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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2009 |
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-OR- |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File No. 1-33145
SALLY BEAUTY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
36-2257936
(I.R.S. Employer Identification No.) |
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3001 Colorado Boulevard Denton, Texas (Address of principal executive offices) |
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76210 (Zip Code) |
Registrant's telephone number, including area code: (940) 898-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $.01 per share |
Name of Each Exchange on Which
Registered New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined under Rule 405 of the Securities Act. YES ý NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. YES o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act).
Large accelerated filer ý | Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES o NO ý
The aggregate market value of registrant's common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant's common stock on March 31, 2009 was approximately $533,207,000. At November 17, 2009, there were 182,313,747 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.
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In this Annual Report, references to "the Company," "Sally Beauty," "our company," "we," "our," "ours" and "us" refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries for periods after the separation from Alberto-Culver Company ("Alberto-Culver"), and to Sally Holdings, Inc. and its consolidated subsidiaries for periods prior to the separation from Alberto-Culver unless otherwise indicated or the context otherwise requires.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K and the documents incorporated by reference herein which are not purely historical facts or which depend upon future events may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. Words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" or similar expressions may also identify such forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements as such statements speak only as of the date they were made. Any forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements, including, but not limited to, risks and uncertainties related to:
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The events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. As a result, our actual results may differ materially from the results contemplated by these forward-looking statements. We assume no obligation to publicly update or revise any forward-looking statements.
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Introduction
We are the largest distributor of professional beauty supplies in the U.S. based on store count. We operate primarily through two business units, Sally Beauty Supply and Beauty Systems Group, or BSG. Through Sally Beauty Supply and BSG (which operates stores under the CosmoProf service mark), we operated a multi-channel platform of 3,727 stores and supplied 187 franchised stores primarily in North America, South America and selected European countries, as of September 30, 2009. Within BSG, we also have one of the largest networks of professional distributor sales consultants in North America, with approximately 1,022 professional distributor sales consultants who sell directly to salons and salon professionals. As of September 30, 2009, Sally Beauty Supply had 2,898 company-operated retail stores and supplied 25 franchised stores (all outside the U.S.), and BSG had 829 company-operated stores and supplied 162 franchised stores. We provide our customers with a wide variety of leading third-party branded and exclusive-label professional beauty supplies, including hair care products, styling appliances, skin and nail care products and other beauty items. Sally Beauty Supply stores target retail consumers and salon professionals, while BSG exclusively targets salons and salon professionals. Approximately 84%, 82% and 84% of our consolidated net sales for the fiscal years ended September 30, 2009, 2008 and 2007, respectively, were in the U.S. For the year ended September 30, 2009, our consolidated net sales were $2,636.6 million.
Sally Beauty Supply began operations with a single store in New Orleans in 1964 and was acquired in 1969 by our former parent company, Alberto-Culver. BSG became a subsidiary of Alberto-Culver in 1995. In November 2006, we separated from Alberto-Culver and became an independent company listed on the New York Stock Exchange. We refer to our separation from Alberto-Culver and its consumer products-focused business as the Separation Transactions. Sally Beauty is a Delaware corporation formed in June 2006 and became the accounting successor company to Sally Holdings upon the completion of the Separation Transactions. When we refer to Alberto-Culver, we mean Alberto-Culver Company prior to the Separation Transactions or the company from which we separated, which is currently a separate public company.
In connection with the Separation Transactions, CDRS Acquisition LLC, or CDRS and CD&R Parallel Fund VII, L.P., or the Parallel Fund, and which we refer to together with CDRS as the CDR Investors, invested an aggregate of $575.0 million in cash equity, representing ownership subsequent to the separation of approximately 48% of the outstanding shares of our common stock on an undiluted basis. CDRS, which owned approximately 47.4% of the outstanding shares of our common stock on an undiluted basis as of September 30, 2009, is a Delaware limited liability company organized by Clayton, Dubilier & Rice Fund VII, L.P., a private investment fund managed by Clayton, Dubilier & Rice, Inc. Also in connection with the Separation Transactions, certain of our subsidiaries incurred approximately $1,850.0 million of indebtedness, as more fully described below. Please see "Risk FactorsRisks Relating to Our Substantial Indebtedness" in Item 1A below.
Professional Beauty Supply Industry Distribution Channels
The professional beauty supply industry serves end-users through four channels: full-service/exclusive distribution, open-line distribution, direct and mega-salon stores.
Full-Service/Exclusive
This channel exclusively serves salons and salon professionals and distributes "professional-only" products for use and resale to consumers in salons. Many brands are distributed through arrangements with suppliers by geographic territory. BSG is a leading full-service distributor in the U.S.
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Open-Line
This channel serves retail consumers and salon professionals through retail stores and the internet. This channel is served by a large number of localized retailers and distributors, with only a few having a regional presence and significant channel share. We believe that Sally Beauty Supply is the only open-line distributor in the U.S. with a national network of retail stores. In addition, Sally Beauty Supply sells some of its products through its web site ( www.sallybeauty.com ).
Direct
This channel focuses on direct sales to salons and salon professionals by large manufacturers. This is the dominant form of distribution in Europe, but represents a small channel in the U.S. due to the highly fragmented nature of the U.S. marketplace, which tends to make direct distribution cost prohibitive for manufacturers.
Mega-Salon Stores
In this channel, large-format salons are supplied directly by manufacturers due to their large scale.
Key Industry Trends
We operate within the large and growing U.S. professional beauty supply industry. Potential growth in the industry is expected to be driven by increases in consumer demand for hair color, hair loss prevention and hair styling products and services, offset by lower sales of certain electrical products and/or full-service sales during periods of economic slowdown. We believe the following key industry trends and characteristics will influence our business going forward:
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depends in large part on our ability to anticipate, gauge and react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty products. We continuously adapt our marketing and merchandising initiatives for Sally Beauty Supply in an effort to expand our market reach or to respond to changing consumer preferences. If we are unable to anticipate and respond to trends in the marketplace for beauty products and changing consumer demands, our business could suffer.
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label products we sell. We purchase our products from a limited number of manufacturers. As is typical in distribution businesses, these relationships are subject to change from time to time (including the expansion or loss of distribution rights in various geographies and the addition or loss of product lines). Since we purchase products from many manufacturers on an at-will basis, under contracts which can generally be terminated without cause upon 90 days' notice or less or which expire without express rights of renewal, such manufacturers could discontinue sales to us at any time or upon the expiration of the distribution period. Some of our contracts with manufacturers may be terminated by such manufacturers if we fail to meet specified minimum purchase requirements. In such cases, we do not have contractual assurances of continued supply, pricing or access to new products and vendors may change the terms upon which they sell. Infrequently, a supplier will seek to terminate a distribution relationship through legal action. Changes in our relationships with suppliers occur often and could positively or negatively impact our net sales and operating profits. Although we focus on developing new revenue and cost management initiatives to mitigate the negative effects resulting from unfavorable changes in our supplier relationships, there can be no assurance that our efforts will continue to completely offset the loss of these or other distribution rights. Please see "Risk Factors We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us" in Item 1A below.
We expect to continue to expand our product line offerings and to gain additional distribution rights over time through either further negotiation with suppliers or by strategic acquisitions of existing distributors. Although we are focused on developing new revenue and cost management initiatives, there can be no assurance that our efforts will partially or completely offset any potential loss of distribution rights in the future. Please see "Risk FactorsWe depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us" in Item 1A below.
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Business Segments, Geographic Area Information and Seasonality
We operate two business segments: (i) Sally Beauty Supply, an open-line and exclusive-label distributor of professional beauty supplies offering professional beauty supplies to both retail consumers and salon professionals primarily in North America, Europe, Puerto Rico and South America, and (ii) BSG, a full-service beauty supply distributor offering professional brands directly to salons and salon professionals through our own sales force and professional-only stores, many in exclusive geographical territories in North America. BSG operates stores under the CosmoProf service mark. BSG also franchises beauty supply outlets in the southwest portion of the U.S. and Mexico, and supplies sub-distributors in Europe. Sales of Sally Beauty Supply accounted for approximately 64%, 63% and 62%; and BSG accounted for approximately 36%, 37% and 38% of the company's consolidated net sales for the years ended September 30, 2009, 2008 and 2007, respectively.
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Financial information about business segments and geographic area information is incorporated herein by reference to the "Business Segments and Geographic Area Information," Note 19 of the "Notes to Consolidated Financial Statements" in "Item 8Financial Statements and Supplementary Data" of this Annual Report.
Neither the sales nor the product assortment for Sally Beauty Supply or BSG are generally seasonal in nature.
Sally Beauty Supply
We believe Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on store count. As of September 30, 2009, Sally Beauty Supply operated 2,898 company-operated retail stores, 2,357 of which are located in the U.S. (with the remainder in the United Kingdom and certain other countries in Europe, Canada, Puerto Rico, Mexico and Chile), and supplied 25 franchised stores (all outside the U.S.). Its stores carry an extensive selection of professional beauty products, ranging between 4,000 and 8,000 stock keeping units (or SKUs) of beauty products, and includes products for hair care, nail care, beauty sundries and small electrical appliances targeting retail consumers and salon professionals. Sally Beauty Supply stores carry leading third-party brands such as Clairol, Revlon and Conair, as well as an extensive selection of exclusive-label merchandise. We believe that Sally Beauty Supply has differentiated itself from its competitors through its customer value proposition, attractive pricing, extensive selection of leading third-party branded and exclusive-label products, broad ethnic product selection, the product knowledge of its sales associates and convenient store locations.
Store Design and Operations
Sally Beauty Supply stores are designed to create an appealing shopping environment that embraces the retail consumer and salon professional and highlights its extensive product offering. Sally Beauty Supply stores average between 1,200 square feet and 1,700 square feet in size and are located primarily in strip shopping centers. Generally, Sally Beauty Supply stores follow a consistent format, allowing customers familiarity between Sally Beauty Supply locations.
Sally Beauty Supply stores are segmented into distinctive areas arranged by product type with signs allowing its customers to easily navigate through its stores. Sally Beauty Supply seeks to stimulate cross-selling and impulse buying through strategic product placement and use of the front of the store to highlight new products and key promotional items.
Merchandise
Sally Beauty Supply stores carry a broad selection of branded and exclusive-label beauty supplies. Sally Beauty Supply manages each category by product and by SKU and uses centrally developed planoguides to maintain a consistent merchandise presentation across its store base (primarily in the U.S. and Canada). Through its information systems, Sally Beauty Supply actively monitors each store's performance by category, allowing it to maintain consistently high levels of in-stock merchandise. We believe Sally Beauty Supply's tailored merchandise strategy enables it to meet local demands and helps drive traffic in its stores. Additionally, its information systems enable it to track and automatically replenish inventory levels, generally on a weekly basis, primarily in the U.S.
Sally Beauty Supply offers a comprehensive ethnic product selection with specific appeal to African-American and Hispanic customers. Its ethnic product offerings are tailored by store based on market demographics and category performance. For example, sales of products targeted for the African-American marketplace represented approximately 9% of net sales in Sally Beauty Supply's U.S. stores for fiscal year 2009. We believe the breadth of selection of ethnic products available in Sally Beauty Supply stores is unique and differentiates its stores from its competition. Sally Beauty Supply also aims to position itself to be competitive in price, but not a discount leader.
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Sally Beauty Supply's pricing strategy is differentiated by customer segment. Professional salon customers are generally entitled to a price lower than that received by retail customers. However, Sally Beauty Supply does offer discounts to retail customers through its customer loyalty program.
Leading Third-Party Branded Products
Sally Beauty Supply offers an extensive selection of hair care products, nail care products, beauty sundries and appliances from leading third-party brands such as Clairol, Revlon and Conair, as well as an extensive selection of exclusive-label merchandise. We believe that carrying a broad selection of the latest premier branded merchandise is critical to maintaining long-term relationships with our customers. The merchandise Sally Beauty Supply carries includes products from one or more of the leading manufacturers in each category. Sally Beauty Supply's objective is not only to carry leading brands, but also to carry a full range of branded and exclusive-label products within each category. As hair trends continue to evolve, we expect to offer the changing professional beauty product assortment necessary to meet the needs of retail consumers and salon professionals.
Exclusive-Label Products
Sally Beauty Supply offers a broad range of private label and controlled label products, which we generally refer to collectively as exclusive-label products, unless the context requires otherwise. Private label products are brands manufactured under trademarks we own or license and in some instances we also own the formula. Controlled label products involve brands that are owned by the manufacturer, but for which we have been granted sole distribution rights. We believe exclusive-label products provide customers with an attractive alternative to higher-priced leading third-party brands. Exclusive-label products accounted for approximately 42% of Sally Beauty Supply's product sales in the U.S. during fiscal year 2009. Generally, the exclusive-label brands have higher gross margins than the leading third-party branded products, and we believe this area offers continued potential growth. Sally Beauty Supply maintains exclusive-label products in a number of categories including hair care, small electrical appliances and salon products. Sally Beauty Supply actively promotes its exclusive-label brands through in-store promotions and monthly flyers. We believe our customers perceive these exclusive-label products to be comparable in quality and name recognition to leading third-party branded products.
The following table sets forth the approximate percentage of Sally Beauty Supply's sales by merchandise category:
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Year Ended
September 30, 2009 |
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Hair color |
22.0 | % | |||
Hair care |
18.8 | % | |||
Brushes, cutlery and accessories |
16.9 | % | |||
Skin and nail care |
13.2 | % | |||
Electrical appliances |
11.9 | % | |||
Ethnic products |
8.7 | % | |||
Other beauty items |
8.5 | % | |||
Total |
100.0 | % | |||
Marketing and Advertising
Sally Beauty Supply's marketing program is designed to promote its extensive selection of brand name products at competitive prices. The program is currently centered on multi-page, color flyers highlighting promotional products. Separate flyers are created and tailored to Sally Beauty Supply's retail customers and salon professionals. These flyers, which are available in Sally Beauty Supply stores, are also mailed to loyalty program customers and salon professionals on a monthly basis and are supplemented by e-mail newsletters.
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We continuously adapt our marketing and merchandising initiatives for Sally Beauty Supply in an effort to expand our market reach or to respond to changing consumer preferences.
Sally Beauty Supply's customer loyalty and marketing programs allow Sally Beauty Supply to collect point-of-sale customer data and increase our understanding of customers' needs. The Sally "Beauty Club" is a loyalty program for customers who are not salon professionals. Beauty Club members, after paying a nominal annual fee, receive a special, discounted price on almost every non-sale item. Members are also eligible for a special Beauty Club e-mail newsletter that contains additional savings, beauty tips, new product information and coupons. In addition, the "ProCard" is a marketing program for licensed salon professionals. ProCard members receive discounts on all beauty products sold at Sally Beauty Supply stores. We believe these programs are effective in developing and maintaining customer relationships.
Store Locations
Sally Beauty Supply selects geographic areas and store sites on the basis of demographic information, quality and nature of neighboring tenants, store visibility and location accessibility. Sally Beauty Supply seeks to locate stores primarily in strip malls, which are occupied by other high traffic retailers including grocery stores, mass merchants and home centers.
Sally Beauty Supply balances its store expansion between new and existing marketplaces. In its existing marketplaces, Sally Beauty Supply adds stores as necessary to provide additional coverage. In new marketplaces, Sally Beauty Supply generally seeks to expand in geographically contiguous areas to leverage its experience. We believe that Sally Beauty Supply's knowledge of local marketplaces is an important part of its success.
The following table provides a history of Sally Beauty Supply's store count during the last five fiscal years:
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Fiscal Year Ended September 30, | |||||||||||||||
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2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Stores open at beginning of period |
2,844 | 2,694 | 2,511 | 2,419 | 2,355 | |||||||||||
Net store openings during period |
60 | 110 | 83 | 92 | 62 | |||||||||||
Stores acquired during period |
19 | 40 | 100 | | 2 | |||||||||||
Stores open at end of period |
2,923 | 2,844 | 2,694 | 2,511 | 2,419 | |||||||||||
Beauty Systems Group
We believe that BSG is the largest full-service distributor of professional beauty supplies in the U.S. As of September 30, 2009, BSG had 829 company-operated stores, supplied 162 franchised stores and had a sales force of approximately 1,022 professional distributor sales consultants selling exclusively to salons and salon professionals in substantially every state in the U.S., in Puerto Rico and in portions of Canada, Mexico and certain European countries.
Store Design and Operations
BSG stores are designed to create a professional shopping environment that embraces the salon professional and highlights its extensive product offering. Company-operated BSG stores average approximately 2,700 square feet and are located primarily in secondary strip shopping centers. BSG store layouts are designed to provide optimal variety and options to the salon professional. Stores are segmented into distinctive areas arranged by product type with certain areas dedicated to leading third-party brands; such as Paul Mitchell, Wella, Sebastian, Goldwell and TIGI. The selection of these brands varies by territory.
