Sally Beauty Supply 2006 Annual Report Download - page 26

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Table of Contents
Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt, including secured
debt. This could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the instruments governing
our indebtedness do not fully prohibit us or our subsidiaries from doing so. As of September 30, 2006, on a pro forma basis, our senior
credit facilities, would have provided us commitments for additional borrowings of up to approximately $330 million under the asset-
backed senior secured loan ABL facility, subject to borrowing base limitations. If new debt is added to our current debt levels, the
related risks that we now face would increase and we may not be able to meet all our debt obligations. In addition, the agreements
governing our senior credit facilities as well as the indentures governing our senior notes and senior subordinated notes, which we
refer to collectively as the notes, do not prevent us from incurring obligations that do not constitute indebtedness.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability
to operate our business.
The senior secured term loan facilities, which we refer to as the senior term loans, contain covenants that, among other things, restrict
Sally Holdings’ and its subsidiaries’ ability to:
• dispose of assets;
• incur additional indebtedness (including guarantees of additional indebtedness);
• pay dividends, repurchase stock or make other distributions;
• prepay certain other debt or amend specific debt agreements;
• create liens on assets;
• make investments (including joint ventures);
• engage in mergers, consolidations or sales of all or substantially all of Sally Holdings’ assets;
• engage in certain transactions with affiliates; and
• permit restrictions on Sally Holdings’ subsidiaries ability to pay dividends.
The asset-backed senior secured loan facility, which we refer to as the ABL facility, contains covenants that, among other things,
restrict Sally Holdings’ and its subsidiaries’ ability to:
• change their line of business;
• amend specific debt agreements;
• engage in certain mergers, consolidations and transfers of substantially all assets;
• make certain acquisitions, make certain dividends, distributions and stock repurchases and prepay certain
debt, in each case to the extent any such transaction would reduce availability under the ABL facility below a
specified amount; and
• change the fiscal year of Sally Holdings or its direct parent.
The senior term loans contain a requirement that Sally Holdings not exceed a maximum ratio of net senior secured debt to
consolidated EBITDA (as 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 the ABL facility, it will then be obligated to maintain a specified fixed-charge
coverage ratio. Our ability to comply with these covenants in future periods will depend on our ongoing financial and operating
performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are
beyond our control. Our ability to comply with these covenants in future periods will also depend substantially on the pricing of our
products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business
strategy.
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