Sally Beauty Supply 2006 Annual Report Download - page 27

Table of Contents
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 dividends, repurchase stock or make other distributions;
• prepay subordinated debt;
• create liens on assets (which, in the case of the senior subordinated notes, would be limited in applicability to
liens securing pari passu or subordinated indebtedness);
• 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 restrictions in the indentures governing our notes and the terms of our senior credit facilities may prevent us from taking actions
that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business
strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might
subject us to additional restrictive covenants that could affect our financial and operational flexibility. We cannot assure you that our
subsidiaries who are borrowers under these agreements will be granted waivers or amendments to these agreements if for any reason
they are unable to comply with these agreements, or that we will be able to refinance our debt on terms acceptable to us, or at all.
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 or 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 senior credit facilities 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 depend 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
22