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Professional Distributor Sales Consultants
BSG has a network of approximately 1,022 professional distributor sales consultants, which exclusively serve salons and salon professionals. The following table sets forth the number of consultants in the BSG network during the last five fiscal years:
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Fiscal Year Ended September 30, | |||||||||||||||
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2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Professional distributor sales consultants(a) |
1,022 | 984 | 1,002 | 1,163 | 1,244 |
The number of distributor sales consultants, at September 30, 2009, reflects approximately 100 distributor sales consultants previously employed by Schoeneman Beauty Supply, Inc ("Schoeneman"). On September 30, 2009, the Company acquired Schoeneman and these distributor sales consultants became part of BSG's consultant sales team. The decrease in distributor sales consultants in fiscal year 2007 was in response to the loss of L'Oreal related sales discussed below under "Competition." BSG's sales force was reduced in fiscal year 2007 and the remaining affected distributor sales consultants were offered certain compensation related incentives to stay with us as BSG replaced lost L'Oreal sales.
In order to provide a knowledgeable consultant team, BSG actively recruits individuals with industry knowledge or sales experience, as we believe that new consultants with either broad knowledge about the products or direct sales experience will be more successful.
BSG provides training to new consultants beginning with a one-week training program, followed by a continuing program of media-based training, delivered through audio, video and web-based e-learning. The program is designed to develop product knowledge as well as techniques on how best to serve salon professionals. In addition to selling professional beauty products, these sales consultants offer in-store training for professionals and owners in areas such as new styles, techniques and business practices.
An important component of consultants' compensation is sales commissions. BSG's commission system is designed to drive sales and focus consultants on selling products that are best suited to individual salons and salon professionals. We believe our emphasis on recruitment, training, and sales-based compensation results in a sales force that distinguishes itself from other full-service/exclusive-channel distributors.
The following table sets forth the approximate percentage of BSG sales attributable by channel:
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Fiscal Year Ended
September 30, |
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2009 | 2008 | ||||||
Company-operated retail stores |
60.0 | % | 57.0 | % | ||||
Professional distributor sales consultants (full-service) |
27.9 | % | 29.9 | % | ||||
Franchise stores |
12.1 | % | 13.1 | % | ||||
Total |
100.0 | % | 100.0 | % | ||||
Merchandise
BSG stores carry a broad selection of branded beauty supplies and a lesser selection of exclusive-label products, ranging between 4,000 and 9,000 SKUs of beauty products, including hair care products, nail care, small electrical appliances and other beauty items. Some products are available in bulk packaging for higher volume salon needs. Through BSG's information systems, each store's product performance is actively monitored, allowing maintenance of an optimal merchandise mix. Additionally, BSG's information systems track and automatically replenish inventory levels on a weekly basis, enabling BSG to maintain high levels of product in stock. Although BSG positions itself to be competitive on price, its primary focus
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is to provide a comprehensive selection of branded products to the salon professional. Certain BSG products are sold under exclusive arrangements with suppliers, whereby BSG is designated the sole distributor for a specific brand name within certain geographic territories. We believe that carrying a broad selection of branded merchandise is critical to maintaining relationships with our valued professional customers.
The following table sets forth the approximate percentage of sales attributable by merchandise category:
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Fiscal Year Ended
September 30, 2009 |
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Hair care |
38.5 | % | |||
Hair color |
28.4 | % | |||
Promotional items(a) |
12.5 | % | |||
Skin and nail care |
7.7 | % | |||
Electrical appliances |
4.9 | % | |||
Brushes, cutlery and accessories |
3.2 | % | |||
Other beauty items |
4.8 | % | |||
Total |
100.0 | % | |||
Marketing and Advertising
BSG's marketing program is designed primarily to promote its extensive selection of brand name products at competitive prices. BSG distributes at its stores and mails to its salon and salon professional customers, multi-page color flyers that highlight promotional products. Some BSG stores also host monthly manufacturer-sponsored classes for customers. These classes are held at BSG stores and led by manufacturer-employed educators. Salon professionals, after paying a small fee to attend, are educated on new products and beauty trends. We believe these classes increase brand awareness and drive sales in BSG stores.
Store Locations
BSG stores are primarily located in secondary strip shopping centers. Although BSG stores are located in visible and convenient locations, salon professionals are less sensitive about store location than Sally Beauty Supply customers.
The following table provides a history of BSG's store count during the last five fiscal years:
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Fiscal Year Ended September 30, | |||||||||||||||
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2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Stores open at beginning of period |
929 | 874 | 828 | 822 | 692 | |||||||||||
Net store openings during period |
16 | 44 | 46 | 6 | 37 | |||||||||||
Stores acquired during period (a) |
46 | 11 | | | 93 | |||||||||||
Stores open at end of period |
991 | 929 | 874 | 828 | 822 | |||||||||||
Our Strategy
We believe there are significant opportunities to increase our sales and profitability through the further implementation of our operating strategy and by growing our store base in existing and contiguous
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marketplaces, both organically and through strategic acquisitions. Specific elements of our growth strategy include the following:
Increase Sales Productivity of Our Stores
We intend to grow same store sales by focusing on improving our merchandise mix and introducing new products. In addition, we plan to tailor our marketing, advertising and promotions to attract new customers and increase sales with existing customers. We also plan to enhance our customer loyalty programs, which allow us to collect point-of-sale customer data and increase our understanding of customers' needs.
Open New Stores and Exploring New Marketplaces
In fiscal year 2009, we opened or acquired 79 and 62 net new stores for Sally Beauty Supply and BSG, respectively. Because of the limited initial capital outlay, rapid payback, and attractive return on capital, we intend to continue to expand our Sally Beauty Supply and BSG store base. We believe there are growth opportunities for additional stores in the U.S., Canada, Mexico, Europe and South America. We expect new store openings and acquisitions in existing and new areas to be an important aspect of our future growth opportunities. Please also see "Pursue Strategic Acquisitions."
Increase Sales of Exclusive-label Products
We currently intend to grow exclusive-label sales in Sally Beauty Supply. We believe our customers view our exclusive-label products as high-quality, recognizable brands, which are competitive with leading third-party branded merchandise. Exclusive-label products are currently sold through our Sally Beauty Supply stores with very limited exclusive-label offerings at BSG. Exclusive-label products account for a substantial amount of the Sally Beauty Supply segment net sales and generate a gross margin greater than that of the leading third-party brands sold through our stores. Potential growth for such products is believed to be significant. In addition, our broad exclusive-label product offering minimizes our dependence on any one brand or supplier. We believe exclusive-label products present opportunities to grow profits and increase store loyalty.
Increase Operating Efficiency and Profitability
We believe there are opportunities to increase the profitability of operations, especially in our BSG business. During the last couple of fiscal years, we made certain changes which included right-sizing the business (including some targeted reductions-in-force) and maximizing the efficiency of our structure. We completed a re-branding project at BSG that repositioned all of our North American company-operated stores under a common name and store identity, CosmoProf, which we believe has improved brand consistency, saved on advertising and promotional costs and allowed for a more focused marketing strategy. We also implemented a two-year, $22.0 million capital spending program to consolidate BSG warehouses and reduce administrative expenses related to BSG's distribution network. Additionally, during fiscal year 2007 we implemented working capital improvement initiatives focused on the management of receivables, inventory and payables to further maximize our free cash flow. Over the past few years, we have also undertaken a full review of our procurement strategy. This initiative is intended to identify lower-cost alternative sources of supply in certain product categories from countries with lower manufacturing costs. We also offer between 5,000 and 8,000 SKUs of our Sally Beauty Supply products for sale through our website ( www.sallybeauty.com ), which we expect will increasingly lead to additional sales for that business segment.
Pursue Strategic Acquisitions
We have completed approximately 32 acquisitions over the last 10 years. We believe our experience in identifying attractive acquisition targets; our proven integration process; and our highly scalable infrastructure have created a strong platform for potential future acquisitions, subject to restrictions on our ability to finance acquisitions by incurring additional debt or issuing equity under our debt agreements. For example, (1) on September 4, 2009, we acquired InterSalon, a leading distributor of premier beauty supply
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products with 16 stores located in Chile; (2) on September 18, 2009, we acquired the assets and business of Belleza Concept International, Inc., a distributor of beauty supply products operating in Puerto Rico; (3) on September 30, 2009, we acquired Schoeneman, a 43-store beauty supply chain located in the central northeast United States; 4) in May of 2008 we acquired Pro-Duo, N.V., a cash and carry retailer of both professional and retail hair products with 40 stores located mainly in Belgium, France and Spain; and (5) in February of 2007, we acquired Chapelton 21 Limited, a private company based in Scotland with almost 100 stores located in the United Kingdom, Ireland, Germany and Spain. We intend to continue to identify and evaluate acquisition targets both domestically and internationally, with a focus on expanding our exclusive BSG territories and allowing Sally Beauty Supply to enter new channels outside the U.S.
Competition
Although there are a limited number of sizable direct competitors to our business, the beauty industry is highly competitive. In each area in which we operate, we experience competition from domestic and international businesses often with more resources, including mass merchandisers, drug stores, supermarkets and other chains offering similar or substitute beauty products at comparable prices. Our business also faces competition from department stores. In addition, our business competes with local and regional open-line beauty supply stores and full-service distributors selling directly to salons and salon professionals through both professional distributor sales consultants and outlets open only to salons and salon professionals. Our business also faces increasing competition from certain manufacturers that use their own sales forces to distribute their professional beauty products directly or align themselves with our competitors. Some of these manufacturers are vertically integrating through the acquisition of distributors and stores. In addition, these manufacturers may acquire additional brands that we currently distribute and attempt to shift these products to their own distribution channels. Our business also faces competition from authorized and unauthorized retailers and internet sites offering professional salon-only products. Please see "Risk FactorsThe beauty products distribution industry is highly competitive and is consolidating" for additional information on our competition.
Competitive Strengths
We believe the following competitive strengths differentiate us from our competitors and contribute to our success:
The Largest Professional Beauty Supply Distributor in the U.S. with Multi-Channel Platform
Sally Beauty Supply and BSG together comprise the largest distributor of professional beauty products in the U.S. by store count. Our leading channel positions and multi-channel platform afford us several advantages, including strong positioning with suppliers, the ability to better service the highly fragmented beauty supply marketplace, economies of scale and the ability to capitalize on the ongoing consolidation in our sector. Through our multi-channel platform, we are able to generate and grow revenues across broad, diversified geographies, and customer segments using varying product assortments. We operate in several countries outside the U.S. and Puerto Rico, offering up to 8,000 and 9,000 SKUs in Sally Beauty Supply (in our stores and online) and BSG stores, respectively, to a potential customer base that includes millions of retail consumers, and more than 250,000 salons in the U.S.
Differentiated Customer Value Proposition
We believe that our stores are differentiated from their competitors through convenient location, broad selection of professional beauty products (including leading third-party branded and exclusive-label merchandise), high levels of in-stock merchandise, knowledgeable salespeople and competitive pricing. Our merchandise mix includes a comprehensive ethnic product selection, which is tailored by store based on market demographics and category performance. We believe that the breadth of our selection of these products further differentiates Sally Beauty Supply from its competitors. In addition, as discussed above, Sally Beauty Supply also offers a customer loyalty program for Sally Beauty Supply customers, the Beauty Club, whereby members receive a special, discounted price on products and are also eligible for a special
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Beauty Club e-mail newsletter with additional promotional offerings, beauty tips and new product information for a nominal annual fee. We believe that our differentiated customer value proposition and strong brands drive customer loyalty and high repeat traffic, contributing to our consistent historical financial performance. Our BSG professional distributor sales consultants benefit from their customers having access to the BSG store systems as customers have the ability to pick up the products they need between sales visits from professional distributor sales consultants.
Attractive Store Economics
We believe that our stores generate attractive returns on invested capital. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for international stores costing less or substantially more depending upon the marketplace. Sally Beauty Supply stores average between 1,200 square feet and 1,700 square feet and BSG stores average approximately 2,700 square feet in size. Domestically, our stores are typically located within strip shopping centers. Strong average sales per square foot combined with minimal staffing requirements, low rent expense and limited initial capital outlay typically result in positive contribution margins within a few months, and cash payback on investment within approximately two years. Due to such attractive investment returns and relatively high operating profit contributions per store, during the past five years Sally Beauty Supply and BSG have opened an aggregate of 407 and 149 net new stores, respectively, excluding the effect of acquisitions.
Consistent Financial Performance
We have a proven track record of strong growth and consistent profitability due to superior operating performance, new store openings and strategic acquisitions. Over the past five fiscal years, our consolidated same store sales growth has been positive in each year and has averaged 2.7%, as set forth in the following table:
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Year Ended September 30, | ||||||||||||||||
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Same store sales growth(a)
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2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Sally Beauty Supply |
2.1 | % | 1.2 | % | 2.7 | % | 2.4 | % | 2.4 | % | |||||||
Beauty Systems Group |
1.0 | % | 6.9 | % | 10.1 | % | 4.1 | % | (0.6 | %) | |||||||
Consolidated |
1.8 | % | 2.6 | % | 4.5 | % | 2.8 | % | 1.8 | % |
Experienced Management Team with a Proven Track Record
Our management team, led by President and Chief Executive Officer Gary Winterhalter, has a strong record of performance.
Customer Service
We strive to complement our extensive merchandise selection and innovative store design with superior customer service. We actively recruit individuals with cosmetology experience because we believe that such individuals are more knowledgeable about the products they sell. Additionally, Sally Beauty Supply recruits individuals with retail experience because we believe their general retail knowledge can be leveraged in the beauty supply industry. We believe that employees' knowledge of the products and ability to demonstrate and explain the advantages of the products increases sales and that their prompt, knowledgeable service fosters the confidence and loyalty of customers and differentiates our business from other professional beauty supply distributors.
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We emphasize product knowledge during initial training as well as during ongoing training sessions, with programs intended to provide new associates and managers with significant training. The training programs encompass operational and product training and are designed to increase employee and store productivity. Store employees are also required to participate in training on an ongoing basis to keep up-to-date on products and operational practices.
Most of our stores are staffed with a store manager, and two or three full-time or part-time associates. BSG stores are generally also staffed with an assistant manager. The operations of each store are supervised by a district manager, who reports to a territory manager. A significant number of our store managers and assistant managers are licensed in the cosmetology field. Additionally, in certain geographic areas in the U.S., a significant number of our store personnel, including store managers and assistant managers, speak Spanish as a second language. We believe that these skills enhance our store personnel's ability to serve our customers.
Relationships with Suppliers
We purchase our merchandise directly from manufacturers through supply contracts and by purchase orders. For the fiscal year 2009, our five largest suppliers, Procter & Gamble, the Professional Products Division of L'Oreal USA S/D, Inc., or L'Oreal, Conair Corporation, Shiseido Cosmetic (America) Limited, and John Paul Mitchell Systems, accounted for approximately 40% of our consolidated merchandise purchases. Products are purchased from these and many manufacturers on an at-will basis or under contracts which can be terminated without cause upon 90 days notice or less or expire without express rights of renewal. Such manufacturers could discontinue sales to us at any time or upon short notice. If any of these suppliers discontinued selling or were unable to continue selling to us, there could be a material adverse effect on our consolidated results of operations.
As is typical in the distribution businesses, relationships with suppliers are subject to change from time to time (including the expansion or loss of distribution rights in various geographies and the addition or loss of products lines). Changes in our relationships with suppliers occur often, and could positively or negatively impact our net sales and operating profits. Please see "Risk FactorsWe depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us." However, we believe that we can be successful in mitigating negative effects resulting from unfavorable changes in the relationships between us and our suppliers through, among other things, the development of new or expanded supplier relationships.
Distribution
As of September 30, 2009, we operated 16 distribution centers, seven of which serviced Sally Beauty Supply and nine of which serviced BSG. During the past three years, we implemented a capital spending program to consolidate warehouses and reduce administrative expenses related to BSG's distribution network optimization program. Total capital expenditures were approximately $22.0 million and related expenses were approximately $5.0 million for this program. We believe that annual savings from this program could approximate $10.0 million beginning with fiscal year 2010.
Our purchasing and distribution system is designed to minimize the delivered cost of merchandise and maximize the level of merchandise in-stock in stores. This distribution system also allows for monitoring of delivery times and maintenance of appropriate inventory levels. Product deliveries are typically made to our stores on a weekly basis. Each distribution center has a quality control department that monitors products received from suppliers. We utilize proprietary software systems to provide computerized warehouse locator and inventory support. Please see "Risk FactorsWe are not certain that our ongoing cost control plans will continue to be successful."
Management Information Systems
Our management information systems provide order processing, accounting and management information for the marketing, distribution and store operations functions of our business. A significant portion of
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these systems have been developed internally. The information gathered by the management information systems supports automatic replenishment of in-store inventory and provides support for product purchase decisions. Please see "Risk FactorsWe may be adversely affected by any disruption in our information technology systems."
