Sally Beauty Supply 2006 Annual Report Download

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Form 10-K
Sally Beauty Holdings, Inc. - SBH
Filed: December 22, 2006 (period: September 30, 2006)
Annual report which provides a comprehensive overview of the company for the past year
THE FOLLOWING INFORMATION, DOCUMENT OR REPORT IS BEING MADE AVAILABLE
BY SALLY HOLDINGS LLC TO THE HOLDERS OF ITS 9.25% SENIOR NOTES DUE 2014
AND ITS 10.5% SENIOR SUBORDINATED NOTES DUE 2016 AS WELL AS TO THE
TRUSTEE FOR EACH SERIES OF NOTES PURSUANT TO SECTION 405 OF THE
INDENTURE WITH RESPECT TO EACH SERIES OF NOTES.

Table of contents

  • Page 1
    ... TRUSTEE FOR EACH SERIES OF NOTES PURSUANT TO SECTION 405 OF THE INDENTURE WITH RESPECT TO EACH SERIES OF NOTES. Form 10-K Sally Beauty Holdings, Inc. - SBH Filed: December 22, 2006 (period: September 30, 2006) Annual report which provides a comprehensive overview of the company for the past year

  • Page 2
    Table of Contents PART I ITEM 1. BUSINESS 1 PART I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. BUSINESS RISK FACTORS UNRESOLVED STAFF COMMENTS PROPERTIES LEGAL PROCEEDINGS SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II MARKET FOR REGISTRANT S COMMON EQUITY, RELATED STOCKHOLDER ...

  • Page 3
    EX-99.1 (SELECT PORTIONS OF THE COMPANY'S FINAL PROXY STATEMENT/PROSPECTUS)

  • Page 4
    ...ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2006 -ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-33145 SALLY BEAUTY... to this Form 10K. ⌧ Indicate by...

  • Page 5
    TABLE OF CONTENTS Page PART I ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4. PART II ITEM 5. MARKET FOR REGISTRANT' S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES SELECTED FINANCIAL DATA MANAGEMENT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ...

  • Page 6
    ... net sales were in the U.S. and Canada for each of the last three fiscal years. For the year ended September 30, 2006 our net sales were $2,373.1 million. Sally Beauty Supply began as a single store in New Orleans in 1964 and was purchased in 1969 by our former parent company, Alberto-Culver Company...

  • Page 7
    ... by a large number of localized retailers and distributors, with only a few having a regional presence and significant market share. We believe that Sally Beauty Supply is the only open-line distributor in the U.S. with a national network of retail stores. Direct This channel focuses on direct sales...

  • Page 8
    ... 8-Financial Statements and Supplementary Data" of this report. Neither the sales or product assortment for Sally Beauty Supply or BSG are seasonal in nature. Sally Beauty Supply Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on store count...

  • Page 9
    ... an attractive alternative to higher-priced leading third-party brands. Private label products accounted for approximately 37% of Sally Beauty Supply' s net sales as of September 30, 2006. Generally, the private label brands have higher gross margins than the leading third-party branded products and...

  • Page 10
    ...knowledge of local markets is an important part of its success. The following table provides a history of Sally Beauty Supply store openings since the beginning of fiscal year 2002: Year Ended September 30, 2006 2005 2004 2003 2002 Stores open at beginning of period 2,419 2,355 2,272 2,177 2,112 Net...

  • Page 11
    ... BSG sales attributable by channel: Year Ended September 30, 2006 Company-owned retail stores 47.5% Professional distributor sales consultants 37.2% Franchise stores 15.3% Total 100.0% Merchandise BSG stores carry a broad selection of branded beauty supplies, ranging between 3,700 and 9,500 SKUs of...

  • Page 12
    ...of sales attributable by merchandise category: Year Ended September 30, 2006 Hair care 36.7% Hair color 23.6% Promotional items 19.1% Skin...we will be able to more effectively market our products, particularly in Sally Beauty Supply stores. We also plan to enhance our customer loyalty programs, which ...

  • Page 13
    Table of Contents Open New Stores and Explore New Services and Concepts In fiscal year 2006, we opened 92 and 6 net new stores for Sally Beauty Supply and BSG, respectively. Because of the limited initial capital outlay, rapid payback, and highly attractive return on capital, we intend to continue ...

  • Page 14
    ... breadth of its selection of these products further differentiates Sally Beauty Supply from its competitors. Sally Beauty Supply also offers a customer loyalty program for Sally Beauty Supply customers. Members, after paying a small annual fee to join, receive a special, discounted price on products...

