DISCONTINUED OPERATIONS

12 Months Ended

Jun. 30, 2012

DISCONTINUED OPERATIONS

DISCONTINUED OPERATIONS

2. DISCONTINUED OPERATIONS

        On February 16, 2009, the Company sold its Trade Secret salon concept (Trade Secret). The Company reported Trade Secret as a discontinued operation.

        The Company has a formal note receivable agreement with the purchaser of Trade Secret. The Company recorded a valuation reserve of $31.2 million during fiscal year 2011. The carrying value of the note receivable was fully reserved as of June 30, 2011. The Company has determined the collectibility of accrued interest on the note receivable to be less than probable. The Company suspended recognition of interest income effective April 2010 and will use the cash basis method for recognizing future interest income. The Company did not receive interest payments from the purchaser of Trade Secret during the twelve months ended June 30, 2012.

        The purchaser of Trade Secret emerged from bankruptcy in March 2012 and in conjunction, the Company entered into a credit and security agreement in which the principal balance of the note receivable was reduced from $35.7 to $18.0 million. Payments of $0.5 million are due quarterly beginning on May 31, 2012. Upon receipt of the quarterly payments through February 2019 the remaining principal and unpaid interest will be forgiven. Included in the agreement was a scheduled extraordinary principal payment to be made in the fourth quarter of fiscal year 2012. The purchaser of Trade Secret satisfied the extraordinary principal payment during the fourth fiscal quarter of 2012 by returning $0.8 million of inventory. The Company recorded the recovery of bad debt expense upon receipt of the inventory in June 2012. The principal payment of $0.5 million due May 31, 2012, was not received as of June 30, 2012. The carrying value of the note receivable continues to be fully reserved at June 30, 2012.

        Effective in the second quarter of fiscal year 2010, the Company has an agreement in which the Company provides warehouse services to the purchaser of Trade Secret. Under the warehouse services agreement, the Company recognized $1.5, $2.7 and $3.0 million of other income related to warehouse services during the twelve months ended June 30, 2012, 2011 and 2010, respectively. The carrying value of the receivable related to warehouse services was $0.2 and $0.3 million as of June 30, 2012 and 2011, respectively.

        The Company utilized the consolidation of variable interest entities guidance to determine whether or not Trade Secret was a VIE, and if so, whether the Company was the primary beneficiary of Trade Secret. The Company concluded that Trade Secret is a VIE based on the fact that the equity investment at risk in Trade Secret is insufficient. The Company determined that the purchaser of Trade Secret has met the power criterion due to the purchaser of Trade Secret having the authority to direct the activities that most significantly impact Trade Secret's economic performance. The Company concluded based on the consideration above that the primary beneficiary of Trade Secret is the purchaser of Trade Secret. The exposure to loss related to the Company's involvement with Trade Secret is the guarantee of approximately 20 operating leases. The Company has determined the exposure to the risk of loss on the guarantee of the operating leases to be immaterial to the financial statements. See Note 10 to the Consolidated Financial Statements for further information on the guaranteed leases.

        The income from discontinued operations is summarized below:

	For the Years Ended June 30,
	2012		2011		2010
	(Dollars in thousands)
Revenues	$	—	$	—	$	—
Income from discontinued operations, before income taxes		—		—		154
Income tax benefit on discontinued operations		1,099		—		3,007
Income from discontinued operations, net of income taxes	$	1,099	$	—	$	3,161

        During the twelve months ended June 30, 2012, the Company recorded a $1.1 million tax benefit in discontinued operations related to the release of tax reserves associated with the disposition of the Trade Secret salon concept.

        During the first quarter of fiscal year 2010, the Company recorded a $3.0 million tax benefit in discontinued operations to correct the prior year calculation of the income tax benefit related to the disposition of the Trade Secret salon concept. The Company does not believe the adjustment is material to its results of operations for the twelve months ended June 30, 2010 or its financial position or results of operations of any prior periods.