Employees
In our domestic and foreign operations, we had approximately 22,410 employees as of September 30, 2009; consisting of approximately 6,480 salaried, 4,930 hourly and 11,000 part-time employees. We had approximately 21,140 employees as of September 30, 2008; consisting of approximately 5,850 salaried, 4,710 hourly and 10,580 part-time employees. Part-time employees are used to supplement schedules, particularly in North America. The number of employees at September 30, 2009, includes approximately 600 persons employed by Schoeneman and approximately 100 persons employed by InterSalon.
Certain subsidiaries in Mexico have collective bargaining agreements covering warehouse and store personnel which expire at various times over the next several years. We believe that we have good relationships with our employees worldwide.
Management
For information concerning our directors and executive officers, please see "Directors and Executive Officers of the Registrant" in Item 10 of this Annual Report.
Regulation
We are subject to a wide variety of laws and regulations, which historically have not had a material effect on our business. For example, in the U.S., most of the products sold and the content and methods of advertising and marketing utilized are regulated by a host of federal agencies, including, in each case, one or more of the following: the Food and Drug Administration, or FDA, the Federal Trade Commission, or FTC, and the Consumer Products Safety Commission. The transportation and disposal of many of our products are also subject to federal regulation. State and local agencies regulate many aspects of our business. In marketplaces outside of the U.S., regulation is also comprehensive and focused upon labeling and safety issues.
Sally Beauty Supply supplies 25 and BSG supplies 162 franchised stores located in the U.S., Mexico and certain countries in Europe. As a result of these franchisor-franchisee relationships, we are subject to regulation when offering and selling franchises in the applicable countries. The applicable laws and regulations affect our business practices, as franchisor, in a number of ways, including restrictions placed upon the offering, renewal, termination and disapproval of assignment of franchises. To date, these laws and regulations have not had a material effect upon operations.
Trademarks and Other Intellectual Property Rights
Our trademarks, certain of which are material to our business, are registered or legally protected in the U.S., Canada and other countries throughout the world in which we operate. Our subsidiaries and we own over 238 trademark registrations in the U.S., and 800 trademark registrations outside the U.S. We also rely upon trade secrets and know-how to develop and maintain our competitive position. We protect intellectual property rights through a variety of methods, including reliance upon trademark, patent and trade secret laws and confidentiality agreements with many vendors, employees, consultants and others who have access to our proprietary information. The duration of our trademark registrations is generally 10 or 15 years, depending on the country in which a mark is registered, and generally the registrations can be renewed. The scope and duration of intellectual property protection varies by jurisdiction and by individual product.
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Access to Public Filings
Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, and amendments to such reports are available, without charge, on our website, www.sallybeautyholdings.com , as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission, or SEC, under the Exchange Act. We will provide copies of such reports to any person, without charge, upon written request to our Investor Relations Department at 3001 Colorado Blvd, Denton, TX 76210. The information found on our website shall not be considered to be part of this or any other report filed with or furnished to the SEC.
In addition to our website, you may read and copy public reports we file with or furnish to the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov .
The following describes risks that we believe to be material to our business. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results could be materially and adversely affected. There may be additional risks of which we are not aware or that we do not believe to be material that could materially and adversely affect our business. This report also contains forward-looking statements and the following risks could cause our actual results to differ materially from those anticipated in such forward-looking statements.
Risks Relating to Our Business
The beauty products distribution industry is highly competitive and is consolidating.
The beauty products distribution industry is highly fragmented, and there are few significant barriers to entry into the marketplaces for most of the types of products and services we sell. Sally Beauty Supply competes with other domestic and international beauty product wholesale and retail outlets, including local and regional open line beauty supply stores, professional-only beauty supply stores, salons, mass merchandisers, drug stores and supermarkets. BSG competes with other domestic and international beauty product wholesale and retail suppliers and with manufacturers selling professional beauty products directly to salons and individual salon professionals. We also face competition from authorized and unauthorized retailers as well as internet sites offering professional salon-only products. The increasing availability of diverted professional salon products in large format retail stores such as drug stores, grocery stores and others could have a negative impact on our business. The primary competitive factors in the beauty products distribution industry are the price at which we purchase products from manufacturers, the quality, perceived value, consumer brand name recognition, packaging and mix of the products we sell, customer service, the efficiency of our distribution network and the availability of desirable store locations. Competitive conditions may limit our ability to maintain prices or may require us to reduce prices to retain business or marketplace share. Some of our competitors have greater financial and other resources than we do, and are less leveraged than our business, and may therefore be able to spend more aggressively on advertising and promotional activities and respond more effectively to changing business and economic conditions. We expect existing competitors, business partners and new entrants to the beauty products distribution industry to constantly revise or improve their business models in response to challenges from competing businesses, including ours. If these competitors introduce changes or developments that we cannot address in a timely or cost-effective manner, our business may be adversely affected.
In addition, our industry is consolidating, which may give our competitors increased negotiating leverage and greater marketing resources, thereby providing them corresponding competitive advantages over us. For instance, we may lose customers if our competitors that own national chains acquire additional salons that are BSG customers or if professional beauty supply manufacturers align themselves with other beauty
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product wholesale and retail suppliers who compete with BSG. For example, BSG's largest supplier, L'Oreal, has moved a material amount of revenue out of the BSG nationwide distribution network and into competitive regional distribution networks. L'Oreal has also acquired one supplier (that does not currently do business with BSG) and distributors competitive with BSG in the southeastern U.S. as well as the west coast of the U.S. As a result, L'Oreal entered into direct competition with BSG and there can be no assurance that there will not be further revenue losses over time at BSG, due to potential losses of additional L'Oreal related products as well as from the increased competition from L'Oreal-affiliated distribution networks. If L'Oreal were to acquire a supplier that conducted business with BSG, we could lose that revenue as well. Such consolidation may increase competition from distribution channels related to suppliers and place more leverage in the hands of those suppliers to negotiate better margins on products sold in our stores.
If we are unable to compete effectively in our marketplace or if competitors divert our customers away from our stores, it would adversely impact our business, financial condition and results of operations.
We may be unable to anticipate changes in consumer preferences and buying trends or manage our product lines and inventory commensurate with consumer demand.
Our success depends in part on our ability to anticipate, gauge and react in a timely manner to changes in consumer spending patterns and preferences for beauty products. If we do not anticipate and respond to trends in the marketplace for beauty products and changing consumer demands in a timely manner, our sales may decline significantly and we may be required to mark down certain products to sell the resulting excess inventory at prices which can be significantly lower than the normal retail or wholesale price, which could adversely impact our business, financial condition and results of operations. In addition, we depend on our inventory management and information technology systems in order to replenish inventories and deliver products to store locations in response to customer demands. Any systems-related problems could result in difficulties satisfying the demands of customers which, in turn, could adversely affect our sales and profitability.
We expect the aging baby boomer population to drive future growth in professional beauty supply sales through an increase in the use of hair color and hair loss products. Additionally, we expect continuously changing fashion-related trends that drive new hair styles to result in continued demand for hair styling products. Changes in consumer tastes and fashion trends can have an impact on our financial performance. If we are unable to anticipate and respond to trends in the marketplace for beauty products and changing consumer demands, our business could suffer.
Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons.
Our comparable store sales and quarterly results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable store sales and quarterly financial performance, including:
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Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results to be expected for any other quarter, and comparable store sales for any particular future period may decrease, which could have a material adverse effect on our business, financial condition and results of operations.
We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.
We do not manufacture the brand name or exclusive label products we sell, and instead purchase our products from manufacturers and fillers. We depend on a limited number of manufacturers for a significant percentage of the products we sell. For fiscal year 2009, our three largest suppliers were Procter & Gamble Co., or P&G, the Professional Products Division of L'Oreal USA S/D, Inc., or L'Oreal, and John Paul Mitchell Systems. BSG's largest supplier, L'Oreal, represented approximately 15.1% of BSG's total net sales in the fiscal year 2009.
In addition, since we purchase products from many manufacturers and fillers on an at-will basis under contracts which can generally be terminated without cause upon 90 days notice or less, or which expire without express rights of renewal, such manufacturers and fillers could discontinue sales to us at any time or upon the expiration of the distribution period. Some of our contracts with manufacturers may be terminated by such manufacturers if we fail to meet specified minimum purchase requirements. In such cases, we do not have contractual assurances of continued supply, pricing or access to new products and vendors may change the terms upon which they sell. Infrequently, a supplier will seek to terminate a distribution relationship through legal action. For example, in 2009 L'Oreal filed an action which threatens a long-term distribution agreement with Armstrong McCall. Armstrong McCall is vigorously defending its rights under the agreement. For these and other reasons, we may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the future.
Changes in Sally Beauty Supply and BSG's relationships with suppliers occur often, and could positively or negatively impact the net sales and operating profits of both business segments. Some of our suppliers may seek to decrease their reliance on distribution intermediaries, including full-service/exclusive and open-line distributors like BSG and Sally Beauty Supply, by promoting their own distribution channels, as discussed above. These suppliers may offer advantages, such as discounted prices, when their products are purchased from distribution channels they control. If our access to supplier-provided products were to be diminished relative to our competitors or we were not able to purchase products at the same prices as our competitors, our business could be materially and adversely affected. Also, consolidation among suppliers may increase their negotiating leverage, thereby providing them with competitive advantages over us that may increase our costs and reduce our revenues, adversely affecting our business, financial condition and results of operations.
As discussed above, L'Oreal is entering into direct competition with BSG, and there can be no assurance that there will not be further revenue losses over time at BSG, due to potential losses of additional L'Oreal related products as well as from the increased competition from L'Oreal-affiliated distribution networks. For example, L'Oreal could attempt to terminate our contracts to carry certain of their products in BSG stores, which brought in revenues of approximately $99.1 million in U.S. sales for the fiscal year 2009 and
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have expiration dates at the end of 2012. Therefore, there can be no assurance that the impact of these developments will not adversely impact revenue to a greater degree than we currently expect or that our efforts to mitigate the impact of these developments will be successful. If the impact of these developments is greater than we expect or our efforts to mitigate the impact of these developments are not successful, this could have a material adverse effect on our business, financial condition or results of operations.
Although we plan to mitigate the negative effects resulting from unfavorable changes in our relationships with suppliers, such as L'Oreal, there can be no assurance that our efforts will partially or completely offset the loss of these distribution rights.
Any significant interruption in the supply of beauty supply products by manufacturers of our products could disrupt our ability to deliver merchandise to our stores and customers in a timely manner, which could have a material adverse effect on our business, financial condition and results of operations.
Manufacturers and fillers of beauty supply products are subject to certain risks that could adversely impact their ability to provide us with their products on a timely basis, including industrial accidents, environmental events, strikes and other labor disputes, union organizing activity, disruptions in logistics or information systems, loss or impairment of key manufacturing sites, product quality control, safety, and licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which neither they nor we have control. In addition, our operating results depend to some extent on the orderly operation of our receiving and distribution processes, which depend on manufacturers' adherence to shipping schedules and our effective management of our distribution facilities and capacity.
If a material interruption of supply occurs, or a significant supplier ceases to supply us or materially decreases its supply to us, we may not be able to acquire products with similar quality and consumer brand name recognition as the products we currently sell or to acquire such products in sufficient quantities to meet our customers' demands or on favorable terms to our business, any of which could adversely impact our business, financial condition and results of operations.
If products sold by us are found to be defective in labeling or content, our credibility and that of the brands we sell may be harmed, marketplace acceptance of our products may decrease, and we may be exposed to liability in excess of our products liability insurance coverage and manufacturer indemnities.
We do not control the production process for the brand name and exclusive label products we sell. We may not be able to identify a defect in a product we purchase from a manufacturer or filler before we offer such product for resale. In many cases, we rely on representations of manufacturers and fillers about the products we purchase for resale regarding whether such products have been manufactured in accordance with applicable governmental regulations. Our sale of certain products exposes us to potential product liability claims, recalls or other regulatory or enforcement actions initiated by federal, state or foreign regulatory authorities or through private causes of action. Such claims, recalls or actions could be based on allegations that, among other things, the products sold by us are misbranded, contain contaminants, provide inadequate instructions regarding their use or misuse, or include inadequate warnings concerning flammability or interactions with other substances. Claims against us could also arise as a result of the misuse by purchasers of such products or as a result of their use in a manner different than the intended use. We may be required to pay for losses or injuries actually or allegedly caused by the products we sell and to recall any product we sell that is alleged to be or is found to be defective.
Any actual defects or allegations of defects in products sold by us could result in adverse publicity and harm our credibility, which could adversely affect our business, financial condition and results of operations. Although we may have indemnification rights against the manufacturers of many of the products we distribute and rights as an "additional insured" under the manufacturer's insurance policies, it is not certain that any individual manufacturer or insurer will be financially solvent and capable of making payment to any party suffering loss or injury caused by products sold by us. Further, some types of actions and penalties, including many actions or penalties imposed by governmental agencies and punitive
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damages awards, may not be remediable through reliance on indemnity agreements or insurance. Furthermore, potential product liability claims may exceed the amount of indemnity or insurance coverage or be excluded under the terms of an indemnity agreement or insurance policy. If we are forced to pay to satisfy such claims, it could have an adverse effect on our business, financial condition and results of operations.
We could be adversely affected if we do not comply with laws and regulations or if we become subject to additional or more stringent laws and regulations.
We are subject to a number of U.S. federal, state and local laws and regulations, as well as the laws and regulations applicable in each other marketplace in which we do business. These laws and regulations govern the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products, and the methods we use to import these products. Non-compliance with applicable laws and regulations of governmental authorities, including the FDA and similar authorities in other jurisdictions, by us or the manufacturers of the products sold by us could result in fines, product recalls and enforcement actions or otherwise restrict our ability to market certain products, which could adversely affect our business, financial condition and results of operations. The laws and regulations applicable to us or manufacturers of the products sold by us may become more stringent. Continued legal compliance could require the review and possible reformulation or relabeling of certain products, as well as the possible removal of some products from the marketplace altogether. Legal compliance could also lead to considerably higher internal regulatory costs. Manufacturers may try to recover some or all of any increased costs of compliance by increasing the prices at which we purchase products, and we may not be able to recover some or all of such increased cost in our own prices to our customers. We are also subject to state and local laws and regulations that affect our franchisor-franchisee relationships. Increased compliance costs and the loss of sales of certain products due to more stringent or new laws and regulations could adversely affect our business, financial condition and results of operations.
Laws and regulations impact our business in many areas that have no direct relation to the products we sell. For example, as a public company, we are subject to a number of laws and regulations related to the issuance and sale of our securities. Another area of intense regulation is that of the relationships we have with our employees, including compliance with many different wage/hour and nondiscrimination related regulatory schemes. Violation of any of the laws or regulations governing our business and/or the assertion of individual or class-wide claims could have an adverse effect on our business, financial condition and results of operations.
Product diversion could have an adverse impact on our revenues.
The majority of the products that BSG sells, including those sold by our Armstrong McCall franchisees, are meant to be used exclusively by salons and individual salon professionals or are meant to be sold exclusively by the purchasers, such as salons, to their retail consumers. However, despite our efforts to prevent diversion, incidents of product diversion occur, whereby our products are sold by these purchasers (and possibly by other bulk purchasers such as franchisees) to wholesalers and general merchandise retailers. These retailers, in turn, sell such products to consumers. The diverted product may be old, tainted or damaged and sold through unapproved outlets, all of which could diminish the value of the particular brand. Diversion may result in lower net sales for BSG should consumers choose to purchase diverted products from retailers rather than purchasing from our customers, or choose other products altogether because of the perceived loss of brand prestige.
Product diversion is generally prohibited under our supplier contracts, and we may be under a contractual obligation to stop selling to salons, salon professionals and other bulk purchasers who engage in product diversion. If we fail to stop diversion as required (including any known diversion of products sold through our Armstrong McCall franchisees or by BSG), our supplier contracts could be adversely affected or even terminated. In addition, our investigation and enforcement of our anti-diversion policies may result in reduced sales to our customer base, thereby decreasing our revenues and profitability.
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BSG's financial results are affected by the financial results of BSG's franchised-based business (Armstrong McCall).
BSG receives revenue from products purchased by Armstrong McCall franchisees. Accordingly, a portion of BSG's financial results is to an extent dependent upon the operational and financial success of these franchisees, including their implementation of BSG's strategic plans. If sales trends or economic conditions worsen for Armstrong McCall's franchisees, their financial results may worsen. Additionally, if Armstrong McCall franchisees fail to renew their franchise agreements, or if Armstrong McCall fails to meet its obligations under its franchise agreements or vendor distribution agreements or is required to restructure its franchise agreements in connection with such renewal, it could result in decreased revenues for BSG or legal issues with our franchisees or vendors.