  • Page 15
    ...30, 2006 2005 2004 2003 2002 Comparable store sales growth: Sally Beauty Supply 2.4% 2.4% 3.8% 2.7% 5.7% Beauty Systems ...reports to a territory manager. Suppliers We purchase our merchandise directly from manufacturers and fillers through supply contracts and by purchase order. For fiscal year 2006...

  • Page 16
    ... Distribution As of September 30, 2006, we operated 22 distribution centers, 6 of which serviced Sally Beauty Supply and 16 of which serviced BSG....see "Directors and Executive Officers of the Registrant" in Item 10 of this report. Regulation We are subject to a wide variety of laws and regulations, ...

  • Page 17
    ... and by individual product. Access to Public Filings Our annual report on Form 10-K, current reports on Form 8-K and amendments to such reports are, and, when filed with the SEC our quarterly reports on Form 10-Q and any amendment to such reports will be, available, without charge, on our website...

  • Page 18
    ... 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our annual report on Form 10-K our management' s report on, and assessment of, the effectiveness of our internal controls over financial reporting. In addition, our independent registered public accounting firm must attest to and...

  • Page 19
    ... types of products and services we sell. Sally Beauty Supply competes with other domestic and international beauty product wholesale and retail outlets, including local and regional cash-and-carry beauty supply stores, professional-only beauty supply stores, salons, mass merchandisers, drug stores...

  • Page 20
    ... number of manufacturers for a significant percentage of the products we sell. Sally Beauty Supply' s five largest suppliers provided it with 40.9% and 41.3% of the products Sally Beauty Supply purchased in fiscal years 2006 and 2005, respectively. BSG' s five largest suppliers provided it with 59...

  • Page 21
    ... are not successful, this could have a material adverse effect on our business, financial condition or results of operations. Manufacturers and fillers of beauty supply products are subject to certain risks that could adversely impact their ability to provide us with their products on a timely basis...

  • Page 22
    Table of Contents We could be adversely affected if we do not comply with laws and regulations or if we become subject to additional or more stringent laws and regulations. We are subject to a number of U.S. federal, state and local laws and regulations, as well as the laws and regulations ...

  • Page 23
    ... in part on our ability to open and profitably operate new stores in existing and additional geographic markets. The capital requirements to open a Sally Beauty Supply or BSG store, excluding inventory, average approximately $66,000 and $68,000, respectively. However, we may not be able to open all...

  • Page 24
    ... brand name rights used in connection with our business including, but not limited to, "Sally," "Sally Beauty," "Sally Beauty Supply," "Sally ProCard," "BSG," "CosmoProf," "Armstrong McCall," "ion" and "Beauty Club". We protect our intellectual property rights through a variety of methods, including...

  • Page 25
    ..., the temporary or long term disruption in the supply of products from some local suppliers, the temporary ...Sally Holdings and which was, prior to our separation from Alberto-Culver, a wholly-owned subsidiary of Alberto-Culver, incurred approximately $1.85 billion in debt. As of September 30, 2006...

  • Page 26
    ...prohibit us or our subsidiaries from doing so. As of September 30, 2006, on a pro forma basis, our senior credit facilities, would have ...those terms are defined in the relevant credit agreement). In addition, if Sally Holdings fails to maintain a specified minimum level of borrowing capacity under ...

  • Page 27
    ...The indentures governing the notes, also contain restrictive covenants that, among other things, limit our ability and the ability of Sally Holdings and its restricted subsidiaries to: • dispose of assets; • incur additional indebtedness (including guarantees of additional indebtedness); • pay...

  • Page 28
    Table of Contents meet our debt service and other obligations. Our senior credit facilities and the indentures governing the notes will 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...

  • Page 29
    Table of Contents For purposes of determining whether the distribution of Alberto-Culver common stock to our stockholders in connection with the Alberto-Culver share distribution is disqualified as tax-free to us under the rules described in the second preceding paragraph, any acquisitions of our ...

  • Page 30
    ... renewal options. The following table provides the number of stores in the U.S. and globally, as of September 30, 2006: Beauty Systems Group CompanyLocation Sally Beauty Supply Franchise United States 2,181 588 138 International: Puerto Rico 32 - - United Kingdom 188 - - Canada 9 70 - Japan 32...

  • Page 31
    ...offices and warehouses and our corporate headquarters, as of September 30, 2006: Location Company-Owned Properties: Columbus, Ohio Denton, Texas Denton,... Buckinghamshire, England Monterrey, Nuevo Leon, Mexico (1) Sally Beauty Supply (2) BSG Type of Facility Warehouse Corporate Headquarters Warehouse...

  • Page 32
    ...As of December 14, 2006, there were 1,731 stockholders of record of our common stock and the closing price of our stock as reported by the NYSE was ...financial data of Sally Holdings, Inc. and its consolidated subsidiaries for the five years ended September 30, 2006 (in thousands). Sally Holdings, Inc...

