Sally Beauty Supply 2011 Annual Report Download - page 42

Our ability to comply with the covenants and restrictions contained in the senior credit facilities and the
indentures for the Notes may be affected by economic, financial and industry conditions beyond our
control. The breach of any of these covenants and restrictions could result in a default under either the
senior credit facilities or the indentures that would permit the applicable lenders or note holders, as the
case may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued
and unpaid interest. If we are unable to repay debt, lenders having secured obligations, such as the lenders
under the senior credit facilities, could proceed against the collateral securing the debt. In any such case,
our subsidiaries may be unable to borrow under the senior credit facilities and may not be able to repay the
amounts due under the Term Loans and the Notes. This could have serious consequences to our financial
condition and results of operations and could cause us to become bankrupt or insolvent.
Our ability to generate the significant amount of cash needed to service all of our debt and our ability to refinance all
or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.
Our ability to make scheduled payments on, or to refinance our obligations under, our debt will depend on
our financial and operating performance, which, in turn, will be subject to prevailing economic and
competitive conditions and to the financial and business factors, many of which may be beyond our control,
described under ‘‘—Risks Relating to Our Business’’ above.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be
forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or
restructure our debt. In the future, our cash flow and capital resources may not be sufficient for payments
of interest on and principal of our debt, and such alternative measures may not be successful and may not
permit us to meet our scheduled debt service obligations.
We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional
financing, particularly because of our high levels of debt and the debt incurrence restrictions imposed by
the agreements governing our debt, as well as prevailing market conditions. In the absence of such
operating results and resources, we could face substantial liquidity problems and might be required to
dispose of material assets or operations to meet our debt service and other obligations. Our senior credit
facilities and the indentures governing the Notes restrict our ability to dispose of assets and use the
proceeds from any such dispositions. We cannot assure you we will be able to consummate those sales, or if
we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet
debt service obligations when due.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.
A significant portion of our outstanding debt, including under our senior credit facilities, bears interest at
variable rates. As a result, an increase in interest rates, whether because of an increase in market interest
rates or a decrease in our creditworthiness, would increase the cost of servicing our debt and could
materially reduce our profitability and cash flows. The impact of such an increase would be more
significant for us than it would be for some other companies because of our substantial debt.
The impairment of other financial institutions could adversely affect us.
We have exposure to different counterparties with regard to our interest rate swaps. These transactions
expose us to credit risk in the event of default of our counterparty. We also have exposure to financial
institutions used as depositories of our corporate cash balances. If our counterparties and financial
institutions become impaired or insolvent, this could have serious consequences to our financial condition
and results of operations.
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