Our new Internet-based business may be unsuccessful or may cause internal channel conflict.
We offer many of our beauty products for sale through our website ( www.sallybeauty.com ). Therefore, we encounter risks and difficulties frequently experienced in internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand and develop our internet operations, our websites, and our software and other related operational systems. In addition, our internet-based business may conflict with the success of our Sally Beauty Supply stores. For example, our internet-based business may compete with our Sally Beauty Supply stores for the same customers. Although we believe that our participation in both internet-based and store-based sales is a distinct advantage for us due to synergies and the potential for new customers, customer conflicts between these offerings could create issues that have the potential to adversely affect our results of operations. For example, such conflict could cause some of our current or potential internet customers to consider competing distributors of beauty products. These events could have an adverse effect on our business, financial condition and results of operations.
We may not be able to successfully identify acquisition candidates or successfully complete desirable acquisitions.
In the past several years, we have completed several significant acquisitions. We intend to continue to pursue additional acquisitions in the future. Our business has in the past actively reviewed acquisition prospects that would complement our existing lines of business, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities. There can be no assurance that we will be able to identify suitable acquisition candidates.
If suitable candidates are identified, sufficient funds may not be available to make such acquisitions. We compete against many other companies, some of which are larger and have greater financial and other resources than we do. Increased competition for acquisition candidates could result in fewer acquisition opportunities and higher acquisition prices. In addition, we are highly leveraged and the agreements governing our indebtedness contain limits on our ability to incur additional debt to pay for acquisitions. Additionally, the amount of equity that we can issue to make acquisitions or raise additional capital will be severely limited. We may be unable to finance acquisitions that would increase our growth or improve our financial and competitive position. To the extent that debt financing is available to finance acquisitions, our net indebtedness could be increased as a result of any acquisitions.
If we acquire any businesses in the future, they could prove difficult to integrate, disrupt our business or have an adverse effect on our results of operations.
Any acquisitions that we do make may be difficult to integrate profitably into our business and may entail numerous risks, including:
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In addition, during the acquisition process, we may fail or be unable to discover some of the liabilities of businesses that we acquire. These liabilities may result from a prior owner's noncompliance with applicable laws and regulations. Acquired businesses may also not perform as we expect or we may not be able to obtain the financial improvements in acquired businesses that we expect.
If we are unable to profitably open and operate new stores, our business, financial condition and results of operations may be adversely affected.
Our future growth strategy depends in part on our ability to open and profitably operate new stores in existing and additional geographic areas. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for international stores costing less or substantially more depending upon the marketplace. Despite these relatively-low per-store opening costs, we may not be able to open all of the new stores we plan to open and any new stores we open may not be profitable, either of which could have a material adverse impact on our financial condition or results of operations. There are several factors that could affect our ability to open and profitably operate new stores, including:
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A further downturn in the economy may affect consumer purchases of discretionary items such as beauty products and salon services, which could have a material adverse effect on our business, financial condition and results of operations.
Our results of operations may be materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world. The stress experienced by global capital markets that began in the second half of 2007 continued and substantially increased during 2008 and 2009. Concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased volatility and diminished expectations for the economy. We appeal to a wide demographic consumer profile and offer a broad selection of beauty products sold directly to retail consumers and salons and salon professionals. Continued uncertainty in the economy could adversely impact consumer purchases of discretionary items such as beauty products and salon services, particularly in our electrical products category and in our professional sales business. Factors that could affect consumers' willingness to make such discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit, and consumer confidence in future economic conditions. In the event of a further or protracted economic downturn, consumer spending habits could be adversely affected, and we could experience lower than expected net sales. In addition, a reduction in traffic to, or the closing of, the other destination retailers in the shopping areas where our stores are located could significantly reduce our sales and leave us with unsold inventory. The economic downturn could also adversely affect our vendors which we rely on to supply the products that we sell. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
We are not certain that our ongoing cost control plans will continue to be successful.
Our business strategy depends, to a substantial degree, on continuing to control or reduce operating expenses. In furtherance of this strategy, we have engaged in ongoing activities to reduce or control costs. These activities include maximizing the efficiency of our structure, including through the implementation of a capital spending program in fiscal years 2007 through 2009 to consolidate BSG warehouses and reduce administrative expenses related to BSG's distribution network optimization program. We cannot assure you that our efforts will result in the increased profitability, cost savings or other benefits that we expect, which could have a material adverse effect on our business, financial condition and results of operations.
If we are unable to protect our intellectual property rights, specifically our trademarks and service marks, our ability to compete could be negatively impacted.
The success of our business depends to a certain extent upon the value associated with our intellectual property rights. We own certain trademark and service mark rights used in connection with our business including, but not limited to, "Sally," "Sally Beauty," "Sally Beauty Supply," "Sally Pro Preferred Card," "Sally Beauty Club Card, " "BSG," "CosmoProf," "Proclub," "Armstrong McCall," "ion," "Beyond the Zone," and "Salon Services." We protect our intellectual property rights through a variety of methods, including, but not limited to, applying and obtaining trademarks in the U.S., Canada and other countries throughout the world in which our business operates. We also rely on trade secret laws, in addition to confidentiality agreements with vendors, employees, consultants, and others who have access to our proprietary information. While we intend to vigorously protect our trademarks against infringement, we may not be successful in doing so. In addition, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. The costs required to protect our intellectual property rights and trademarks are expected to continue to be substantial.
23
Our ability to conduct business in international marketplaces may be affected by legal, regulatory and economic risks.
Our ability to capitalize on growth in new international marketplaces and to grow or maintain our current level of operations in our existing international marketplaces is subject to risks associated with our international operations. These risks include: unexpected changes in regulatory requirements; trade barriers to some international marketplaces; economic and foreign currency fluctuations in specific marketplaces; potential difficulties in enforcing contracts, protecting assets, including intellectual property, and collecting receivables in certain foreign jurisdictions; potential tax liabilities associated with repatriating funds from foreign operations; and difficulties and costs of staffing, managing and accounting for foreign operations.
We may be adversely affected by any disruption in our information technology systems.
Our operations are dependent upon our information technology systems, which encompass all of our major business functions. We rely upon such information technology systems to manage and replenish inventory, to fill and ship customer orders on a timely basis, to coordinate our sales activities across all of our products and services and to coordinate our administrative activities. A substantial disruption in our information technology systems for any prolonged time period (arising from, for example, system capacity limits from unexpected increases in our volume of business, outages or delays in our service) could result in delays in receiving inventory and supplies or filling customer orders and adversely affect our customer service and relationships. Our systems might be damaged or interrupted by natural or man-made events or by computer viruses, physical or electronic break-ins and similar disruptions affecting the global internet. There can be no assurance that such delays, problems, or costs will not have a material adverse effect on our financial condition and results of operations.
As our operations grow in both size and scope, we will continuously need to improve and upgrade our systems and infrastructure while maintaining the reliability and integrity of our systems and infrastructure. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business increases, with no assurance that the volume of business will increase. In particular, we have upgraded our financial reporting system and are currently upgrading our distribution systems and implementing a new point-of-sale system for tracking customer sales. These and any other required upgrades to our systems and information technology, or new technology, now and in the future, will require that our management and resources be diverted from our core business to assist in compliance with those requirements. Since our systems are proprietary, our options are limited in seeking third-party help with the operation and upgrade of these systems. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded technology (and customer issues therewith), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect on our business, financial condition or results of operations.
The occurrence of one or more natural disasters or acts of terrorism could adversely affect our operations and financial performance.
The occurrence of one or more natural disasters or acts of terrorism could result in physical damage to one or more of our properties, the temporary closure of stores or distribution centers, the temporary lack of an adequate work force in an area, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those products) from some domestic or foreign suppliers, the temporary disruption in the delivery of goods to our distribution centers (or a substantial increase in the cost of those deliveries), the temporary reduction in the availability of products in our stores, and/or the temporary reduction in visits to stores by customers.
If one or more natural disasters or acts of terrorism were to impact our business, we could, among other things, incur significantly higher costs and longer lead times associated with distributing products to stores.
24
Furthermore, insurance costs associated with our business may rise significantly in the event of a large scale natural disaster or act of terrorism.
Our accounting and other management systems, controls and resources may not be adequately prepared to meet the financial reporting and other requirements to which we are subject.
As an independent, publicly-traded company, we are directly subject to reporting and other obligations under the Exchange Act. These reporting and other obligations place significant demands on the management and administrative and operational resources, including accounting resources, of us and our subsidiaries. As a public company, we incur significant legal, accounting, and other expenses. Under the SEC rules and regulations, as well as those of the New York Stock Exchange, we have significant compliance costs.
In addition, as a public company we are subject to rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, which require us to include in our Annual Report on Form 10-K our management's report on, and assessment of, the effectiveness of our internal controls over financial reporting. Furthermore, our independent registered public accounting firm must attest to and report on the effectiveness of such internal controls. If we fail to properly assess and/or achieve and maintain the adequacy of our internal controls, there is a risk that we will not comply with all of the requirements imposed by Section 404. Moreover, effective internal controls are necessary to help prevent financial fraud. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements, which ultimately could harm our business and could negatively impact the market price of our securities.
To comply with these requirements, we and our subsidiaries are continuously upgrading our systems, including information technology, and implementing additional financial and management controls, reporting systems and procedures. These and any other required upgrades to our financial and management controls, reporting systems, information technology and procedures under the financial reporting requirements and other rules that apply to reporting companies, now and in the future, will require that our management and resources be diverted from our core business to assist in compliance with those requirements. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of upgrades, or the impact on the reliability of our data from these upgrades 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 their obligations we may have to undertake alternative financing plans, such as refinancing or restructuring their debt, selling assets, reducing or delaying capital investments or seeking 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
25
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, 2009, we had an aggregate principal amount of approximately $1,677.5 million, including capital lease obligations, of outstanding debt, and a total debt to equity ratio of -2.73:1.00.
Our substantial debt could have important consequences to you. For example, it could:
Any of the foregoing impacts of our substantial indebtedness could have a material adverse effect on our business, financial condition and results of operations.
Despite our current indebtedness levels, we and our subsidiaries may be able to incur substantially more debt, including secured debt, which could further exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may incur substantial additional indebtedness in the future. The terms of the instruments governing our indebtedness do not fully prohibit us or our subsidiaries from doing so. As of September 30, 2009, our senior credit facilities provided us commitments for additional borrowings of up to approximately $325.6 million under the asset-backed senior secured loan (or ABL) facility, subject to
26
borrowing base limitations. If new debt is added to our current debt levels, the related risks that we face would increase, and we may not be able to meet all our debt obligations. In addition, the agreements governing our senior credit facilities as well as the indentures governing our senior notes and senior subordinated notes, which we refer to collectively as the Notes, do not prevent us from incurring obligations that do not constitute indebtedness.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business.
The senior secured term loan facilities, which we refer to as the Term Loans, contain covenants that, among other things, restrict Sally Holdings and its subsidiaries' ability to:
The ABL facility contains covenants that, among other things, restrict Sally Holdings and its subsidiaries' ability to:
The Term Loans contain a requirement that Sally Holdings not exceed a maximum ratio of net senior secured debt to consolidated EBITDA (as those terms are defined in the relevant credit agreement). In addition, if Sally Holdings fails to maintain a specified minimum level of borrowing capacity under the ABL facility, it will then be obligated to maintain a specified fixed-charge coverage ratio. Our ability to comply with these covenants in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these covenants in future periods
27
will also depend substantially on the pricing of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy.
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:
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 Term Loans 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.
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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 meet our debt service and other obligations. Our senior credit facilities and the indentures governing the Notes restrict our ability to dispose of assets and use the proceeds from any such dispositions. We cannot assure you we will be able to consummate those sales, or if we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet debt service obligations when due.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability.
A significant portion of our outstanding debt, including under our senior credit facilities, bears interest at variable rates. As a result, an increase in interest rates, whether because of an increase in market interest rates or a decrease in our creditworthiness, would increase the cost of servicing our debt and could materially reduce our profitability and cash flows. The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial debt.
The impairment of other financial institutions could adversely affect us.
We have exposure to different counterparties with regard to our interest rate swaps. These transactions expose us to credit risk in the event of default of our counterparty. We also have exposure to financial institutions used as depositories of our corporate cash balances. If our counterparties and financial institutions become impaired or insolvent, this could have serious consequences to our financial condition and results of operations.
Risks Relating to Our Separation from Alberto-Culver and Relating To Our Largest Stockholder
We rely upon Alberto-Culver for the accuracy of certain historical services and information.
We sometimes rely upon Alberto-Culver for the accuracy and/or completeness of certain historical services and information provided to us when we were part of that company. For example, 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 U.S. federal income tax liability. We also rely upon Alberto-Culver for historical information related to our insurance programs and other benefits. There can be no assurance that our reliance upon the accuracy or completeness of historical information or services previously provided by them will not have an adverse impact on our business, financial condition and results of operations.
If the share distribution of Alberto-Culver common stock in the transactions separating us from Alberto-Culver did not constitute a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, or if we became liable for additional taxes owed by Alberto-Culver, then we may be responsible for payment of significant U.S. federal income taxes.
The following discussion describes the risk that the share distribution of Alberto-Culver common stock in the Separation Transactions may have triggered significant tax liabilities for us, which could result in a material adverse effect on us. In connection with the share distribution of Alberto-Culver common stock in the separation, we received (i) a private letter ruling from the Internal Revenue Service, or IRS, and (ii) an opinion of Sidley Austin LLP, counsel to Alberto-Culver, in each case, to the effect that the transactions qualify as a reorganization under Section 368(a)(1)(D) of the Code and a distribution eligible for non-recognition under Sections 355(a) and 361(c) of the Code. The private letter ruling and the opinion of counsel were based, in part, on assumptions and representations as to factual matters made by, among others, Alberto-Culver, us and representatives of Mrs. Carol L. Bernick, Mr. Leonard H. Lavin and certain of our other stockholders to whom we refer as the Lavin family stockholders, as requested by the IRS or counsel, which, if incorrect, could jeopardize the conclusions reached by the IRS and counsel. The private
29
letter ruling also did not address certain material legal issues that could affect its conclusions, and reserved the right of the IRS to raise such issues upon a subsequent audit. Opinions of counsel neither bind the IRS or any court, nor preclude the IRS from adopting a contrary position.
If the Alberto-Culver share distribution were not to qualify as a tax-free distribution under Section 355 of the Code, we would recognize taxable gain equal to the excess of the fair market value of the Alberto-Culver common stock distributed to our stockholders over our tax basis in such Alberto-Culver common stock.
Even if the Alberto-Culver share distribution otherwise qualified as a tax-free distribution under Section 355 of the Code, it would result in significant U.S. federal income tax liabilities to us if there was an acquisition of our stock or the stock of Alberto-Culver as part of a plan or series of related transactions that includes the Alberto-Culver share distribution and that results in an acquisition of 50% or more of Alberto-Culver's or our outstanding common stock.
In the event that we recognize a taxable gain in connection with the Alberto-Culver share distribution (either (i) because the Alberto-Culver share distribution did not qualify as a tax-free distribution under Section 355 of the Code or (ii) because of an acquisition by CDR Investors of 50% or more of Alberto-Culver or our outstanding common stock as part of a plan or series of related transactions that includes the Alberto-Culver share distribution), the taxable gain recognized by us would result in significant U.S. federal income tax liabilities to us. Under the Code, we would be jointly and severally liable for these taxes for which Alberto-Culver may be required to indemnify us under the tax allocation agreement, and there can be no assurance that Alberto-Culver would be able to fulfill its obligations under the tax allocation agreement if Alberto-Culver was determined to be responsible for these taxes thereunder.
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 did not carefully monitor its, or we did 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.
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's common stock may adversely affect the tax-free nature of the share distribution of Alberto-Culver's common stock in the Separation Transactions. First, with certain exceptions, sales by the Lavin family stockholders of our common stock or Alberto-Culver's 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 was 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 had sold an amount of our common stock that it received in connection with the Separation Transactions (or acquired 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 that was acquired by CDR Investors were to equal or exceed 50% of our outstanding common stock,
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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.
The voting power of our largest stockholder may discourage third party acquisitions of us at a premium.
CDRS, our largest stockholder, owns approximately 47.4% of our outstanding common stock on an undiluted basis. Pursuant to the stockholders agreement entered into by us, the CDR Investors and the Lavin family stockholders, which we refer to as the Stockholders Agreement, CDRS has designated five of our eleven directors, as well as the Chairman of our Board of Directors, and CDRS' rights to nominate certain numbers of directors will continue so long as it owns specified percentages of our common stock. The CDR Investors' ownership of our common stock may have the effect of discouraging offers to acquire control of us and may preclude holders of our common stock from receiving any premium above market price for their shares that may otherwise be offered in connection with any attempt to acquire control of us.