  • Page 33
    ...Sally Beauty Supply Beauty Systems Group Total Professional distributor sales consultants (end of period) Comparable store sales growth(d): Sally Beauty Supply Beauty... issued and outstanding as of September 30, 2006. (a) Effective October 1, 2005, Sally Holdings adopted SFAS No. 123(R) using the...

  • Page 34
    28

  • Page 35
    ...Sally Holdings, Inc. and the related notes included elsewhere in this annual report. This Management' s Discussion and Analysis of Financial Condition and Results of Operations of Sally...merchandise. For the year ended September 30, 2006, Sally Beauty Supply' s net sales and segment operating profit ...

  • Page 36
    ... and relative lack of financial resources, booth renters are likely to be dependent on frequent trips to professional beauty supply stores, like BSG and Sally Beauty Supply. • Frequent re-stocking needs. Salon professionals primarily rely on just-in-time inventory due to capital constraints and...

  • Page 37
    ... 2006 was $22.2 million. Approximately $1.8 million of the estimated purchase price will be paid in equal annual ...2006, as amended, among us, Alberto-Culver, CDRS and others, which we refer to as the investment agreement. As a result of the separation, (i) we own and operate the Sally Beauty Supply...

  • Page 38
    ...) Alberto-Culver continues to own and operate its consumer products business. In addition, on November 16, 2006, in connection with our separation from Alberto-Culver: • Sally Holdings and certain of our other subsidiaries incurred approximately $1,850 million of indebtedness, including (i) $1,070...

  • Page 39
    ... issued and outstanding, and our common stock commenced regular way trading on the NYSE under the symbol "SBH." On November 24, 2006, Sally Holdings entered into two interest rate swap agreements. See "Quantitative and Qualitative Disclosures about Market Risk-Interest rate risk." References to our...

  • Page 40
    ...paid to Regis and legal and investment banking fees, during the fourth quarter of fiscal year 2005 and fiscal year 2006. The total amount of transaction expenses, including the termination fee, incurred by Sally Holdings was approximately $41.5 million ($27.2 million after taxes) and was expensed by...

  • Page 41
    ...pro-forma disclosures as if the fair value method was adopted. Sally Holdings elected to measure stock-based compensation expense using the intrinsic ... September 30, 2005 and for the quarter ended December 31, 2006, we reported translation gains of approximately $3.5 million in the aggregate on an ...

  • Page 42
    ... shows the results of operations of our business for the fiscal years ended September 30, 2006, 2005 and 2004, expressed as a percentage of net sales for the respective periods: Year Ended September 30, 2006 2005 2004 Net sales 100.0% 100.0% 100.0% Cost of products sold and distribution expenses 54...

  • Page 43
    ... key measures we rely on to gauge our operating performance (dollars in thousands): Year Ended September 30, 2006 2005 2004 Net sales: Sally Beauty Supply $ 1,419,332 $ 1,358,899 $ 1,296,057 Beauty Systems Group 953,768 895,408 801,610 $ 2,373,100 $ 2,254,307 $ 2,097,667 Gross Profit $ 1,086...

  • Page 44
    ...2006. Sally Beauty Supply. Net sales for Sally Beauty Supply increased $60.4 million, or 4.4%, to $1,419.3 million for the year ended September 30, 2006...from the inclusion of a full reporting period for the CosmoProf business for the year ended September 30, 2006, which provided 2.8 percentage points...

  • Page 45
    ... and BSG discussed below. Sally Beauty Supply. As a result of the foregoing, Sally Beauty Supply' s segment operating profit increased $20.1 million, or 11.9%, to $188.8 million for the year ended September 30, 2006 compared to $168.7 million for the same period in 2005. Segment operating profit...

  • Page 46
    ...$6.3 million, or 5.4%, to $110.2 million for the year ended September 30, 2006 compared to $116.5 million for the same period in 2005. Net earnings, as... for the year ended September 30, 2005 by 0.6%. Sally Beauty Supply. Net sales for Sally Beauty Supply increased $62.8 million, or 4.8%, to $1,358.9 ...

  • Page 47
    ...sales, were 8.5% for the year ended September 30, 2005 compared to 8.1% for the year ended September 30, 2004. Sally Beauty Supply. As a result of the foregoing, Sally Beauty Supply' s segment operating profit increased $16.9 million, or 11.1%, to $168.7 million for the year ended September 30, 2005...

  • Page 48
    ..., the effect of changes in foreign exchange rates increased net sales for the year ended September 30, 2004 by 1.2%. Sally Beauty Supply. Net sales for Sally Beauty Supply increased $88.2 million, or 7.3%, to $1,296.1 million for the year ended September 30, 2004 compared to $1,207.9 million for...

