Sally Beauty Supply 2011 Annual Report Download - page 128

Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2011, 2010 and 2009
with the Company’s termination of the prior ABL credit facility, the Company expensed approximately
$1.6 million in unamortized deferred financing costs, which is included in interest expense in the
Company’s consolidated statements of earnings.
Principal and interest on the senior term loan B facility is payable quarterly. The senior term loan facilities
contain a covenant requiring Sally Holdings and its subsidiaries to meet certain maximum consolidated
secured leverage ratio levels, which decline over time. The consolidated secured leverage ratio is a ratio of
(A) net consolidated secured debt to (B) consolidated EBITDA as defined in the agreement underlying
the senior term loan facilities. Compliance with the consolidated secured leverage ratio is tested quarterly,
with a maximum ratio of 3.50 as of September 30, 2011. Failure to comply with the consolidated secured
leverage ratio covenant under the senior term loan facilities would result in a default under such facilities.
Borrowing under the senior term loan facilities and the ABL credit facility are secured by substantially all
of our assets, those of Sally Investment Holdings LLC, a wholly-owned subsidiary of Sally Beauty and the
direct parent of Sally Holdings, those of our domestic subsidiaries and, in the case of the ABL credit
facility, those of our Canadian subsidiaries and a pledge of certain intercompany notes. Borrowings under
the senior term loan facilities may be prepaid at the option of Sally Holdings at any time without premium
or penalty and are subject to mandatory repayment in an amount equal to 50% of excess cash flow (as
defined in the agreement governing the senior term loan facilities) for any fiscal year unless a specified
leverage ratio is met. Amounts prepaid pursuant to said provision may be applied, at the option of Sally
Holdings, against minimum loan repayments otherwise required of it over the twelve-month period
following any such payment under the terms of the loan agreements. Additionally, borrowings under the
senior term loan facilities would be subject to mandatory repayment in an amount equal to 100% of the
proceeds of specified asset sales that are not reinvested in the business or applied to repay borrowings
under the ABL credit facility. No mandatory repayments of any kind were made or required to be made in
the fiscal year 2011. We believe that the Company is currently in compliance with the agreements and
instruments governing our debt, including our financial covenants.
During the fiscal year 2011, the Company made optional prepayments in the aggregate amount of
$147.0 million on its senior term loan B facility. In connection with such optional prepayments, the
Company recorded losses on extinguishment of debt in the aggregate amount of $1.2 million, which are
included in interest expense in the Company’s consolidated statements of earnings.
The Company uses interest rate swaps, as part of its overall economic risk management strategy, to add
stability to the interest payments due in connection with its senior term loan obligations. In the fiscal year
2008, the Company entered into interest rate swap agreements with an aggregate notional amount of
$300.0 million. These agreements expire in May 2012 and enable the Company to convert a portion of its
variable-interest rate obligations to fixed-interest rate obligations in connection with the term loan
facilities, with interest ranging from 5.818% to 6.090%. Interest payments related to our term loans are
impacted by changes in LIBOR. Please see Note 16 for additional information about the Company’s
interest rate swap agreements.
The senior notes and senior subordinated notes are unsecured obligations of the issuers and are jointly and
severally guaranteed on a senior basis (in the case of the senior notes) and on a senior subordinated basis
(in the case of the senior subordinated notes) by each material domestic subsidiary of the Company.
Interest on the senior notes and senior subordinated notes is payable semi-annually. The senior notes carry
optional redemption features whereby the Company has the option to redeem the notes prior to maturity
on or after November 15, 2010 at par plus a premium declining ratably to par, plus accrued and unpaid
interest. The senior subordinated notes carry optional redemption features whereby the Company has the
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