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

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

The Condensed Consolidated Balance Sheet data for June 30, 2013 was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2013 and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

Stock-Based Employee Compensation:

During the three and six months ended December 31, 2013, the Company granted restricted stock units (RSUs), equity-based stock appreciation rights (SARs), and performance share units (PSUs). There were no significant changes to the assumptions used in calculating the fair value of SARs. All grants relate to stock incentive plans that have been approved by the shareholders of the Company.

The following is a table of shares granted:



	For the Periods Ended December 31, 2013
	Three Months	Six Months
Restricted stock units	124,860	350,083
Equity-based stock appreciation rights	30,959	469,482
Performance share units	19,946	304,550

Total compensation cost for stock-based payment arrangements totaled $1.7 and $1.5 million for the three months ended December 31, 2013 and 2012, respectively, and $3.6 and $3.3 million for the six months ended December 31, 2013 and 2012, respectively, recorded within general and administrative expense on the Condensed Consolidated Statement of Operations.

Long-Lived Asset Impairment Assessments, Excluding Goodwill:

The Company assesses the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Impairment is evaluated based on the sum of undiscounted estimated cash flows expected to result from the use of long-lived assets that do not recover their carrying values. The fair value of the long-lived asset is estimated based on the best information available, including market data. During the six months ended December 31, 2013 and 2012, the Company recorded $6.4 and $3.4 million, respectively, of long-lived asset impairment. During the three months ended December 31, 2013, the Company recorded $3.0 million of impairment charges associated with the Regis salon concept reporting unit. See Goodwill discussion within this Note 1 and Note 8, and change in reporting units discussion in Note 11 to the Condensed Consolidated Financial Statements.

Goodwill:

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is tested for impairment annually during the Company’s fourth fiscal quarter or at the time of a triggering event. The fair value of the Regis salon concept reporting unit exceeded its carrying value by approximately 9.0% and the Company's other reporting units exceeded their carrying value by greater than 20.0% as of the fiscal year 2013 annual impairment test.

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. See Note 11 to the Condensed Consolidated Financial Statements.

Second, the Regis and Promenade salon concepts reported same-store sales of negative 6.4% and 7.0% respectively, during the three months ended December 31, 2013. These results were unfavorable compared to the Company’s projections used in the fiscal year 2013 annual goodwill impairment test. The disruptive impact of strategic initiatives announced in the fourth quarter of fiscal year 2013 on the first two fiscal quarters of 2014 was greater than the Company had anticipated.

Pursuant to the change in operating segments and the lower than projected same-store sales, the Company performed interim goodwill impairment tests on its Regis and Promenade salon concept reporting units. The Company updated its projections to reflect the Company’s current expectations for these businesses and compared the carrying value of the respective reporting units, including goodwill, to their estimated fair values. As a result of the interim goodwill impairment tests performed during the three months ended December 31, 2013, a $34.9 million non-cash impairment charge was recorded for the excess carrying value of goodwill over the implied fair value of goodwill for the Regis salon concept reporting unit. The estimated fair value of the Promenade salon concept reporting unit exceeded its carrying value by approximately 12.0% and was not impaired.

The Company considered the negative impact of the fourth quarter fiscal year 2013 strategic initiatives on the results of the remaining reporting units for the three and six months ended December 31, 2013 and determined that their fair values were significantly greater than their carrying values at December 31, 2013. Therefore, the Company did not perform interim goodwill impairment tests on these reporting units.

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. Subsequent to the interim impairment test of goodwill, the Company compared the carrying value, including goodwill, of the reporting units under the new reporting unit structure to their estimated fair values. The fair values of the North American Value reporting unit exceeded its carrying value by greater than 20.0%. The North American Premium reporting unit does not have any goodwill, as it was fully impaired as of December 31, 2013. Based on the changes to the Company's operating segment structure, goodwill has been reallocated to the new reporting units at December 31, 2013 and June 30, 2013.

As of December 31, 2013, the Company’s estimated fair value, as determined by the sum of the Company’s reporting units’ fair values, reconciled to within a reasonable range of the Company’s market capitalization which included an assumed control premium of 30.0%.

A summary of the Company’s goodwill balance by reporting unit is as follows:



Reporting Unit	December 31, 2013		June 30, 2013
	(Dollars in thousands)
North American Value	$	425,332	$	425,932
North American Premium	—		34,953
Total	$	425,332	$	460,885

Income Taxes:

In the United States, after excluding certain deferred tax liabilities related to assets with indefinite lives, the Company had net deferred tax assets of approximately $83.7 million as of December 31, 2013, which generally expire many years into the future or have no definite expiration period. Realization of deferred tax assets is ultimately dependent upon future taxable income. On a quarterly basis, the Company is required to assess the likelihood that deferred tax assets will be recovered.

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 the second quarter of fiscal year 2014, the impacts from strategic initiatives implemented late in fiscal year 2013 were continuing to negatively impact the Company’s financial performance. Accordingly, the Company incurred a non-cash charge in the amount of $83.1 million to establish a valuation allowance against its United States deferred tax assets. The Company will continue to assess the recovery of its United States deferred tax assets on a quarterly basis, and will reverse this valuation allowance and record a tax benefit when the Company generates sufficient sustainable United States pre-tax earnings to make the realizability of the deferred tax assets more likely than not.

Foreign Currency Translation:

During the six months ended December 31, 2012, the Company completed the sale of its investment in Provalliance and subsequently liquidated all foreign entities with Euro denominated operations. As a result, the Company recognized a net $33.8 million foreign currency translation gain within interest income and other, net in the Condensed Consolidated Statement of Operations for amounts previously classified within accumulated other comprehensive income.

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

Accounting for Cumulative Translation Adjustment upon Derecognition of Foreign Entities

In March 2013, the Financial Accounting Standards Board (FASB) updated the accounting guidance related to the release of cumulative translation adjustments. The updated accounting guidance clarified when to release cumulative translation adjustments into net income. The updated guidance is effective for the Company beginning in the first quarter of fiscal year 2015 with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on the Company’s consolidated financial statements.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In July 2013, the FASB issued new accounting requirements which provide guidance on the financial statement presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward exists. The requirements are effective for the Company beginning in the first quarter of fiscal year 2015 with early adoption permitted. The Company does not expect the adoption of these requirements to have a material impact on the Company’s consolidated financial statements.