  • Page 49
    ... due to the $27.0 million non-cash charge related to Alberto-Culver' s conversion to one class of common stock. Sally Beauty Supply. As a result of the foregoing, Sally Beauty Supply' s segment operating profit increased by $14.2 million, or 10.4%, to $151.8 million for the year ended September 30...

  • Page 50
    ... increased sales. Inventories increased $49.9 million to $575.0 million at September 30, 2006 compared to $525.1 at September 30, 2005. The increase was primarily due to an increase in the number of Sally Beauty Supply stores, the introduction of new lines for fragrances, hair color and electrical...

  • Page 51
    ... to an escrow payment by BSG to the former owners of West Coast. Stock options subject to redemption of $7.5 million as of September 30, 2006 represent the intrinsic value as of November 5, 2003 of currently outstanding Alberto-Culver stock options held by our employees which were modified on that...

  • Page 52
    ... in the first quarter of fiscal year 2006. Net property and equipment was $149.4 million at September 30, 2005, an increase of $23.5 million compared to September 30, 2004. The increase resulted primarily from capital expenditures for additional Sally Beauty Supply and BSG stores and the remodeling...

  • Page 53
    ...and all such borrowings were repaid during the year. No borrowings by these subsidiaries were outstanding as of September 30, 2006, 2005 and 2004. Sally Holdings historically also had revolving credit facilities as well as notes payable and notes receivable with affiliated companies. Borrowings from...

  • Page 54
    ...." The senior secured term loan facilities contain a covenant requiring Sally Holdings and its subsidiaries to comply with maximum consolidated secured leverage...likely will not be comparable to EBITDA or similarly titled measures reported by other companies. Based upon the current level of operations...

  • Page 55
    ...purchase obligations. The majority of our operating leases are for Sally Beauty Supply and BSG stores, which typically are located in strip ... cash obligations and commitments outstanding by future payment dates at September 30, 2006 (dollars in thousands): Payments Due by Period Less than More than 1...

  • Page 56
    ...notes mature in 2016. There are no other minimum required annual principal payments for the other components of our new debt. ...-Balance Sheet Financing Arrangements At September 30, 2006, 2005 and 2004, we had no off...estimates and assumptions that affect the reported amounts of assets, liabilities, ...

  • Page 57
    ... SFAS No. 123 (R) using the modified prospective method. Under this method, compensation expense is recognized for new stock option grants beginning in fiscal year 2006 and for the unvested portion of outstanding stock options that were granted prior to the adoption of SFAS No. 123 (R). We recognize...

  • Page 58
    ...15, 2006. We are currently assessing the effect of this pronouncement on our consolidated financial statements. Forward Looking Statements This Annual Report on...that cover exclusive territories; the effect of consolidation in the beauty supply industry; the risk that the benefits from the separation ...

  • Page 59
    ...income taxes by approximately $1.4 million on an annual basis, respectively. Sally Holdings and certain of our other subsidiaries will ... by fiscal year of existing long-term fixed rate debt* at September 30, 2006 is as follows (dollars in thousands): Long-Term Expected Maturities 2007 2008 2011 ...

  • Page 60
    ...a Delaware limited liability company, was renamed "Sally Holdings LLC" and became an indirect wholly-owned subsidiary of our company in connection with the separation of our business from Alberto-Culver. Sally Beauty Holdings, Inc. was formed on June 16, 2006 in connection with the separation of our...

  • Page 61
    ... Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholder Sally Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Sally Holdings, Inc. (a wholly-owned subsidiary of AlbertoCulver Company) and subsidiaries as of September 30, 2006...

  • Page 62
    Table of Contents SALLY HOLDINGS, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Alberto-Culver Company) Consolidated Balance Sheets September 30, 2006 and 2005 (In thousands) 2006 Assets Current assets: Cash and cash equivalents Trade accounts receivable, less allowance for doubtful accounts ...

  • Page 63
    Table of Contents SALLY HOLDINGS, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Alberto-Culver Company) Consolidated Statements of Earnings Years ended September 30, 2006, 2005, and 2004 (In thousands) 2006 2005 Net sales $ 2,373,100 $ 2,254,307 Cost of products sold and distribution expenses...

  • Page 64
    ...SALLY HOLDINGS, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Alberto-Culver Company) Consolidated Statements of Cash Flows Years ended September 30, 2006, 2005, and 2004 (In thousands) 2006... (net of deferred tax benefit of $1,815 - in 2006) 3,371 Net loss on disposal of leaseholds and other ...

