Sally Beauty Supply 2011 Annual Report Download - page 39

future, will require that our management and resources be diverted from our core business to assist in
compliance with the requirements. There can be no assurance that the time and resources our
management will need to devote to the requirements, any delays due to the installation of any upgrade, any
resulting service outages, and any impact on the reliability of our data from an upgrade will not have a
material adverse effect on our business, financial condition or results of operations.
We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.
We are a holding company and do not have any material assets or operations other than ownership of
equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries,
and our ability to generate cash to meet our obligations or to pay dividends is highly dependent on the
earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The
ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make
scheduled payments on our obligations will depend on their future financial performance, which will be
affected by a range of economic, competitive and business factors, many of which are outside of our
control. We cannot assure you that the cash flow and earnings of our operating subsidiaries will be
adequate for our subsidiaries to service their debt obligations. If our subsidiaries do not generate sufficient
cash flow from operations to satisfy corporate obligations, we may have to: undertake alternative financing
plans (such as refinancing), restructure debt, sell assets, reduce or delay capital investments, or seek to
raise additional capital. We cannot assure you that any such alternative refinancing would be possible, that
any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from
those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional
financing would be permitted under the terms of our various debt instruments then in effect. Our inability
to generate sufficient cash flow to satisfy our obligations, or to refinance our obligations on commercially
reasonable terms, would have an adverse effect on our business, financial condition and results of
operations.
Furthermore, we and our subsidiaries may incur substantial additional indebtedness in the future that may
severely restrict or prohibit our subsidiaries from making distributions, paying dividends or making loans to
us.
Risks Relating to Our Substantial Indebtedness
We have substantial debt and may incur substantial additional debt, which could adversely affect our financial
health, our ability to obtain financing in the future and our ability to react to changes in our business.
In connection with the Separation Transactions, certain of our subsidiaries, including Sally Holdings LLC,
which we refer to as Sally Holdings, incurred approximately $1,850.0 million in debt. As of September 30,
2011, we had an aggregate principal amount of approximately $1,413.1 million, including capital lease
obligations, of outstanding debt, and a total debt to equity ratio of ǁ6.45:1.00.
Our substantial debt could have important consequences. For example, it could:
• make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults
on and acceleration of such indebtedness;
• limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions,
debt service requirements or general corporate purposes;
• require us to dedicate a substantial portion of our cash flow from operations to the payment of
principal and interest on our indebtedness, thereby reducing the availability of such cash flows to
fund working capital, capital expenditures and other general corporate purposes;
• restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us, which could
limit our ability to conduct repurchases of our own equity securities or pay dividends to our
stockholders, thereby limiting our ability to enhance stockholder value through such transactions;
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