The interests of our largest stockholder may differ from the interests of other holders of our common stock.
CDRS, our largest stockholder, owns approximately 47.4% of our outstanding common stock on an undiluted basis. Pursuant to the Stockholders Agreement, CDRS has designated five of our eleven directors and CDRS' rights to nominate certain numbers of directors will continue so long as it owns specified percentages of our common stock, as discussed above. In addition, the current Chairman of our Board of Directors is affiliated with CDRS. The interests of CDRS may differ from those of other holders of our common stock in material respects. For example, CDRS may have an interest in pursuing acquisitions, divestitures, financings, re-financings, stockholder dividends or other transactions that, in its judgment, could enhance its overall equity portfolio or the short-term value of their investment in us, even though such transactions might involve substantial risks to holders of our common stock. The manager of CDRS' ultimate parent is in the business of making investments in companies, and may from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers of us or our customers. Additionally, CDRS may determine that the disposition of some or all of its interests in us would be beneficial to it at a time when such disposition could be detrimental to us and/or to the other holders of our common stock. Moreover, the ownership by CDRS of approximately 47.4% of our outstanding common stock may have the effect of discouraging offers to acquire control of us and may preclude holders of our common stock from receiving any premium above market price for their shares that may otherwise be offered in connection with any attempt to acquire control of us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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Substantially all of our store and warehouse locations are leased and our corporate headquarters and four warehouses/distribution centers are owned. The average store lease is for a term of five years with customary renewal options. The following table provides the number of stores in the U.S. and globally, as of September 30, 2009:
|
Sally Beauty Supply | Beauty Systems Group | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Location
|
Company-Operated | Franchise | Company-Operated | Franchise | |||||||||||
United States (excluding Puerto Rico) |
2,357 | | 739 | 133 | |||||||||||
Puerto Rico |
34 | | 3 | | |||||||||||
International: |
|||||||||||||||
United Kingdom |
254 | 6 | | | |||||||||||
Belgium |
28 | 3 | | | |||||||||||
Canada |
45 | | 87 | | |||||||||||
Chile |
16 | | | | |||||||||||
France |
19 | 2 | | | |||||||||||
Germany |
30 | | | | |||||||||||
Japan |
19 | | | | |||||||||||
Mexico |
85 | | | 29 | |||||||||||
Other |
11 | 14 | | | |||||||||||
Total International |
507 | 25 | 87 | 29 | |||||||||||
Total Store Count |
2,898 | 25 | 829 | 162 | |||||||||||
The following table provides locations for our significant offices and warehouses and corporate headquarters, as of September 30, 2009:
Location
|
Type of Facility | Sq. Feet | Business Segment | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Company-Owned Properties: |
||||||||||
Columbus, Ohio |
Warehouse | 246,000 | (1 | ) | ||||||
Denton, Texas |
Corporate Headquarters | N/A | (1 | )(2) | ||||||
Denton, Texas |
Warehouse | 45,000 | (2 | ) | ||||||
Jacksonville, Florida |
Warehouse | 237,000 | (1 | ) | ||||||
Reno, Nevada |
Warehouse | 253,000 | (1 | ) | ||||||
Leased Properties: |
||||||||||
Benicia, California |
Office, Warehouse | 187,000 | (2 | ) | ||||||
Clackamas, Oregon |
Warehouse | 104,000 | (2 | ) | ||||||
Fresno, California |
Warehouse | 200,000 | (2 | ) | ||||||
Greenville, Ohio |
Office, Warehouse | 246,000 | (2 | ) | ||||||
Pottsville, Pennsylvania |
Office, Warehouse | 160,000 | (2 | )(3) | ||||||
Spartanburg, South Carolina |
Warehouse | 100,000 | (2 | ) | ||||||
Blackburn, Lancashire, England |
Warehouse | 107,000 | (1 | ) | ||||||
Calgary, Alberta, Canada |
Warehouse | 62,000 | (2 | ) | ||||||
Gent, Belgium |
Office, Warehouse | 83,000 | (1 | ) | ||||||
Mississauga, Ontario, Canada |
Office, Warehouse | 60,000 | (2 | ) | ||||||
Guadalupe, Nuevo Leon, Mexico |
Warehouse | 40,000 | (1 | ) | ||||||
Thornliebank, Scotland |
Office, Warehouse | 94,000 | (1 | ) |
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There were no material legal proceedings pending against us or our subsidiaries as of September 30, 2009. We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.
We are subject to a number of U.S., federal, state and local laws and regulations, as well as the laws and regulations applicable in each other marketplace in which we do business. These laws and regulations govern, among other things, the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products and the methods we use to import these products. We believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward.
On February 25, 2008, we disclosed in a Current Report on Form 8-K that on February 21, 2008, L'Oreal filed a lawsuit in the Superior Court of the State of California in and for the County of San DiegoCentral Division naming, among others, SD Hair, Ltd. and Hair of Nevada, LLC (collectively, "SD Hair"), franchisees of our subsidiary Armstrong McCall division ("AMLP") of our BSG business unit, as defendants. The suit alleged, among other things, that SD Hair breached its franchise agreement with AMLP by diverting (selling) Matrix branded products to unauthorized buyers, and that L'Oreal is entitled to make claims against SD Hair under the franchise agreement as a third-party beneficiary of that agreement. On March 24, 2008, SD Hair filed a cross-complaint in the same case naming AMLP and BSG as cross-defendants, seeking, among other things, i) declaratory relief from BSG and AMLP in the form of a judicial finding that SD Hair is not in breach of its franchise agreement and that L'Oreal has no rights as a third-party beneficiary to SD Hair's franchise agreement, and ii) injunctive relief in the form of a judicial order compelling AMLP and BSG to take appropriate legal action against L'Oreal to enforce SD Hair's claimed rights under AMLP's Matrix distribution agreement. We have answered the cross-complaint and the lawsuit has been set for a jury trial in June of 2010.
On July 30, 2009, we disclosed in a Current Report on Form 8-K that L'Oreal filed a Second Amended Complaint in connection with the previously disclosed lawsuit described above. The Second Amended Complaint alleges, among other things, that AMLP, certain of its employees and others were involved in selling Matrix branded products to unauthorized buyers and that certain of its employees (and others) engaged in improper business transactions for personal benefit during 2005 through 2007. L'Oreal seeks money damages, certain injunctive relief and a declaration that L'Oreal is entitled to terminate the 1981 Matrix Distributor Agreement now in effect between L'Oreal and AMLP. None of the employees involved in the allegations are executive officers of the Company. Substantially all of these allegations were made known by L'Oreal to the Company prior to the filing of the Second Amended Complaint. L'Oreal also provided the Company with documents allegedly supporting the allegations.
As a result of these allegations made by L'Oreal, many of which are incorporated into the Second Amended Complaint, the Audit Committee of the Board of Directors of the Company engaged independent special counsel to investigate whether certain employees engaged in improper business transactions for personal benefit. After extensive review, the Audit Committee and independent special counsel found insufficient evidence to support a conclusion that Company employees entered into improper transactions for personal benefit.
On September 8, 2009, AMLP and BSG filed a cross-complaint against L'Oreal. In the cross-complaint, AMLP and BSG allege that L'Oreal does not have a genuine interest in stopping diversion, and that L'Oreal's anti-diversion policies have been discriminatorily applied to AMLP and BSG. AMLP further alleges that L'Oreal is using diversion as a pretext to attempt to terminate the Distributor Agreement with AMLP.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the New York Stock Exchange, Inc., or the NYSE, under the symbol "SBH." Prior to the Separation Transactions, there was no established public trading market for our common stock. The following table sets forth the high and low sales prices of our common stock, as reported by the NYSE, during the fiscal years ended September 30, 2009 and 2008.
Quarter Ended
|
High | Low | ||||||
---|---|---|---|---|---|---|---|---|
Fiscal Year 2009: |
||||||||
September 30, 2009 |
$ | 8.49 | $ | 5.48 | ||||
June 30, 2009 |
$ | 8.09 | $ | 5.11 | ||||
March 31, 2009 |
$ | 6.22 | $ | 3.71 | ||||
December 31, 2008 |
$ | 8.70 | $ | 2.66 | ||||
Fiscal Year 2008: |
||||||||
September 30, 2008 |
$ | 10.50 | $ | 6.25 | ||||
June 30, 2008 |
$ | 7.80 | $ | 5.64 | ||||
March 31, 2008 |
$ | 9.15 | $ | 6.25 | ||||
December 31, 2007 |
$ | 10.84 | $ | 7.27 |
As of November 17, 2009, there were 1,484 stockholders of record of our common stock, and the closing price of our common stock as reported by the NYSE was $7.44.
Dividends
We have not declared or paid dividends at any time during the last two fiscal years prior to the date of this Annual Report.
We currently anticipate that we will retain future earnings to support our growth strategy or to repay outstanding debt. We do not anticipate paying regular cash dividends on our common stock in the foreseeable future. Any payment of future cash dividends will be at the discretion of our Board of Directors and will depend upon, among other things, future earnings, operations, capital requirements, our general financial condition, contractual restrictions (including those present in our credit agreements) and general business conditions. We depend on our subsidiaries for cash and unless we receive dividends, distributions, advances, transfers of funds or other cash payments from our subsidiaries, we will be unable to pay any cash dividends on our common stock in the future. However, none of our subsidiaries are obligated to make funds available to us for payment of dividends. Further, the terms of our subsidiaries' debt agreements significantly restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. Finally, 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. Please see "Risk FactorsRisks Relating to Our Substantial Indebtedness" and Note 12 of the "Notes to Consolidated Financial Statements" in "Item 8Financial Statements and Supplementary Data."
34
Performance Graph
The following illustrates the comparative total return among Sally Beauty, the Dow Jones U.S. Specialty Retailers Index (formerly the Dow Jones Wilshire Specialty Retailers Index) and the S&P 500 Index assuming that $100 was invested on November 17, 2006, the date regular-way trading of our common stock commenced and that dividends, if any, were reinvested for the fiscal year included in the data:
The Dow Jones U.S. Specialty Retailers Index (NYSE: DJUSRS) is a comprehensive view of entities which are primarily in the retail sector in the U.S. Sally Beauty is one of the issuers included in this index.
|
||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
11/06 | 12/06 | 3/07 | 6/07 | 9/07 | 12/07 | 3/08 | 6/08 | 9/08 | 12/08 | 3/09 | 6/09 | 9/09 | |||||||||||||||||||||||||||
Sally Beauty Holdings, Inc. |
100.00 | 99.24 | 116.92 | 114.50 | 107.51 | 115.14 | 87.79 | 82.19 | 109.41 | 72.39 | 72.26 | 80.92 | 90.46 | |||||||||||||||||||||||||||
S&P 500 |
100.00 | 103.33 | 103.99 | 110.52 | 112.77 | 109.01 | 98.71 | 96.02 | 87.98 | 68.68 | 61.11 | 70.85 | 81.91 | |||||||||||||||||||||||||||
Dow Jones US Specialty Retailers TSM |
100.00 | 98.70 | 102.44 | 106.76 | 97.61 | 90.46 | 82.54 | 76.64 | 75.66 | 58.72 | 65.48 | 70.98 | 81.97 |
This data assumes that $100 was invested on November 17, 2006 in the Company's common stock and in each of the indexes shown and that all dividends are reinvested. The Company did not declare dividends during the period covered by this table. Stockholder returns shown should not be considered indicative of future stockholder returns.
35
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Sally Beauty and its consolidated subsidiaries for the year ended September 30, 2009, 2008 and 2007, and of Sally Holdings, Inc. and its consolidated subsidiaries for the years ended September 30, 2006 and 2005 (dollars in thousands, except per share data). Sally Holdings, Inc. was a wholly owned subsidiary of Alberto-Culver until November 16, 2006 when it was converted to a Delaware limited liability company, was renamed "Sally Holdings LLC," and became an indirect wholly owned subsidiary of Sally Beauty in connection with the Separation Transactions. Sally Beauty was formed on June 16, 2006 in connection with the Separation Transactions. On November 16, 2006, the Company commenced regular-way trading on the NYSE as an independent company under the symbol "SBH."
|
Year Ended September 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||
Results of operations information: |
||||||||||||||||||
Net sales |
$ | 2,636,600 | $ | 2,648,191 | $ | 2,513,772 | $ | 2,373,100 | $ | 2,254,307 | ||||||||
Cost of products sold and distribution expenses |
1,393,283 | 1,413,597 | 1,360,025 | 1,286,329 | 1,227,307 | |||||||||||||
Gross profit |
1,243,317 | 1,234,594 | 1,153,747 | 1,086,771 | 1,027,000 | |||||||||||||
Selling, general and administrative expenses(a) |
899,415 | 903,146 | 857,276 | 798,211 | 768,847 | |||||||||||||
Depreciation and amortization |
47,066 | 48,533 | 42,605 | 38,032 | 33,906 | |||||||||||||
Sales-based service fee charged by Alberto-Culver |
| | 3,779 | 28,852 | 27,615 | |||||||||||||
Non-cash charge related to Alberto-Culver's conversion to one class of common stock(b) |
| | | | 4,051 | |||||||||||||
Transaction expenses(c) |
| | 21,502 | 41,475 | | |||||||||||||
Operating earnings |
296,836 | 282,915 | 228,585 | 180,201 | 192,581 | |||||||||||||
Interest expense, net(d) |
132,022 | 159,116 | 145,972 | 92 | 2,966 | |||||||||||||
Earnings before provision for income taxes |
164,814 | 123,799 | 82,613 | 180,109 | 189,615 | |||||||||||||
Provision for income taxes |
65,697 | 46,222 | 38,121 | 69,916 | 73,154 | |||||||||||||
Net earnings |
$ | 99,117 | $ | 77,577 | $ | 44,492 | $ | 110,193 | $ | 116,461 | ||||||||
Net earnings per share(e) |
||||||||||||||||||
Basic |
$ | 0.55 | $ | 0.43 | $ | 0.25 | | | ||||||||||
Diluted |
$ | 0.54 | $ | 0.42 | $ | 0.24 | | | ||||||||||
Weighted average shares, basic |
181,691 | 181,189 | 180,392 | | | |||||||||||||
Weighted average shares, diluted |
183,306 | 182,704 | 182,375 | | | |||||||||||||
Operating data: |
||||||||||||||||||
Number of retail stores (end of period): |
||||||||||||||||||
Sally Beauty Supply |
2,923 | 2,844 | 2,694 | 2,511 | 2,419 | |||||||||||||
Beauty Systems Group |
991 | 929 | 874 | 828 | 822 | |||||||||||||
Total |
3,914 | 3,773 | 3,568 | 3,339 | 3,241 | |||||||||||||
Professional distributor sales consultants (end of period) |
1,022 | 984 | 1,002 | 1,163 | 1,244 | |||||||||||||
Same store sales growth(f): |
||||||||||||||||||
Sally Beauty Supply |
2.1 | % | 1.2 | % | 2.7 | % | 2.4 | % | 2.4 | % | ||||||||
Beauty Systems Group |
1.0 | % | 6.9 | % | 10.1 | % | 4.1 | % | (0.6 | %) | ||||||||
Consolidated |
1.8 | % | 2.6 | % | 4.5 | % | 2.8 | % | 1.8 | % | ||||||||
Financial condition information (at period end): |
||||||||||||||||||
Working capital |
$ | 341,733 | $ | 367,198 | $ | 354,185 | $ | 479,107 | $ | 382,482 | ||||||||
Cash, cash equivalents and short-term Investments |
54,447 | 99,788 | 38,272 | 107,571 | 38,612 | |||||||||||||
Property, plant and equipment, net |
151,252 | 156,260 | 154,068 | 142,735 | 149,354 | |||||||||||||
Total assets |
1,490,732 | 1,527,023 | 1,404,503 | 1,338,841 | 1,225,507 | |||||||||||||
Long-term debt, excluding current maturities(d) |
1,653,013 | 1,724,684 | 1,758,594 | 621 | 18,828 | |||||||||||||
Stockholders' (deficit) equity |
$ | (615,451 | ) | $ | (702,960 | ) | $ | (767,710 | ) | $ | 1,005,967 | $ | 900,296 |
36
method, effective October 1, 2005. Fiscal years 2009, 2008, 2007 and 2006 include share-based compensation of $8.6 million, $10.2 million, $13.1 million and $5.2 million, respectively.
We have not declared or paid dividends at any time during the last two fiscal years prior to the date of this Annual Report. We do not anticipate paying regular cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain future earnings to support our growth strategy or to repay outstanding debt.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section discusses management's view of the financial condition, results of operations and cash flows of Sally Beauty and its consolidated subsidiaries, as of and for the fiscal years ended September 30, 2009 and 2008. This section should be read in conjunction with the audited consolidated financial statements of Sally Beauty and, for periods prior to the Separation Transactions, the audited consolidated financial statements of Sally Holdings, Inc., and the related notes included elsewhere in this Annual Report. This Management's Discussion and Analysis of Financial Condition and Results of Operations section contains forward-looking statements. Please see "Cautionary Notice Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements that could cause results to differ materially from those reflected in such forward-looking statements.
