Sally Beauty Supply 2006 Annual Report Download - page 54

Table of Contents
Liquidity Following our Separation from Alberto-Culver
In connection with our separation from Alberto-Culver, we, through our subsidiaries, (a) entered into senior term loan facilities under
which we borrowed approximately $1.07 billion at closing, (b) issued approximately $430 million principal amount of senior notes
and $280 million principal amount of senior subordinated notes and (c) entered into a $400 million ABL facility, subject to borrowing
base limitations, of which approximately $70 million was drawn at closing. Through our subsidiaries, we incurred aggregate
indebtedness in connection with the transactions of approximately $1.85 billion. Proceeds from this new debt and the $575 million
equity investment by the CDR investors were used to pay a $25.00 per share cash dividend to holders of record of our common stock,
who were Alberto-Culver shareholders as of the record date for the separation transaction.
Following the completion of our separation from Alberto-Culver, we are highly leveraged and a substantial portion of our liquidity
needs will arise from debt service on indebtedness incurred in connection with the transactions and from funding the costs of
operations, working capital and capital expenditures. Ongoing liquidity needs are expected to be funded by net cash provided by
operating activities and borrowings under the ABL facility. See “—Contractual Obligations” below. Our ability to obtain liquidity
from the issuance of additional public or private equity will be severely limited for at least two years following completion of our
separation from Alberto-Culver because issuance of our common stock may cause the Alberto-Culver share distribution to be taxable
to us and our stockholders under Section 355(e) of the Internal Revenue Code. See “Risk Factors—Risks Relating to the Tax
Treatment of our Separation from Alberto-Culver and Relating to Our Largest Stockholder.”
The senior secured term loan facilities contain a covenant requiring Sally Holdings and its subsidiaries to comply with maximum
consolidated secured leverage ratio levels, which will decline over time. The consolidated secured leverage ratio will be tested
quarterly, beginning with the four quarter period ending March 31, 2007. The consolidated secured leverage ratio is a ratio of (A) net
consolidated secured debt to (B) Consolidated EBITDA as defined in the senior secured term loan facilities.
The ABL facility contains a covenant requiring Sally Holdings and its subsidiaries to maintain a fixed-charge coverage ratio of 1.0 to
1 when availability under the ABL facility falls below $40 million. The fixed-charge coverage ratio is defined as the ratio of
(A) EBITDA as defined in the ABL facility, or Credit Agreement EBITDA, less unfinanced capital expenditures to (B) fixed charges
as included in the definition of the fixed-charge coverage ratio. The ABL facility uses fixed amounts for Credit Agreement EBITDA
for periods preceding our separation from Alberto-Culver.
For purposes of calculating either the consolidated secured leverage ratio or the fixed-charge coverage ratio, Consolidated EBITDA
and Credit Agreement EBITDA are measured on a last-four-quarters basis. Accordingly, the calculation can be disproportionately
affected by a particularly strong or weak quarter and may not be comparable to the measure for any previous or subsequent four-
quarter period.
Failure to comply with the consolidated secured leverage ratio covenant under the senior secured term loan facilities would result in a
default under such facilities. Failure to comply with the fixed-charge coverage ratio covenant (if and when applicable) under the ABL
facility would result in a default under such facility. Either such a default could also result in a default under the other facility or
facilities, as the case may be, and the notes. Absent a waiver or an amendment from our lenders and note holders, such defaults could
permit the acceleration of all indebtedness under the ABL facility, senior secured term loan facilities and the notes, which would have
a material adverse effect on our results of operations, financial position and cash flows.
Consolidated EBITDA and Credit Agreement EBITDA are not recognized measurements under accounting principles generally
accepted in the United States of America, or “GAAP” and should not be considered as a substitute for financial performance and
liquidity measures determined in accordance with GAAP, such as net income, operating income or operating cash flow. In addition,
because other companies may calculate EBITDA differently, Consolidated EBITDA and Credit Agreement EBITDA likely will not be
comparable to EBITDA or similarly titled measures reported by other companies.
Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances, funds generated by
operations and funds available under the new ABL facility will be sufficient to meet our working capital requirements and to finance
capital expenditures over the next twelve months. However, our ability to meet
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