  • Page 65
    Table of Contents SALLY HOLDINGS, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Alberto-Culver Company) Consolidated Statements of Stockholder' s Equity Years ended September 30, 2006, 2005, and 2004 (In thousands) Number Shares Dollars Other Total Stock Issued Stock Issued Paid-in ...

  • Page 66
    Stock options subject to redemptions Balance at September 30, 2006 - - (7,528 ) - - (7,528 ) 1 $ - $ 62,172 $ 927,512 $ 16,283 $ 1,005,967 See accompanying notes to the consolidated financial statements. 59

  • Page 67
    ...On November 10, 2006, the stockholders of Alberto-Culver approved a plan to separate its consumer products business and its Sally Beauty Supply/BSG distribution business ... management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and ...

  • Page 68
    Table of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver ...of long-term debt, including current maturities, approximates the carrying amounts at September 30, 2006. Fair value estimates are calculated using the present value of the projected debt cash flows...

  • Page 69
    Table of Contents Sally Holdings, Inc. and...of SFAS No. 142, Goodwill and Other Intangibles, management annually considers whether there has been a permanent impairment to the...and $45.5 million in the fiscal years ended September 30, 2006, 2005 and 2004, respectively, and are included in selling, ...

  • Page 70
    Table of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver...recorded. Sales returns and allowances were approximately 2% of net sales in each of fiscal years 2006, 2005 and 2004. (r) Shipping and Handling Shipping and handling costs related to freight to ...

  • Page 71
    ...Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver Company) Notes to Consolidated Financial Statements Prior to fiscal year 2006...157 $ 119,532 The $3.0 million and $17.9 million additions to reported net earnings in fiscal years 2005 and 2004, respectively, for stock-...

  • Page 72
    Table of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto...periods as the related stock options are exercised or canceled. (t) Recent Accounting Pronouncements In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an...

  • Page 73
    ... The change in the carrying amounts of goodwill by operating segment for the fiscal years ended September 30, 2006 and 2005 is as follows (in thousands): Beauty Sally Beauty Systems Supply Group Total Balance at September 30, 2004 $ 9,275 $ 295,507 $ 304,782 Additions, net of purchase price...

  • Page 74
    ... with indefinite lives and intangible assets subject to amortization by operating segment at September 30, 2006 and 2005 (in thousands): Sally Beauty Beauty Systems Supply Group Total Balance at September 30, 2006: Intangible assets with indefinite lives: Trade names $ 713 $ 34,480 $ 35,193 Other...

  • Page 75
    ...Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver Company) Notes to Consolidated Financial Statements Accrued expenses consist of the following at September 30, 2006 and 2005 (in thousands): 2006... borrowings outstanding at September 30, 2006 or 2005, has an interest ...

  • Page 76
    ... of Paid in Capital Prior to fiscal year 2003, Alberto-Culver owned all of the stock of Monarch Beauty Supply Co. Ltd. (Monarch) and certain shares of Beauticians Supply Ltd. (Beauticians), the remaining shares of which were owned by the Company. Since their respective purchase dates, the...

  • Page 77
    ...Sally... of the non-cash charge impacting fiscal year 2006 was calculated in accordance with SFAS No. 123... are exercisable on a cumulative basis in four equal annual increments commencing one year after the date of grant.... its consumer products and beauty supply distribution businesses involving Clayton,...

  • Page 78
    ... was expected to be recognized over a weighted average period of 2.0 years. In connection with the closing of the transaction separating Alberto-Culver' s consumer products and beauty supply distribution businesses involving 71

  • Page 79
    ... annual...2006, the Company had $1.0 million of unearned compensation related to restricted shares that was expected to be amortized to expense over a weighted average period of 3.8 years. In connection with the closing of the transaction separating Alberto-Culver' s consumer products and beauty supply...

  • Page 80
    ...Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver Company) Notes to Consolidated Financial Statements 14. Income Taxes The provision for income taxes for the fiscal years ended September 30, 2006... tax rate is summarized below: 2006 2005 2004 Statutory tax rate 35...

  • Page 81
    Table of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned ...beauty products, in order to expand the geographic area served by BSG. The total purchase price at September 30, 2006 was $22.2 million. Approximately $1.8 million of the estimated purchase price will be paid in equal annual...

  • Page 82
    Table of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of ... future results. Pro-forma information for the fiscal years ended September 30, 2006 and 2005 is not provided since West Coast Beauty Supply' s results of operations are included for the full year. 2004 Pro-...

  • Page 83
    ... service fees totaled $28.9 million, $27.6 million and $26.1 million in fiscal years 2006, 2005 and 2004, respectively. These amounts are classified as unallocated expenses for the Company' s segment reporting purposes in "note 18." Management believes that had the Company been operating as a stand...

