Sally Beauty Supply 2007 Annual Report Download - page 36

The process for determining whether a prohibited change in control has occurred under the rules is complex, inherently factual and subject to interpretation of
the facts and circumstances of a particular case. If Alberto-Culver does not carefully monitor its, or we do not carefully monitor our, compliance with these rules,
this might inadvertently cause or permit a prohibited change in the ownership of us or of Alberto-Culver to occur, thereby triggering Alberto-Culver's or our
respective obligations to indemnify the other pursuant to the tax allocation agreement, which would have a material adverse effect on us and/or Alberto-Culver.
As the successor entity to Alberto-Culver after the separation, we rely upon the prior-year federal income tax returns of Alberto-Culver, and accounting methods
established therein, for certain calculations that affect our current U.S. federal income tax liability.
If any of the above events occur, we will be jointly and severally liable for these taxes, and there can be no assurance that Alberto-Culver would be able to fulfill
its indemnification obligations to us under the tax allocation agreement if Alberto-Culver was determined to be responsible for these taxes thereunder. In
addition, these mutual indemnity obligations could discourage or prevent a third party from making a proposal to acquire us.
Actions taken by the Lavin family stockholders or by the CDR investors could adversely affect the tax-free nature of the share distribution of Alberto-Culver
common stock in connection with the transactions separating us from Alberto-Culver.
Sales and/or acquisitions by the Lavin family stockholders of our common stock or Alberto-Culver common stock may adversely affect the tax-free nature of the
share distribution of Alberto-Culver common stock in the Separation Transactions. First, with certain exceptions, sales by the Lavin family stockholders of our
common stock or Alberto-Culver common stock at any time after the Separation Transactions might be considered evidence that the share distribution was used
principally as a device for the distribution of earnings and profits, particularly if the selling stockholder were found to have an intent to effect such sale at the
time of the share distribution. If the IRS successfully asserted that the share distribution was used principally as such a device, the share distribution would not
qualify as a tax-free distribution, and thus would be taxable to us. Second, with certain exceptions, if any of the Lavin family stockholders were to sell an amount
of our common stock that it received in connection with the Separation Transactions (or to acquire additional shares of our common stock) within the two year
period following completion of the Alberto-Culver share distribution, and that amount of stock, if added to the common stock comprising approximately 48% of
our outstanding common stock on an undiluted basis that was acquired by CDR Investors were to equal or exceed 50% of our outstanding common stock, as
determined under the Code and applicable Treasury regulations, a deemed acquisition of control of us in connection with the Alberto-Culver share distribution
would be presumed. If this presumption were not rebutted, we would be subject to significant U.S. federal income tax liabilities, which, if not reimbursed by
Alberto-Culver, would have a material adverse effect on us. Similarly, acquisitions by the CDR Investors or their affiliates of our common stock may cause a
deemed acquisition of control of us in connection with the Alberto-Culver share distribution.
We are affected by significant restrictions on our ability to issue equity securities following completion of the transactions separating us from
Alberto-Culver.
Because of certain limitations imposed by the Code and regulations thereunder, the amount of equity that we can issue to make acquisitions or raise additional
capital is severely limited and will continue to be so for at least two years following completion of the Separation Transactions, or November 2008. As a result,
we may not be able to raise even a small amount of equity capital during that period. These limitations may restrict our ability to carry out our business objectives
and to take advantage of opportunities that could be favorable to our business. In addition, because we, through our subsidiaries, incurred approximately
$1,850.0 million in debt in connection with those transactions, and the instruments governing our indebtedness contain limits on our ability to incur additional
debt, our inability to raise even a small
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Source: Sally Beauty Holding, 10-K, November 29, 2007