Highlights of the Fiscal Year Ended September 30, 2009
38
Overview
Description of Business
We are the largest distributor of professional beauty supplies in the U.S. based on store count. We operate primarily through two business units, Sally Beauty Supply and BSG. Through Sally Beauty Supply and BSG (which operates stores under the CosmoProf service mark), we operated a multi-channel platform of 3,727 stores and supplied 187 franchised stores in North America, South America and selected European countries, as of September 30, 2009. Within BSG, we also have one of the largest networks of professional distributor sales consultants in North America, with approximately 1,022 professional distributor sales consultants who sell directly to salons and salon professionals. We provide our customers with a wide variety of leading third-party branded and exclusive-label professional beauty supplies, including hair care products, styling appliances, skin and nail care products and other beauty items. Sally Beauty Supply stores target retail consumers and salon professionals, while BSG exclusively targets salons and salon professionals. For the year ended September 30, 2009, our consolidated net sales and operating earnings were $2,636.6 million and $296.8 million, respectively.
We believe Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on store count. As of September 30, 2009, Sally Beauty Supply operated 2,898 company-operated retail stores, 2,357 of which are located in the U.S. (with the remainder in the United Kingdom and certain other countries in Europe, Canada, Puerto Rico, Mexico and Chile) and supplied 25 franchised stores (all outside the U.S.). Sally Beauty Supply stores in the U.S. range in size between 1,200 square feet and 1,700 square feet and are primarily located in strip shopping centers. The product selection in Sally Beauty Supply stores ranges between 4,000 and 8,000 SKUs of beauty products and includes products for hair care, skin and nail care, beauty sundries and electrical appliances targeting retail consumers and salon professionals. Sally Beauty Supply stores carry leading third-party brands such as Clairol, Revlon and Conair, as well as an extensive selection of exclusive-label merchandise. For the year ended September 30, 2009, Sally Beauty Supply's net sales and segment operating earnings were $1,695.7 million and $283.9 million, respectively, representing 64.3% and 75.6% of our consolidated net sales and operating profit before unallocated corporate expenses, respectively.
We believe BSG is the largest full-service distributor of professional beauty supplies in the U.S. As of September 30, 2009, BSG had 829 company-operated stores, supplied 162 franchised stores and had a sales force of approximately 1,022 professional distributor sales consultants selling exclusively to salons and salon professionals in substantially all states in the U.S. and in portions of Canada, Puerto Rico, Mexico and certain European countries. BSG stores average approximately 2,700 square feet and are primarily located in secondary strip shopping centers. Through BSG's large store base and sales force, BSG is able to access a significant portion of the highly fragmented U.S. salon channel. The product selection in BSG stores, ranging between 4,000 and 9,000 SKUs of beauty products, includes hair care and color, skin and nail care, beauty sundries and electrical appliances; targeting salons and salon professionals. BSG carries leading professional beauty product brands, intended for use in salons and for resale by the salon to consumers. Certain BSG products are sold under exclusive distribution agreements with suppliers, whereby BSG is designated as the sole distributor for a product line within certain geographic territories. For the year ended September 30, 2009, BSG's net sales and segment operating profit were $940.9 million and $91.6 million, respectively, representing 35.7% and 24.4% of our consolidated net sales and operating profit before unallocated corporate expenses, respectively.
Industry and Business Trends
We operate within the large and growing U.S. professional beauty supply industry. Potential growth in the industry is expected to be driven by increases in hair color, hair loss prevention and hair styling products, offset by lower sales of electrical products during periods of prolonged economic slowdown. We believe the
39
following key industry and business trends and characteristics will influence our business and our financial results going forward:
40
difficult to integrate, disrupt our business or have an adverse effect on our results of operations" and "Our ability to conduct business in international marketplaces may be affected by legal, regulatory and economic risks."
We expect to continue to expand our product line offerings and to gain additional distribution rights over time through either further negotiation with suppliers or by strategic acquisitions of existing distributors. Although we are focused on developing new revenue and cost management
41
initiatives, there can be no assurance that our efforts will partially or completely offset any potential loss of distribution rights in the future. Please see "Risk FactorsWe depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us."
42
Significant Recent Acquisitions
During the fiscal year 2009, we acquired Schoeneman Beauty Supply, Inc. ("Schoeneman") at a cost of approximately $71.0 million, subject to certain adjustments, of which a significant portion was allocated to goodwill. The acquisition of Schoeneman, a 43-store beauty supply chain located in the central northeast United States, was on September 30, 2009 and was pursuant to a merger agreement between Schoeneman, the former stockholders of Schoeneman and a subsidiary of the Company. The Company currently expects to realize approximately $10 million of future tax savings as a result of anticipated incremental depreciation and amortization tax deductions relating to the assets acquired in this transaction. Goodwill of approximately $61.0 million was recorded as a result of this acquisition. In addition, during the fiscal year 2009, we completed several other individually immaterial acquisitions at an aggregate cost of $11.3 million. The purchase prices of all acquisitions completed during the fiscal year 2009 have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The final valuation of the assets acquired and liabilities assumed will be completed during fiscal year 2010. Generally, we funded these acquisitions with cash from operations.
During the fiscal year 2008, we completed several acquisitions at an aggregate cost of $53.4 million, of which substantially all was allocated to intangible assets and goodwill. Generally, we funded these acquisitions with cash from operations as well as borrowings under our ABL facility. In May of 2008, we acquired Pro-Duo, a 40-store beauty supply chain with stores mainly in Belgium, France and Spain, for €19.3 million (approximately $29.8 million plus incidental acquisition costs capitalized) subject to certain adjustments. This acquisition provided the Sally Beauty Supply segment with an expanded geographic footprint in continental Europe and was funded with cash from operations and borrowings on our subsidiaries' ABL facility. We also assumed €3.0 million (approximately $4.7 million) of pre-acquisition debt of Pro-Duo in connection with the acquisition.
During the fiscal year 2007, we acquired Chapelton 21 Limited, which we refer to as Salon Services, a private company based in Scotland. This acquisition provided the Sally Beauty Supply segment a strong European presence. We acquired Salon Services for an aggregate cash purchase price of approximately $57.8 million of which $30.0 million was allocated to goodwill and $17.6 million was allocated to identifiable intangible assets. Certain of our subsidiaries financed the purchase price through a draw-down of approximately $57.0 million under our subsidiaries' ABL facility. In addition, we extinguished approximately $3.9 million of pre-acquisition debt of Salon Services. Salon Services, through its direct and
43
indirect subsidiaries supplies professional hair and beauty products primarily to salon and spa operators and independent hair and beauty professionals in the United Kingdom, Germany, Ireland and Spain.
Our Separation from Alberto-Culver
Our business historically constituted two operating segments within the consolidated financial statements of Alberto-Culver. On November 16, 2006, we separated from Alberto-Culver, pursuant to the Investment Agreement. As a result: (i) we own and operate the Sally Beauty Supply and BSG distribution businesses that were owned and operated by Alberto-Culver prior to the Separation Transactions; (ii) at the closing of the Separation Transactions, the stockholders of Alberto-Culver prior thereto became the beneficial owners of approximately 52% of our outstanding common stock on an undiluted basis and the CDR Investors, who in the aggregate invested $575.0 million in us, received an equity interest representing approximately 48% of our outstanding common stock on an undiluted basis; and (iii) Alberto-Culver continued to own and operate its consumer products business. In addition, in connection with the Separation Transactions, the Company, through subsidiaries Sally Investment Holdings LLC ("Sally Investment") and Sally Holdings, incurred approximately $1,850.0 million of indebtedness. See Note 12 of the "Notes to Consolidated Financial Statements" in "Item 8Financial Statements and Supplementary Data" of this Annual Report.
Prior to November 16, 2006, the Company was a subsidiary of Alberto-Culver and had no share-based compensation plans of its own; however, certain employees of the Company had been granted stock options and stock awards under share-based compensation plans of Alberto-Culver. Alberto-Culver treated the Separation Transactions as though they constituted a change in control for purposes of Alberto-Culver's stock options and stock awards. As a result, in accordance with the terms of these plans, all outstanding stock options and restricted shares of Alberto-Culver, including those held by our employees, became fully vested upon completion of the Separation Transactions. Due to the Separation Transactions, during the fiscal year 2007, we recorded a charge of approximately $5.3 million, which represents the amount of future compensation expense that would have been recognized in subsequent periods as the stock options and restricted shares for our employees vested over the original vesting periods. Upon completion of the Separation Transactions, all outstanding Alberto-Culver stock options held by our employees became options to purchase shares of our common stock.
Credit Facilities
The Term Loans and the ABL facility are secured by substantially all of our assets, those of Sally Investment, those of our domestic subsidiaries and, in the case of the ABL facility, those of our Canadian subsidiaries. The Term Loans may be prepaid at our option at any time without premium or penalty. Such facility is subject to mandatory prepayment in an amount equal to 50% of excess cash flow (as defined in the agreement governing the Term Loans) for any fiscal year unless a specified leverage ratio is met. Additionally, the facility is subject to mandatory prepayment in an amount equal to 100% of the proceeds of specified asset sales that are not reinvested in the business or applied to repay borrowings under the ABL facility.
Our Notes are unsecured obligations of Sally Holdings and its co-issuer and are guaranteed on a senior basis (in the case of the senior notes) and on a senior subordinated basis (in the case of the senior subordinated notes) by each material domestic subsidiary of Sally Holdings (other than the co-issuer). Our Notes carry optional redemption features whereby Sally Holdings has the option to redeem the Notes on or before November 15, 2010 and November 15, 2011, respectively, at par plus a premium, plus accrued and unpaid interest and, thereafter, at par plus a premium declining ratably to par, plus accrued and unpaid interest.
44
Details of long-term debt (excluding capitalized leases) as of September 30, 2009 are as follows (dollars in thousands):
|
Amount | Maturity dates | Interest Rates | ||||||
---|---|---|---|---|---|---|---|---|---|
ABL facility |
$ | | | (i) Prime plus up to 0.50% or; | |||||
|
(ii) LIBOR plus (1.00% to 1.50%) | ||||||||
Term Loan A |
105,000 | Nov. 2012 | (i) Prime plus (1.00% to 1.50%) or; | ||||||
|
(ii) LIBOR plus (2.00% to 2.50%) | ||||||||
Term Loan B |
863,856 | Nov. 2013 | (i) Prime plus (1.25% to 1.50%) or; | ||||||
|
(ii) LIBOR plus (2.25% to 2.50%) | ||||||||
Other(a) |
3,135 | 2009-2014 | 4.05% to 7.0% | ||||||
Total |
$ | 971,991 | |||||||
Senior notes |
$ | 430,000 | Nov. 2014 | 9.25% | |||||
Senior subordinated notes |
275,000 | Nov. 2016 | 10.50% | ||||||
Total |
$ | 705,000 | |||||||
Other Significant Items
Interest Rate Swap Agreements
The Company, though Sally Holdings, utilizes interest rate swap agreements to manage its cash flow risk associated with changing interest rates as it relates to its Term Loans. We do not currently purchase or hold any derivative instruments for trading or speculative purposes. The counterparties are deemed to be of substantial resources and strong creditworthiness. However, these transactions do result in exposure to credit risks in the event of default by a counterparty. The recent financial crisis affecting the banking systems and financial markets resulted in many well-known financial institutions becoming less creditworthy or having diminished liquidity and, thus, we could be exposed to an increased level of counterparty risk. In the event that a counterparty defaults in its obligation under our interest rate swaps, we could incur substantial financial loss. At September 30, 2009, the aggregate fair market value of all our interest rate swaps was a liability of $17.7 million.
In November of 2006, Sally Holdings entered into four interest rate swap agreements with an aggregate notional amount of $500 million. Interest rate swap agreements with a notional amount of $150 million expired in November of 2008 and interest rate swap agreements with a notional amount of $350 million will expire in November of 2009. These interest rate swap agreements do not currently qualify as hedges and, therefore, the change in fair value of these interest rate swap agreements is recorded in net interest expense in the consolidated statements of earnings.
Additionally, in May of 2008, Sally Holdings entered into two interest rate swap agreements with an aggregate notional amount of $300 million. These interest rate swap agreements are designated as effective hedges, consistent with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815. Accordingly, adjustments to reflect the change in the fair values of these interest rate swap agreements are recorded in accumulated other comprehensive income until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any ineffectiveness is recognized in net interest expense in the consolidated statements of earnings. Please see "Item 7AQuantitative and Qualitative Disclosures about Market RiskInterest rate risk" and Note 14 of the "Notes to Consolidated Financial Statements" in Item 8"Financial Statements and Supplementary Data."
45
Share-Based Payments
For the fiscal years 2009, 2008 and 2007, total share-based compensation cost charged against earnings was $8.6 million, $10.2 million and $13.1 million, respectively, and resulted in an increase in additional paid-in capital by the same amounts. Share-based compensation for the fiscal year 2007 includes $5.3 million of accelerated expense related to the Separation Transactions. Share-based compensation for the fiscal year 2009, 2008 and 2007 includes $2.0 million, $3.1 million and $2.6 million, respectively, of accelerated expense related to certain retirement eligible employees who are eligible to continue vesting awards upon retirement under the terms of the 2007 Omnibus Incentive Plan (the "2007 Plan"). For the fiscal year 2009, 2008 and 2007, the total income tax benefit recognized in the consolidated statements of earnings from all share-based compensation plans in which our employees participate or participated was $2.1 million, $2.5 million and $5.1 million, respectively, and resulted in the recognition of deferred tax assets of the same amount. Our consolidated statements of cash flows reflect, for the fiscal year 2009, an excess tax shortfall of $0.2 million and, for the fiscal year 2008 and 2007, excess tax benefits of $0.5 million and $0.8 million, respectively, from employee exercises of stock options as financing cash flows. As of September 30, 2009, we had $9.0 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be charged to expense over the weighted average period of 2.3 years and $2.0 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be charged to expense over the weighted average period of 3.3 years.
Prior to the Separation Transactions, we were a subsidiary of Alberto-Culver and had no share-based compensation plans of our own; however, certain of our employees had been granted stock options and restricted stock awards under share-based compensation plans of Alberto-Culver. The Separation Transactions constituted a change in control for purposes of Alberto-Culver's stock option and stock award plans. As a result, in accordance with the terms of these plans, all outstanding stock options and stock awards of Alberto-Culver, including those held by our employees, became fully vested upon completion of the Separation Transactions on November 16, 2006. In addition, Alberto-Culver's stock option and stock award plans became our plans. Accordingly, in fiscal year 2007, we recorded a charge to expense equal to the amount of future compensation expense of approximately $5.3 million that would have been recognized in subsequent periods had these stock options and stock awards for our employees vested over the original vesting periods. Upon completion of the Separation Transactions, all outstanding Alberto-Culver stock options held by our employees became options to purchase shares of our common stock.