  • Page 84
    Table of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver Company)... to be deductible for tax purposes. On June 19, 2006, Alberto-Culver announced a plan to split its beauty supply distribution business, the Company, from its consumer products business....

  • Page 85
    ...) one share of common stock of Sally Beauty Holdings, Inc., which will own and operate the Company' s beauty supply distribution business and (iii) a ...being expensed by us during the first quarter ending December 31, 2006. A transaction cost analysis is being performed to identify expenses associated...

  • Page 86
    ... between segments. Segment data for the fiscal years ended September 30, 2006, 2005 and 2004 is as follows (in thousands): Business Segments Information 2006 2005 2004 Net sales: Sally Beauty Supply $ 1,419,332 $ 1,358,899 $ 1,296,057 Beauty Systems Group 953,768 895,408 801,610 $ 2,373,100 $ 2,254...

  • Page 87
    ... of Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver Company) Notes to Consolidated Financial Statements Geographic data for the fiscal years ended September 30, 2006, 2005 and 2004 is as follows (in thousands): Geographic Area Information 2006 2005 2004...

  • Page 88
    ...50)% Total $ 1,140,000 2014 Senior notes $ 430,000 9.25% Senior subordinated notes 280,000 2016 10.50% Total $ 710,000 On November 17, 2006, Sally Beauty Holdings, Inc. had 180,050,492 shares of stock issued and outstanding and commenced regularway trading on the New York Stock Exchange (NYSE) as an...

  • Page 89
    ... Contents Sally Holdings, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Alberto-Culver Company) Notes to Consolidated Financial Statements 20. Quarterly Financial Data (Unaudited) Unaudited quarterly consolidated statement of earnings information for the fiscal years ended September 30, 2006...

  • Page 90
    ...our disclosure controls and procedures can be reported in our quarterly reports on Form 10-Q and our annual reports on Form 10-K. Many of the ... our CEO and CFO have concluded that, as of September 30, 2006, we maintain disclosure controls and procedures that are effective in providing reasonable...

  • Page 91
    ... the rules of the NYSE. Pursuant to the stockholders agreement among us, CDRS, Parallel Fund and the Lavin family stockholders, following the 2007 annual meeting of our stockholders until the earlier of the tenth anniversary of the closing date and the termination of the stockholders agreement, so...

  • Page 92
    ...will expire on the dates of our first, second and third annual stockholder meetings, respectively. Name Age Position James G. Berges 58...Beauty Systems Group since May 2006. From October 1993 to May 2006, Mr. Lowery served as Senior Vice President and General Merchandise Manager of Sally Beauty Supply...

  • Page 93
    ... from October 2000 to October 2004. Michael G. Spinozzi is President of Sally Beauty Supply. Prior to the Company' s separation from the Alberto-Culver Company, Mr. Spinozzi served as President of Sally Beauty Supply since May 2006. Prior to that, Mr. Spinozzi served in several capacities at Borders...

  • Page 94
    ...of Ryerson Inc. Edward W. Rabin was President of Hyatt Hotels Corporation until 2006, having served in various senior management roles since joining the company in 1969....by the Company' s board of directors. We expect our first annual meeting of stockholders to be held in April 2007. Committees of ...

  • Page 95
    ...• prepare the reports and analysis on executive compensation, which will be required to be included in our annual proxy statements. ... of the Board of Directors on November 16, 2006 and ratified by the full Board of Directors on December 5, 2006. The Compensation Committee consists of Ms. Affeldt ...

  • Page 96
    ...charter, which was adopted by the Board of Directors on December 5, 2006. Corporate Governance Communications with the Board of Directors Any holder of the... with our Second Amended and Restated By-laws, after our 2007 annual meeting of stockholders, CDRS shall have the right to nominate a certain...

  • Page 97
    ... in ownership with the Securities and Exchange Commission, the NYSE and us. Based solely on our review of such reports received by it, we believe that during fiscal year 2006, our executive officers, directors and greater than 10% beneficial owners complied with all such filing requirements. 90

  • Page 98
    ...capacities as executive officers of the Company. SUMMARY COMPENSATION TABLE Annual Compensation Other Long-Term Compensation Awards Payouts Stock Awards ($)(1) ...Manager, Beauty Systems Group Gary T. Robinson Senior Vice President, Chief Financial Officer and Treasurer Year 2006 2005 2004 2006 2005 ...

  • Page 99
    corresponding payout per unit. For the three-year performance period ended September 30, 2004, Alberto91

  • Page 100
    ...$9,389; $5,438 of matching contributions to the Sally Beauty 401(k) Savings Plan; and $74,184 of...each dated as of November 16, 2006, with certain Company executives. Each ... average dollar amount of the executive' s actual or annualized annual bonus in respect of the five years preceding termination, ...

