Sally Beauty Supply 2006 Annual Report Download - page 81

Table of Contents
Sally Holdings, Inc. and Subsidiaries
(A Wholly-Owned Subsidiary of Alberto-Culver Company)
Notes to Consolidated Financial Statements
Management believes that it is more likely than not that results of future operations will generate sufficient taxable income to realize
the deferred tax assets, net of the valuation allowance. The Company has recorded a valuation allowance to account for uncertainties
regarding recoverability of most foreign loss carryforwards.
Stock option expense and the non-cash charge related to Alberto-Culver’ s conversion to one class of common stock resulted in the
recognition of a deferred tax asset of $1.8 million and $1.5 million in fiscal years 2006 and 2005, respectively. During fiscal years
2006 and 2005, the deferred tax asset was reduced by $1.9 million and $2.8 million, respectively for current tax benefits recognized
upon the exercise of Alberto-Culver stock options by employees of the Company subsequent to the conversion, resulting in a deferred
tax asset of $4.9 million at September 30, 2006.
Domestic earnings before provision for income taxes were $174.6 million, $192.0 million and $160.9 million in fiscal years 2006,
2005 and 2004, respectively. Foreign operations had earnings before provision for income taxes of $5.5 million in fiscal year 2006, a
loss before provision for income taxes of $2.4 million in fiscal year 2005 and earnings before provision for income taxes of
$6.5 million in fiscal year 2004.
Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions.
Management does not expect the outcome of tax audits to have a material adverse effect on the Company’ s financial condition, results
of operations or cash flow.
Undistributed earnings of the Company’ s foreign operations are intended to remain permanently invested to finance future growth
and expansion. Accordingly, no U.S. income taxes have been provided on those earnings at September 30, 2006.
15. Acquisitions
On June 8, 2006, the Company acquired Salon Success, a U.K. based distributor of professional 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 amounts over the three years following the closing of the acquisition. In
accordance with the purchase agreement, additional consideration of up to $2.1 million may be paid over the same three-year period
based on sales to a specific customer. Goodwill of $10.6 million has been recorded as a result of the acquisition and is not expected to
be deductible for tax purposes. Certain identifiable intangible assets of $7.6 million were also recorded and are expected to be
deductible for tax purposes. The acquisition was accounted for using the purchase method and, accordingly, the results of operations
of Salon Success have been included in the consolidated financial statements from the date of acquisition. Salon Success is included in
the BSG segment. Pro-forma information for Salon Success is not provided since it is not material to the Company’ s consolidated
results of operations. The purchase price of Salon Success has been allocated to assets acquired and liabilities assumed based on their
estimated fair values at the date of acquisition.
On December 31, 2004, the Company acquired Innovation Successful Salon Services, Inc., XRG Enterprises, Inc., Artistic Salon
Services, Inc., and Pacific Salon Services, Inc., full service distributors of professional beauty products under common ownership
(collectively referred to as CosmoProf), in order to continue to expand the geographic area served by Beauty Systems Group. The total
amount paid for the acquisition was $91.2 million. Goodwill of $54.8 million was recorded as a result of the acquisition, substantially
all of which is expected to be deductible for income tax purposes. Certain identifiable intangible assets of $24.6 million were also
recorded. Of this amount, $19.7 million was assigned to registered trade names and $4.9 million to other identifiable intangible assets.
The Company has determined that the registered trade names have indefinite lives and are not subject to amortization for book
purposes. Substantially all of the trade names and other intangible assets are expected to be deductible for tax purposes. CosmoProf is
included in the BSG segment.
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