Results of Operations
The following table shows the condensed results of operations of our business for the fiscal years ended September 30, 2009, 2008 and 2007 (in millions):
|
Year Ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||
Net sales |
$ | 2,636.6 | $ | 2,648.2 | $ | 2,513.8 | |||||
Cost of products sold and distribution expenses |
1,393.3 | 1,413.6 | 1,360.0 | ||||||||
Gross profit |
1,243.3 | 1,234.6 | 1,153.8 | ||||||||
Total other operating costs and expenses |
946.5 | 951.7 | 925.2 | ||||||||
Operating earnings |
296.8 | 282.9 | 228.6 | ||||||||
Interest expense, net |
132.0 | 159.1 | 146.0 | ||||||||
Earnings before provision for income taxes |
164.8 | 123.8 | 82.6 | ||||||||
Provision for income taxes |
65.7 | 46.2 | 38.1 | ||||||||
Net earnings |
$ | 99.1 | $ | 77.6 | $ | 44.5 | |||||
46
The following table shows the condensed results of operations of our business for the fiscal years ended September 30, 2009, 2008 and 2007, expressed as a percentage of net sales for the respective periods:
|
Year Ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | |||||
Cost of products sold and distribution expenses |
52.8 | % | 53.4 | % | 54.1 | % | |||||
Gross profit |
47.2 | % | 46.6 | % | 45.9 | % | |||||
Total other costs and expenses |
35.9 | % | 35.9 | % | 36.8 | % | |||||
Operating earnings |
11.3 | % | 10.7 | % | 9.1 | % | |||||
Interest expense, net |
5.0 | % | 6.0 | % | 5.8 | % | |||||
Earnings before provision for income taxes |
6.3 | % | 4.7 | % | 3.3 | % | |||||
Provision for income taxes |
2.5 | % | 1.8 | % | 1.5 | % | |||||
Net earnings |
3.8 | % | 2.9 | % | 1.8 | % | |||||
47
Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance (dollars in thousands):
|
Year Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008(a) | 2007(a) | |||||||||
Net sales: |
||||||||||||
Sally Beauty Supply |
$ | 1,695,652 | $ | 1,672,897 | $ | 1,569,088 | ||||||
BSG |
940,948 | 975,294 | 944,684 | |||||||||
|
$ | 2,636,600 | $ | 2,648,191 | $ | 2,513,772 | ||||||
Gross Profit |
$ | 1,243,317 | $ | 1,234,594 | $ | 1,153,747 | ||||||
Gross profit margin |
47.2 | % | 46.6 | % | 45.9 | % | ||||||
Selling, general and administrative expenses |
$ | 899,415 | $ | 903,146 | $ | 857,276 | ||||||
Depreciation and amortization |
$ | 47,066 | $ | 48,533 | $ | 42,605 | ||||||
Earnings before provision for income taxes: |
||||||||||||
Segment operating profit: |
||||||||||||
Sally Beauty Supply |
$ | 283,872 | $ | 285,615 | $ | 272,364 | ||||||
BSG |
91,604 | 80,927 | 63,456 | |||||||||
Segment operating profit |
375,476 | 366,542 | 335,820 | |||||||||
Unallocated expenses |
(70,022 | ) | (73,385 | ) | (68,889 | ) | ||||||
Share-based compensation expense |
(8,618 | ) | (10,242 | ) | (13,065 | ) | ||||||
Sales-based service fee charged by Alberto-Culver |
| | (3,779 | ) | ||||||||
Transaction expenses |
| | (21,502 | ) | ||||||||
Operating earnings |
296,836 | 282,915 | 228,585 | |||||||||
Interest expense, net of interest income |
(132,022 | ) | (159,116 | ) | (145,972 | ) | ||||||
Earnings before provision for income taxes |
$ | 164,814 | $ | 123,799 | $ | 82,613 | ||||||
Segment operating profit margin: |
||||||||||||
Sally Beauty Supply |
16.7 | % | 17.1 | % | 17.4 | % | ||||||
BSG |
9.7 | % | 8.3 | % | 6.7 | % | ||||||
Consolidated operating profit margin |
11.3 | % | 10.7 | % | 9.1 | % | ||||||
Number of stores at end-of-period (including franchises): |
||||||||||||
Sally Beauty Supply |
2,923 | 2,844 | 2,694 | |||||||||
BSG |
991 | 929 | 874 | |||||||||
|
3,914 | 3,773 | 3,568 | |||||||||
Same store sales growth(b) |
||||||||||||
Sally Beauty Supply |
2.1 | % | 1.2 | % | 2.7 | % | ||||||
BSG |
1.0 | % | 6.9 | % | 10.1 | % | ||||||
Consolidated |
1.8 | % | 2.6 | % | 4.5 | % |
48
Description of Sales and Expenses
Net Sales. Our net sales consist primarily of the following:
Cost of Products Sold and Distribution Expenses. Cost of products sold and distribution expenses consist of the cost to purchase merchandise from suppliers, less rebates and allowances, and certain overhead expenses including purchasing costs, freight from distribution centers to stores and handling costs in the distribution centers. Cost of products sold and distribution expenses are also affected by store inventory shrinkage, which represents products that are lost, stolen or damaged at the store level.
Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of personnel costs, commissions paid to professional distributor sales consultants, benefits, utilities, property maintenance, advertising, rent, insurance, freight and distribution expenses for delivery to customers, administrative costs and costs associated with our corporate support center.
Sales-based Service Fee. Prior to the Separation Transactions, we were charged a sales-based service fee under the consulting, business development and advisory services agreement between certain of our subsidiaries and Alberto-Culver. In conjunction with the Separation Transactions, the arrangements giving rise to this fee from Alberto-Culver were terminated and the related charges have ceased. We believe that had we been a stand-alone company, we would have not incurred a comparable expense.
Transaction Expenses. For fiscal year 2007, transaction expenses are costs associated with the Separation Transactions and are primarily payments to Alberto-Culver pursuant to the separation agreements. In addition, we recognized severance costs for two executives and certain professional fees related to the Separation Transactions.
Net Interest Expense. Net interest expense includes the amortization of deferred debt issuance costs and is stated net of interest income. Net interest expense is primarily associated with debt incurred in connection with the Separation Transactions.
49
The Fiscal Year Ended September 30, 2009 compared to the Fiscal Year Ended September 30, 2008
The table below presents net sales, gross profit and gross profit margin data for each reportable segment (dollars in thousands).
|
Fiscal Year Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | Increase (Decrease) |
|
||||||||||
Net sales: |
||||||||||||||
Sally Beauty Supply |
$ | 1,695,652 | $ | 1,672,897 | $ | 22,755 | 1.4 | % | ||||||
BSG |
940,948 | 975,294 | (34,346 | ) | (3.5 | )% | ||||||||
Consolidated net sales |
$ | 2,636,600 | $ | 2,648,191 | $ | (11,591 | ) | (0.4 | )% | |||||
Gross profit: |
||||||||||||||
Sally Beauty Supply |
$ | 878,738 | $ | 858,375 | $ | 20,363 | 2.4 | % | ||||||
BSG |
364,579 | 376,219 | (11,640 | ) | (3.1 | )% | ||||||||
Consolidated gross profit |
$ | 1,243,317 | $ | 1,234,594 | $ | 8,723 | 0.7 | % | ||||||
Gross profit margin: |
||||||||||||||
Sally Beauty Supply |
51.8 | % | 51.3 | % | 0.5 | % | ||||||||
BSG |
38.7 | % | 38.6 | % | 0.1 | % | ||||||||
Consolidated gross profit margin |
47.2 | % | 46.6 | % | 0.6 | % |
Net Sales
Consolidated net sales decreased by $11.6 million, or 0.4%, for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008. Company-operated stores that have been open for at least 14 months contributed an increase of approximately $70.5 million, or 2.7%, and sales through certain non-store sales channels contributed an increase of approximately $3.9 million, or 0.1%, to consolidated net sales. Other sales channels experienced declines compared to the fiscal year ended September 30, 2008. Sales through BSG's franchise-based businesses declined by approximately $12.0 million, or 0.5%, sales through our BSG distributor sales consultants declined approximately $29.2 million, or 1.1%, and sales through new stores (not including acquisitions) declined approximately $19.6 million, or 0.7%, due to fewer store openings through the twelve-month period ended September 30, 2009 compared to the twelve-month period ended September 30, 2008. In addition, incremental sales from businesses acquired in the preceding 12 months contributed $25.2 million, or 1.0%, less to our consolidated net sales for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008. Consolidated net sales for the fiscal year ended September 30, 2009, are inclusive of approximately $86.0 million in negative impact from changes in foreign currency exchange rates.
Sally Beauty Supply. Net sales for Sally Beauty Supply increased by $22.8 million, or 1.4%, for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008. In the Sally Beauty Supply segment, company-operated stores that have been open for at least 14 months contributed an increase of approximately $52.4 million, or 3.1%, while our non-store sales channels contributed an increase of approximately $3.9 million, or 0.2%. Sales of businesses acquired in the preceding 12 months contributed $28.3 million less to the Sally Beauty Supply segment's net sales for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008 and sales through new stores (not including acquisitions) declined approximately $5.3 million, or 0.3%. Net sales for Sally Beauty Supply for the fiscal year ended September 30, 2009, are inclusive of approximately $64.1 million in negative impact from changes in foreign currency exchange rates.
Beauty Systems Group. Net sales for BSG decreased by $34.3 million, or 3.5%, for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008. While company-operated
50
stores that have been open for at least 14 months contributed an increase of approximately $18.1 million, or 1.9%, and sales from businesses acquired in the preceding 12 months contributed $3.1 million more to the BSG segment's net sales, other sales channels experienced declines compared to the fiscal year ended September 30, 2008. Sales through BSG's franchise-based businesses declined by approximately $12.0 million, or 1.2%, sales through distributor sales consultants declined approximately $29.2 million, or 3.0%, and sales through new stores (not including acquisitions) declined approximately $14.3 million, or 1.5%. Net sales for BSG for the fiscal year ended September 30, 2009, are inclusive of approximately $21.9 million in negative impact from changes in foreign currency exchange rates.
Gross Profit
Consolidated gross profit increased by $8.7 million, or 0.7%, for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008, principally due to higher sales volume for the Sally Beauty Supply segment and improved gross margin percentages for both business segments. This increase was partially offset by lower sales volume for the BSG segment, as more fully described below.
Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $20.4 million, or 2.4%, for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008, principally as a result of increased unit sales volume and improved margins. Sally Beauty Supply's gross profit as a percentage of net sales increased to 51.8% for the fiscal year ended September 30, 2009 compared to 51.3% for the fiscal year ended September 30, 2008. This increase was the result of recent marketing efforts, low-cost sourcing initiatives and a shift in product mix (including an increase in sales of exclusive-label products and other higher-margin products).
Beauty Systems Group. BSG's gross profit decreased by $11.6 million, or 3.1%, for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008, principally as a result of lower unit sales volume. BSG's gross profit as a percentage of net sales increased slightly to 38.7% for the fiscal year ended September 30, 2009 compared to 38.6% for the fiscal year ended September 30, 2008, principally as a result of a favorable change in sales mix towards higher company-operated store sales volume (with higher gross profit margins as opposed to both franchise store and distributor sales consultants' sales).
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses decreased by $3.7 million, or 0.4%, to $899.4 million for the fiscal year ended September 30, 2009 compared to $903.1 million for the fiscal year ended September 30, 2008. Selling, general and administrative expenses, as a percentage of net sales, were 34.1% for both the fiscal year ended September 30, 2009 and the fiscal year ended September 30, 2008. The decrease in selling, general and administrative expenses reflects lower share-based compensation of $1.6 million, lower sales commissions of $4.7 million and a decrease in other unallocated corporate expenses as a result of cost-saving initiatives as well as favorable foreign currency transactions of $3.9 million resulting from intercompany notes not permanently invested, partially offset by the incremental expenses related to businesses acquired in the last twelve months as well as to an increase in advertising expenses of approximately $4.6 million. Selling, general and administrative expense for the fiscal year ended September 30, 2008 included approximately $3.0 million for BSG retention incentives for distributor sales consultants (resulting from the L'Oreal contractual changes reported during fiscal year 2007) and warehouse optimization expenses of approximately $2.4 million, with no similar expenses in the fiscal year ended September 30, 2009.
Depreciation and Amortization
Consolidated depreciation and amortization decreased to $47.1 million for the fiscal year ended September 30, 2009 compared to $48.5 million for the fiscal year ended September 30, 2008, due to a
51
favorable impact from changes in foreign currency exchange rates, partially offset by the expenses associated with businesses acquired in the fiscal years 2008 and 2009.
Operating Earnings
The following table sets forth, for the periods indicated, information concerning our operating earnings for each reportable segment (dollars in thousands):
|
Fiscal Year Ended September 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008(a) | Increase (Decrease) | ||||||||||||
Operating Earnings: |
|||||||||||||||
Segment operating profit: |
|||||||||||||||
Sally Beauty Supply |
$ | 283,872 | $ | 285,615 | $ | (1,743 | ) | (0.6 | )% | ||||||
BSG |
91,604 | 80,927 | 10,677 | 13.2 | % | ||||||||||
Segment operating profit |
375,476 | 366,542 | 8,934 | 2.4 | % | ||||||||||
Unallocated expenses |
(70,022 | ) | (73,385 | ) | (3,363 | ) | (4.6 | )% | |||||||
Share-based compensation expense |
(8,618 | ) | (10,242 | ) | (1,624 | ) | (15.9 | )% | |||||||
Operating earnings |
$ | 296,836 | $ | 282,915 | $ | 13,921 | 4.9 | % | |||||||
Consolidated operating earnings increased by $13.9 million, or 4.9%, to $296.8 million for the fiscal year ended September 30, 2009 compared to $282.9 million for the fiscal year ended September 30, 2008. Operating earnings, as a percentage of net sales, were 11.3% for the fiscal year ended September 30, 2009 compared to 10.7% for the fiscal year ended September 30, 2008. The increase in consolidated operating earnings was due primarily to an increase in BSG operating earnings and declines in unallocated expenses and share-based compensation expense, offset in part by a decline in the Sally Beauty Supply's operating profits, as discussed below. Consolidated operating earnings for the fiscal year ended September 30, 2009, are inclusive of approximately $1.4 million in negative impact from changes in foreign currency exchange rates.
Sally Beauty Supply. Sally Beauty Supply's segment operating earnings decreased $1.7 million, or 0.6%, to $283.9 million for the fiscal year ended September 30, 2009 compared to $285.6 million for the fiscal year ended September 30, 2008. The decrease in Sally Beauty Supply's segment operating earnings was primarily a result of higher advertising costs of approximately $6.4 million and the incremental costs related to approximately 78 additional company-operated stores (stores opened or acquired during the past twelve months) operating during the fiscal year ended September 30, 2009, partially offset by declines in other segment operating expenses resulting from cost-saving initiatives. Segment operating earnings, as a percentage of net sales, were 16.7% for the fiscal year ended September 30, 2009 compared to 17.1% for the fiscal year ended September 30, 2008. The decrease in Sally Beauty Supply's segment operating earnings as a percentage of segment net sales was primarily a result of higher advertising costs as a percentage of segment net sales and continued softer sales in some of the segment's international operations.
Beauty Systems Group. BSG's segment operating earnings increased $10.7 million, or 13.2%, to $91.6 million for the fiscal year ended September 30, 2009 compared to $80.9 million for the fiscal year ended September 30, 2008. Segment operating earnings, as a percentage of net sales, were 9.7% for the fiscal year ended September 30, 2009 compared to 8.3% for the fiscal year ended September 30, 2008. This increase was due primarily to a decline in segment operating expenses resulting from cost-saving initiatives
52
and slightly higher segment gross profit, as discussed above. BSG's segment operating earnings also reflect, for the fiscal year ended September 30, 2008, approximately $3.0 million for retention incentives for distributor sales consultants (resulting from the L'Oreal contractual changes reported during fiscal year 2007). Segment operating earnings for the fiscal year ended September 30, 2009, are inclusive of approximately $2.0 million in negative impact from changes in foreign currency exchange rates.
Unallocated expenses. Unallocated expenses, which represent corporate costs (such as payroll, employee benefits and travel expenses for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our operating segments decreased by $3.4 million, or 4.6%, to $70.0 million for the fiscal year ended September 30, 2009 compared to $73.4 million for the fiscal year ended September 30, 2008. This decrease was due primarily to favorable foreign currency transactions of $5.1 million resulting from intercompany notes not permanently invested, partially offset by an increase in corporate expenses mainly in connection with recent upgrades to our information technology systems.
Share-based Compensation Expense. For the fiscal year ended September 30, 2009, total compensation cost charged against income for share-based compensation arrangements was $8.6 million compared to $10.2 million for the fiscal year ended September 30, 2008. This decrease was due to a decline in the fair value per share of options awarded in the period ended September 30, 2009 compared to options awarded in the period ended September 30, 2008. During the fiscal year ended September 30, 2009 and 2008, the Company granted to its employees and consultants approximately 2.7 million and 2.8 million stock options, respectively, and approximately 123,000 and 136,000 restricted share awards, respectively, under the 2007 Plan. Additionally, during the fiscal year ended September 30, 2009 and 2008, the Company granted approximately 93,500 and 55,700 restricted stock units, respectively, to certain of its non-employee directors under the 2007 Plan.
Net Interest Expense
Interest expense, net of interest income of $0.3 million, was $132.0 million for the fiscal year ended September 30, 2009 compared to $159.1 million, net of interest income of $0.7 million, for the fiscal year ended September 30, 2008. The decrease in interest expense was primarily attributable to a $9.9 million favorable change in the fair value of certain interest rate swaps (please see Note 14 of the "Notes to Consolidated Financial Statements" in Item 8"Financial Statements and Supplementary Data") and to lower prevailing interest rates on our ABL and senior term loan facilities and lower outstanding principal balances on our senior term loans.
Provision for Income Taxes
Provision for income taxes was $65.7 million during the fiscal year ended September 30, 2009 compared to $46.2 million for the fiscal year ended September 30, 2008. The effective tax rate is 39.9% for fiscal year 2009 compared to 37.3% for fiscal year 2008. The increase in the effective tax rate primarily relates to a reduction in earnings in low tax jurisdictions and a reduction in favorable permanent items triggered by lower foreign earnings.
Net Earnings
As a result of the foregoing, consolidated net earnings increased by $21.5 million, or 27.8%, to $99.1 million for the fiscal year ended September 30, 2009 compared to $77.6 million for the fiscal year ended September 30, 2008. Net earnings, as a percentage of net sales, were 3.8% for the fiscal year ended September 30, 2009 compared to 2.9% for the fiscal year ended September 30, 2008.