  • Page 101
    ... Lowery 2.49 Senior Vice President and General Merchandise Manager, Beauty Systems Group Gary T. Robinson 1.99 Senior Vice President, ... the sections entitled "Compensation of Executive Officers of New Sally-Stock Option Grants," "-Stock Option Exercises," "-Long-Term...424(b)(3) on October 13, 2006. 93

  • Page 102
    ...MATTERS The table below contains information as of December 8, 2006, except as otherwise indicated, concerning the number of ... in the Profit Sharing Plan, 607 shares held as a participant in the Sally Beauty 401(k) Savings Plan, and 26,659 shares subject to stock options exercisable currently...

  • Page 103
    ... 30, 2006 2005 Audit Fees(1) $ 864,000 $ 743,000 Audit-Related Fees - - Tax Fees(2) 355,000 240,000 All Other Fees - - Total Fees(3) $ 1,219,000 $ 983,000 (1) Aggregate fees billed for professional services for the audit of annual financial statements as well as accounting and reporting advisory...

  • Page 104
    ... is incorporated by reference from Exhibit 2.01 to the Company' s Current Report on Form 8-K filed on October 30, 2006 Amended and Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated November 16, 2006, which is incorporated herein by reference from Exhibit 4.1 to the Company...

  • Page 105
    ... from Exhibit 4.5.2 to the Company' s Current Report on Form 8-K filed on November 22, 2006 Credit Agreement, dated November 16, 2006, with respect to an Asset-Based Loan Facility, among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, any Canadian Borrower from time to time...

  • Page 106
    97

  • Page 107
    ... G. Winterhalter, which is incorporated by reference from Exhibit 10.9 to the Current Report on Form 8-K filed by Alberto-Culver Company on June 22, 2006 Severance Letter, dated as May 25, 2006, from Sally Beauty Company, Inc. to Michael G. Spinozzi Form of Severance Agreement, which is incorporated...

  • Page 108
    32 .1-32.2 99 .1 Section 1350 Certifications Select portions of the Company' s Final Proxy Statement/Prospectus-Information Statement (File No. 333-136259), filed pursuant to Rule 424(b)(3) on October 13, 2006 98

  • Page 109
    ... of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of December, 2006. SALLY BEAUTY HOLDINGS, INC. By /s/ Gary G. Winterhalter Gary G. Winterhalter President and Chief Executive...

  • Page 110
    /s/ Richard J. Schnall Richard J. Schnall Director December 22, 2006 99

  • Page 111
    ..., the parties have caused this Amendment to be executed in their names by a duly authorized officer or representative as of December 13, 2006. SALLY BEAUTY HOLDINGS, INC. By: /s/ Raal H. Roos Name: Raal H. Roos Title: Senior Vice President, General Counsel and Secretary CDRS ACQUISITION LLC By...

  • Page 112
    Exhibit 10.10 May 25, 2006 Michael G. Spinozzi 4634 Lohr Road Ann Arbor, Michigan 48108 Dear Mike: I am writing to confirm the following agreement related to your employment with Sally Beauty Company, Inc. ("Sally"). You have expressed concern over your lack of financial protection in the event of a...

  • Page 113
    ...Sally, or in the event that Sally no longer exists, the successor of Sally... with this paragraph. Sally, or in the event that Sally no longer exists, ... amendment to you. If Sally, or in the event that Sally no longer exists, the...Winterhalter Gary Winterhalter President Sally Beauty Company, Inc. Acknowledged and ...

  • Page 114
    ...by and among Alberto-Culver Company, a Delaware corporation (the "Company"), Sally Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of the...be converted into options to purchase shares of common stock of New Sally; WHEREAS, in respect of the Company' s Management Incentive Plan and...

  • Page 115
    ... SHI agrees that it and New Sally will enter into a new Severance ...rate under Section 1274(d) of the Code, compounded semi-annually, which shall be payable upon demand; provided, however,...affiliate of CD&R) on or prior to October 31, 2006, or (b) such principal agreements are terminated prior to the...

  • Page 116
    ...(b) A written notice of the Executive' s termination of employment by SHI, New Sally or by the Executive, as the case may be, shall (i) set forth in... the giving of such notice). The failure by the Executive, SHI or New Sally to set forth in such notice any fact or circumstance which contributes to a ...

  • Page 117
    ...to, the Executive (or the Executive' s estate or beneficiaries) under any other employee benefit plan or compensation program of the Company, New Sally or SHI. 13. Application of Section 409A. Notwithstanding the foregoing, if SHI or the Executive reasonably and in good faith determines that payment...

  • Page 118
    ...49] times if the Date of Termination is after the Effective Time, plus [2][1.5][1] times the average of the dollar amount of the Executive' s actual or annualized (for any fiscal year consisting of less than 12 full months or with respect to which the Executive has been employed by the Company and...

