activities within the Condensed Consolidated Statement of Cash Flows.  Approximately $0.1 million of tax-effected gain related to this derivative was charged to the cumulative translation adjustment account during the nine months ended March 31, 2007.  The cumulative tax-effected net loss recorded in accumulated other comprehensive income (AOCI) related to the cross-currency swap was $7.9 million at March 31, 2007. This amount will remain deferred within AOCI indefinitely, as the event which would trigger its release from AOCI and recognition in earnings is the sale or liquidation of the Company’s international operations that the cross-currency swap hedged.  The Company currently has no intent to sell or liquidate this portion of its business operations.

On January 3, 2007, the Company terminated its Canadian forward foreign currency contracts having a $14.5 million notional amount.  The termination resulted in a deferred gain of $0.4 million which is recorded in AOCI in the Condensed Consolidated Balance Sheet, as the contracts hedged currency risk associated with a portion of the monthly forecasted intercompany foreign-currency-denominated transactions stemming from the forecasted monthly product shipments from the Company’s subsidiaries located in the Unites States to its Canadian subsidiaries.  The

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deferred gain will be recorded into income through May 31, 2009 as the forecasted foreign currency transactions are recognized in earnings.

8.             INCOME TAXES:

The reported effective income tax rate was 61.9 percent and 37.4 percent for the three months ended March 31, 2007 and 2006, respectively, and 36.5 percent and 35.6 percent for the nine months ended March 31, 2007 and 2006, respectively.  The provision for income taxes differs from the amount of income tax determined by applying the applicable United States (U.S.) statutory rate to earnings before income taxes, as a result of the following:

 

In December 2006, President Bush signed the Tax Relief and Health Care Act of 2006 into law. This Act retroactively reinstated the Work Opportunity and Welfare-to-Work Tax Credits for a two year period beginning January 1, 2006. In accordance with generally accepted accounting principles, the financial impact of the tax credits earned during the entire calendar year is required to be reflected in the Company’s tax rate for the quarter in which the Act was signed into law, which was the Company’s quarter ended December 31, 2006.

The effective income tax rate for the three and nine months ended March 31, 2007 was adversely impacted by the pre-tax, non-cash goodwill impairment charge of $23.0 million recorded during the three months ended March 31, 2007.  The majority of the goodwill impairment charge is not deductible for tax purposes.

9.             SUBSEQUENT EVENTS:

On April 18, 2007, the Company entered into a Contribution Agreement with Empire Beauty School Inc.  Pursuant to the Agreement, Regis and Empire Beauty School Inc. will each contribute their respective cosmetology school businesses, as defined in the Agreement, to a newly formed company, Empire Education Group, Inc. Upon completion of the transaction, Regis will own a 49 percent minority interest in Empire Education Group, Inc.  Empire’s management team will operate and manage the combined business.  The transaction is expected to close July 1, 2007, subject to regulatory and accreditation approvals.  In conjunction with the transaction, Regis and Empire Beauty School Inc. entered into a Consulting Agreement effective April 18, 2007 through the close of the transaction.  The consulting services covered under the Consulting Agreement include, among other things, a review of Regis’ business operations.  The five Vidal Sassoon Academies are not part of this transaction.

In April 2007, the Company acquired exchangeable notes issued by Yamano Holding Corporation and a loan obligation of a Yamano Holdings subsidiary, Beauty Plaza Co. Ltd., for $11.3 million.  The notes are exchangeable for approximately 14.7% of the outstanding shares of Beauty Takashi Co. Ltd., a subsidiary of Yamano Holdings.  In connection with the purchase of the exchangeable notes and loan obligation, the parties also entered into a business collaboration agreement with respect to their joint pursuit of opportunities relating to retail hair salons in Asia.

10.          SEGMENT INFORMATION:

The Company operates or franchises 9,585 North American salons (located in the United States, Canada and Puerto

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Rico), 2,042 international salons, 56 beauty schools and 90 hair restoration centers.  The Company operates its North American salon operations through five primary concepts: Regis Salons, MasterCuts, Trade Secret, SmartStyle and Strip Center salons.  The concepts offer similar products and services, concentrate on the mass market consumer marketplace and have consistent distribution channels.  All of the company-owned and franchise salons within the North American salon concepts are located in high traffic, retail shopping locations that attract mass market consumers, and the individual salons generally display similar economic characteristics. The salons share interdependencies and a common support base.  The Company’s international salon operations, which are primarily in Europe, are located in malls, leading department stores, mass merchants and high-street locations.  The Company’s beauty schools are located in the United States and the United Kingdom. The Company’s hair restoration centers are located in the United States and Canada.

Based on the way the Company manages its business, it has reported its North American salons, international salons, beauty schools and hair restoration centers as four separate reportable segments.

Financial information for the Company’s reporting segments is shown in the following tables:

 

		For the Three Months Ended March 31, 2007
		Salons						Beauty			Hair Restoration			Unallocated
(Dollars in thousands)		North America			International			Schools			Centers			Corporate			Consolidated
Revenues:
Service		$	379,903		$	34,856		$	20,459		$	14,330		$	—		$	449,548
Product		150,356			16,794			2,582			15,730			—			185,462
Royalties and fees		9,383			9,342			—			1,299			—			20,024
		539,642			60,992			23,041			31,359			—			655,034
Operating expenses:
Cost of service		220,079			18,922			8,035			7,585			—			254,621
Cost of product		77,323			10,151			1,485			4,726			—			93,685
Site operating expenses		43,302			2,792			4,050			1,318			—			51,462
General and administrative		29,507			11,218			2,357			7,226			32,990			83,298
Rent		79,119			11,662			2,348			1,626			504			95,259
Depreciation and amortization		20,736			2,191			852			2,432			4,231			30,442
Goodwill impairment		—			—			23,000			—			—			23,000
Total operating expenses		470,066			56,936			42,127			24,913			37,725			631,767
Operating income (loss)		69,576			4,056			(19,086		)	6,446			(37,725		)	23,267
Other income (expense):
Interest		—			—			—			—			(10,355		)	(10,355		)
Other, net		—			—			—			—			1,075			1,075
Income (loss) before income taxes		$	69,576		$	4,056		$	(19,086	)	$	6,446		$	(47,005	)	$	13,987

 

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