  • Page 119
    ..., Inc. (Delaware) Neka Salon Supply, Inc. (New Hampshire) Sally Beauty Supply LLC (Delaware) Diorama Services Company, LLC (Delaware) Sally Capital Inc. (Delaware) Sally Beauty Distribution LLC (Delaware) Sally Beauty International Finance LLC (Delaware) Beauty Holding LLC (Delaware) Beyond the...

  • Page 120
    ... (England) Fashion Services Limited (Northern Ireland) Winthalt Limited (England) Sally Beauty Supply, B.V. (Netherlands) Sally Hair and Beauty GmbH (Germany) Sally Beauty Supply Japan, Inc. (Japan) SBCBSG Company de Mexico, s. de R.I. de C.V. (Mexico) SBIFCO Company de Mexico, S.A. de C.V. (Mexico...

  • Page 121
    ...' s equity for each of the years in the three-year period ended September 30, 2006, which report appears in the September 30, 2006 annual report on Form 10-K of Sally Beauty Holdings, Inc. Our report refers to changes in the Company' s method of accounting for stock-based compensation effective...

  • Page 122
    ...that: (1) I have reviewed this annual report on Form 10-K of Sally Beauty Holdings, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of... the registrant' s internal control over financial reporting. Date: December 22, 2006 By: /s/ GARY G. WINTERHALTER Gary G. Winterhalter...

  • Page 123
    ...annual report on Form 10-K of Sally Beauty Holdings, Inc.; (2) Based on my knowledge, this report...in this report; (4) ...this report ...report based on such evaluation; and d. Disclosed in this report any change in the registrant' s internal control over financial reporting...over financial reporting, to the...

  • Page 124
    ... SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sally Beauty Holdings, Inc. (the "Company") on Form 10-K for the year ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 125
    ... SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sally Beauty Holdings, Inc. (the "Company") on Form 10-K for the year ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 126
    Exhibit 99.1 The following information on this Exhibit 99.1 to the Annual Report on Form 10-K of Sally Beauty Holdings, Inc. (the "Company") is incorporated by reference from the Company' s Final Proxy Statement/Prospectus-Information Statement (File No. 333-136259), filed with the SEC ...

  • Page 127
    ... Grants The following table contains information relating to the Alberto-Culver stock option grants made during the fiscal year ended September 30, 2006 to the New Sally named executive officers. The options are subject to the terms of the 2003 ACSOP. In connection with the transaction, options to...

  • Page 128
    ...2006 Individual Grants Percent of Number of Securitie Underlyi ng Options Granted( (#) Total Options Granted to Employee in Fiscal Year(2) Potential Realizable Value at Assumed Annual...by taking the number of options granted to the New Sally named executive officer and dividing that number by the ...

  • Page 129
    ...Alberto-Culver common stock by the New Sally named executive officers during the fiscal year ended September 30, 2006, as well as the number and...-money options to purchase Alberto-Culver common stock as of September 30, 2006. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION ...

  • Page 130
    ...contains information relating to the grant of performance units under the Alberto-Culver SVIP during the fiscal year ended September 30, 2006 to the New Sally named executive officers. LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR Number of Shares, Units or Other Rights (#)(1) Estimated Future...

  • Page 131
    full calendar months of any fiscal year have elapsed, the entire fiscal year shall be deemed to have elapsed. No payout will be made if Alberto-Culver' s total stockholder return compared to the total stockholder return of companies comprising the Applicable Index would rank it at less than the 40 ...

  • Page 132
    ...in their severance agreement within two years after a change in control. In connection with the execution of the investment agreement these New Sally executive officers entered into termination agreements providing that the transactions are not a change in control for the purposes of their severance...

  • Page 133
    ... Termination Agreements. In connection with the transactions described above, on June 18, 2006, (i) Alberto-Culver entered into a termination agreement with Mr. Bernick and (ii) Alberto-Culver and Sally Holdings entered into a termination and consulting agreement with Mr. Renzulli. The description...

  • Page 134
    ...specified benefits if between June 19, 2006 and the second anniversary of the transactions his employment is terminated by Sally Holdings without "cause" or by ...a change in Mr. Winterhalter' s reporting responsibilities; a reduction in Mr. Winterhalter' s annual base salary; any requirement that Mr. ...

  • Page 135
    ...the severance amounts range from 1.49 to 2.49 times each officer' s current salary and average annual bonus over the last five years and the benefit plan coverage continues for a period of 24... *** • 10 _____ Created by 10KWizard www.10KWizard.comSource: Sally Beauty Holding, 10-K, December 22, 2006