53
The Fiscal Year Ended September 30, 2008 compared to the Fiscal Year Ended September 30, 2007
The table below presents net sales, gross profit and gross profit margin data for each reportable segment (dollars in thousands).
|
Fiscal Year Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2007(a) | Increase (Decrease) | |||||||||||
Net sales: |
||||||||||||||
Sally Beauty Supply |
$ | 1,672,897 | $ | 1,569,088 | $ | 103,809 | 6.6 | % | ||||||
BSG |
975,294 | 944,684 | 30,610 | 3.2 | % | |||||||||
Consolidated net sales |
$ | 2,648,191 | $ | 2,513,772 | $ | 134,419 | 5.3 | % | ||||||
Gross profit: |
||||||||||||||
Sally Beauty Supply |
$ | 858,375 | $ | 798,656 | $ | 59,719 | 7.5 | % | ||||||
BSG |
376,219 | 355,091 | 21,128 | 6.0 | % | |||||||||
Consolidated gross profit |
$ | 1,234,594 | $ | 1,153,747 | $ | 80,847 | 7.0 | % | ||||||
Gross profit margin: |
||||||||||||||
Sally Beauty Supply |
51.3 | % | 50.9 | % | 0.4 | % | ||||||||
BSG |
38.6 | % | 37.6 | % | 1.0 | % | ||||||||
Consolidated gross profit margin |
46.6 | % | 45.9 | % | 0.7 | % |
Net Sales
Consolidated net sales increased $134.4 million, or 5.3% for the fiscal year ended September 30, 2008 compared to the fiscal year ended September 30, 2007. The significant factors causing the net sales increase were same store sales growth of 2.6%, which contributed approximately $51.5 million, or 2.0%; net sales from new stores (not including acquisitions) of approximately $45.0 million, or 1.8%; and $56.3 million, or 2.2%, in additional sales from acquired businesses; partially offset by a decrease in franchise store sales of approximately $15.7 million, or 0.6%, and in distributor sales consultant revenue of approximately $12.0 million, or 0.5%. These amounts are inclusive of approximately $18.4 million, or 0.7%, in positive impact from foreign currency exchange rates. Current period net sales were positively impacted by the introduction of new product lines during the fiscal year 2008 but negatively impacted by lower L'Oreal product sales of approximately $36.2 million due to the previously-disclosed contractual changes occurring during fiscal year 2007.
Sally Beauty Supply. Net sales for Sally Beauty Supply increased $103.8 million, or 6.6%, for the fiscal year ended September 30, 2008 compared to the fiscal year ended September 30, 2007. The significant factors causing the net sales increase were same stores sales growth of 1.2%, which contributed approximately $17.7 million, or 1.1%; net sales from 110 new stores (not including acquisitions) of approximately $26.6 million, or 1.7%; and $56.3 million, or 3.6%, in additional sales from acquired businesses. These sales are inclusive of approximately $8.0 million, or 0.5%, in positive impact from foreign currency exchange rates. Same store sales were positively impacted by continued growth of exclusive-label product sales and certain merchandise categories as well as an increase in promotional sales.
Beauty Systems Group. Net sales for BSG increased $30.6 million, or 3.2% for the fiscal year ended September 30, 2008 compared to the fiscal year ended September 30, 2007. The significant factors causing the net sales increase were same store sales growth of 6.9%, which contributed approximately $33.8 million, or 3.6%; and net sales from 44 new stores of approximately $18.4 million, or 1.9%; partially
54
offset by a decrease in franchise sales of approximately $15.7 million, or 1.7%, and in distributor sales consultant revenue of approximately $12.0 million, or 1.3%. These sales are inclusive of approximately $10.4 million, or 1.1%, in positive impact from foreign currency exchange rates. BSG net sales were positively impacted by the introduction of new product lines during the fiscal year 2008 but negatively impacted by lower L'Oreal product sales of approximately $36.2 million due to the previously-disclosed contractual changes during fiscal year 2007.
Gross Profit
Consolidated gross profit increased $80.8 million for the fiscal year ended September 30, 2008 as compared to the fiscal year ended September 30, 2007, principally due to increased sales volume resulting from acquisitions for Sally Beauty Supply and improved gross margins in both operating segments.
Sally Beauty Supply. Sally Beauty Supply's gross profit increased $59.7 million for the fiscal year ended September 30, 2008 compared to the fiscal year ended September 30, 2007, principally as a result of increased unit sales volume and gross profit margin improvements across nearly all geographic areas. Sally Beauty Supply's gross profit as a percent of net sales increased to 51.3% for the fiscal year ended September 30, 2008 compared to 50.9% for the fiscal year ended September 30, 2007. This increase was principally the result of a shift in product mix including an increase in sales of exclusive-label products and other higher-margin products. This increase was partially offset by an increase in promotional initiatives in the U.S. and higher freight costs.
Beauty Systems Group. BSG's gross profit increased $21.1 million for the fiscal year ended September 30, 2008 compared to the fiscal year ended September 30, 2007. This increase was principally as a result of increased unit sales volume offset in part by approximately $1.7 million of warehouse optimization costs, included in cost of products sold and distribution expenses. BSG's gross profit as a percentage of net sales increased to 38.6% for the fiscal year ended September 30, 2008 compared to 37.6% for the fiscal year ended September 30, 2007. This increase was due primarily to margin pressure from lower-margin products in our franchise-based business during the fiscal year ended September 30, 2007 that was not repeated during the fiscal year ended September 30, 2008 as well as a shift in sales mix during the fiscal year ended September 30, 2008, towards higher company-operated store sales volume (with higher gross profit margins as opposed to both franchise store and distributor sales consultants' sales), as well as the introduction of new product lines during the fiscal year 2008.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses increased $45.9 million to $903.1 million for the fiscal year ended September 30, 2008 compared to $857.3 million for the fiscal year ended September 30, 2007. This increase was attributable principally to expenses directly associated with the increase in unit sales volume, increased expenses related to the opening of new stores and to acquired businesses. Selling, general and administrative expenses include approximately $2.4 million of warehouse optimization costs for the fiscal year ended September 30, 2008 and approximately $3.0 million and $5.2 million of BSG retention incentives for distributor sales consultants due to the L'Oreal contractual changes reported during fiscal year 2007 for the fiscal year ended September 30, 2008 and 2007, respectively. Most of the retention incentives related to the L'Oreal contractual changes have been expensed during 2007 and 2008. Fiscal 2008 results also include professional fees incurred for a corporate reorganization project related to the rationalization of our various foreign subsidiaries. Selling, general and administrative expenses, as a percentage of net sales, were 34.1% for the fiscal years ended September 30, 2008 and 2007. The expense increases were partially offset by a $1.0 million decrease in expenses from the inclusion in the results, for the fiscal year ended September 30, 2007, of allocated overhead charges from Alberto-Culver prior to the Separation Transactions. There were no comparable charges during the fiscal year ended September 30, 2008.
55
Depreciation and Amortization
Consolidated depreciation and amortization increased $5.9 million to $48.5 million for fiscal year ended September 30, 2008 compared to $42.6 million for the fiscal year ended September 30, 2007. The increase was due primarily to the amortization of intangible assets associated with acquisitions and capital expenditures made to support unit growth of both operating segments.
Sales-based Service Fee Charged by Alberto-Culver
The sales-based service fee charged by Alberto-Culver was $3.8 million for the fiscal year ended September 30, 2007. The fiscal year ended September 30, 2008 had no comparable expenses as a result of the cancellation of this agreement in connection with the Separation Transactions.
Transaction Expenses
We recorded $21.5 million in expenses related to the Separation Transactions for the fiscal year ended September 30, 2007. These expenses were for fees allocated to us by Alberto-Culver for severance payments to certain former officers and for other professional fees related to the Separation Transactions. We did not incur any comparable expenses related to the Separation Transactions in the fiscal year ended September 30, 2008.
Operating Earnings
The following table sets forth, for the periods indicated, information concerning our operating earnings for each reportable segment (in thousands):
|
Fiscal Year Ended September 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008(a) | 2007(a) | Increase (Decrease) | |||||||||||
Operating Earnings: |
||||||||||||||
Segment operating profit: |
||||||||||||||
Sally Beauty Supply |
$ | 285,615 | $ | 272,364 | $ | 13,251 | 4.9 | % | ||||||
BSG |
80,927 | 63,456 | 17,471 | 27.5 | % | |||||||||
Segment operating profit |
366,542 | 335,820 | 30,722 | 9.1 | % | |||||||||
Unallocated expenses |
(73,385 | ) | (68,889 | ) | 4,496 | 6.5 | % | |||||||
Share-based compensation expense |
(10,242 | ) | (13,065 | ) | (2,823 | ) | (21.6 | )% | ||||||
Sales-based service fee charged by Alberto-Culver |
| (3,779 | ) | (3,779 | ) | (100.0 | )% | |||||||
Transaction expenses |
| (21,502 | ) | (21,502 | ) | (100.0 | )% | |||||||
Operating earnings |
$ | 282,915 | $ | 228,585 | $ | 54,330 | 23.8 | % |
(a) Certain amounts for prior fiscal years have been reclassified to conform to the current year's presentation.
Consolidated operating earnings increased $54.3 million, or 23.8%, to $282.9 million for the fiscal year ended September 30, 2008 compared to $228.6 million for the fiscal year ended September 30, 2007. Operating earnings, as a percentage of net sales, were 10.7% for the fiscal year ended September 30, 2008 compared to 9.1% for the fiscal year ended September 30, 2007. The increase in consolidated operating earnings was due primarily to increased gross profit by both operating segments as well as the non-recurrence of both $21.5 million of expenses related to the Separation Transactions and a sales-based service fee of $3.8 million charged by Alberto-Culver in the fiscal year ended September 30, 2007.
56
Sally Beauty Supply. Sally Beauty Supply's segment operating earnings increased $13.3 million, or 4.9%, to $285.6 million for the fiscal year ended September 30, 2008 compared to $272.4 million for the fiscal year ended September 30, 2007. Segment operating earnings, as a percentage of net sales, were 17.1% for the fiscal year ended September 30, 2008 compared to 17.4% for the fiscal year ended September 30, 2007. The decrease in Sally Beauty Supply's segment operating earnings as a percentage of net sales was primarily a result of higher advertising costs of approximately $3.6 million.
Beauty Systems Group. BSG's segment operating earnings increased $17.5 million, or 27.5%, to $80.9 million for the fiscal year ended September 30, 2008 compared to $63.4 million for the fiscal year ended September 30, 2007. Segment operating earnings, as a percentage of net sales, were 8.3% for the fiscal year ended September 30, 2008 compared to 6.7% for the fiscal year ended September 30, 2007. BSG's segment operating earnings were positively impacted by improvement in gross profit margins due to sales mix as well as a lower growth rate in selling, general and administrative expenses. In addition, operating earnings were improved from the non-recurrence of certain consulting fees and expenses related to the L'Oreal contractual changes incurred for the fiscal year ended September 30, 2007. These improvements were offset, in part, by the operating expenses attributable to stores opened and businesses acquired as well as by warehouse optimization project expenses of $4.7 million (including depreciation) in the fiscal year ended September 30, 2008.
Unallocated expenses. Unallocated expenses, which represent corporate costs that have not been charged to the operating segments, increased to $73.4 million, or by approximately $4.5 million, for the year ended September 30, 2008 compared to the year ended September 30, 2007. The increase was due primarily to higher payroll related costs to provide support for the growth in segment operations.
Share-based Compensation Expense. For the fiscal year ended September 30, 2008, total compensation cost charged against income for share-based compensation arrangements was $10.2 million compared to $13.1 million for the year ended September 30, 2007. The amounts for the fiscal year 2008 included $3.1 million of accelerated expense related to certain retirement eligible employees who are eligible to continue vesting awards upon retirement and, for the fiscal year 2007, $5.3 million of accelerated expense related to the Separation Transactions and $2.6 million of accelerated expense related to certain retirement eligible employees who are eligible to continue vesting awards upon retirement.
During the years ended September 30, 2008 and 2007, the Company granted to its employees and directors approximately 2.8 million and 2.4 million stock options, respectively. Additionally, during fiscal years 2008 and 2007, the Company granted approximately 55,700 and 55,600 restricted stock units ("RSUs"), respectively, to certain of its non-employee directors under the 2007 Plan.
Sales-based Service Fee Charged by Alberto-Culver
The sales-based service fee charged by Alberto-Culver was $3.8 million for the fiscal year ended September 30, 2007. The fiscal year ended September 30, 2008 had no comparable expenses as a result of the cancellation of this agreement in connection with the Separation Transactions.
Transaction Expenses
We recorded $21.5 million in expenses related to the Separation Transactions for the fiscal year ended September 30, 2007. These expenses were for fees allocated to us by Alberto-Culver for severance payments to certain former officers and for other professional fees related to the Separation Transactions. We did not incur any comparable expenses related to the Separation Transactions in the fiscal year ended September 30, 2008.
57
Interest Expense, net
Interest expense, net of interest income of $0.7 million, was $159.1 million for the fiscal year ended September 30, 2008 compared to $146.0 million, net of interest income of $1.7 million, for the fiscal year ended September 30, 2007. The increase in interest expense was primarily attributable to the impact of interest associated with the debt incurred on November 16, 2006 which was outstanding for 47 less days in fiscal year 2007 than in fiscal year 2008. Net interest expense also reflects non-cash expense of $4.6 million and $3.0 million for the fiscal year ended September 30, 2008 and 2007, respectively, resulting from marked-to-market adjustments for certain interest rate swaps, as described in Note 14 of the "Notes to Consolidated Financial Statements" in Item 8"Financial Statements and Supplementary Data."
Provision for Income Taxes
Provision for income taxes was $46.2 million during the fiscal year ended September 30, 2008 compared to $38.1 million for the fiscal year ended September 30, 2007. The effective tax rate is 37.3% for fiscal year 2008 compared to 46.1% for fiscal year 2007. The reduction in the estimated annual effective tax rate primarily relates to non-deductible costs related to the Separation Transactions included in the tax rate for the fiscal year 2007 and the reduced impact of permanent items on higher earnings and a reduction in foreign statutory tax rates for fiscal year 2008.
Net Earnings
As a result of the foregoing, consolidated net earnings increased $33.1 million to $77.6 million for the fiscal year ended September 30, 2008 compared to $44.5 million for the fiscal year ended September 30, 2007. Net earnings, as a percentage of net sales, were 2.9% for the fiscal year ended September 30, 2008 compared to 1.8% for the fiscal year ended September 30, 2007.
Financial Condition
September 30, 2009 Compared to September 30, 2008
Working capital (current assets less current liabilities) at September 30, 2009 was $341.7 million compared to $367.2 million at September 30, 2008, representing a decrease of $25.5 million. The ratio of current assets to current liabilities was 1.91 to 1.00 at September 30, 2009 compared to 1.84 to 1.00 at September 30, 2008. The decrease in working capital reflects an $89.7 million decrease in current assets and a decrease of $64.3 million in current liabilities. The decrease in current assets as of September 30, 2009 includes a $45.3 million decrease in cash and cash equivalents and a $38.5 million reduction in inventory levels. The decrease in current liabilities as of September 30, 2009 was primarily the result of a decrease in current maturities of long-term debt of $76.1 million partially offset by an increase of $21.6 million in accounts payable.
Cash and cash equivalents decreased by $45.3 million to $54.4 million at September 30, 2009 compared to $99.8 million at September 30, 2008 due primarily to cash used in connection with acquisitions and to repay debt during the fiscal year ended September 30, 2009 (please see Liquidity and Capital Resources below).
Inventories decreased by $38.5 million to $559.7 million at September 30, 2009 compared to $598.2 million at September 30, 2008 due primarily to efforts to right-size inventory levels (including through lower purchases by us) during the fiscal year ended September 30, 2009 in response to the current economic slowdown, and to the effect of foreign currency translation adjustments of approximately $7.3 million, partially offset by the inventories of businesses acquired in the 2009 fiscal year.
Current maturities of long-term debt decreased by $76.1 million to $24.5 million at September 30, 2009 compared to $100.6 million at September 30, 2008 due primarily to the repayment of $75.0 million of borrowings under our ABL facilities. (please see Liquidity and Capital Resources below).
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Accounts payable increased by $21.6 million to $193.6 million at September 30, 2009 from $172.0 million at September 30, 2008 due primarily to changes in the timing of payments to vendors in connection with purchases of inventory and property plant and equipment in the ordinary course of business, and to the assumption of the accounts payable of businesses acquired in the 2009 fiscal year.
Net property and equipment decreased $5.0 million to $151.3 million at September 30, 2009 compared to $156.3 million at September 30, 2008, primarily due to current fiscal year depreciation expense and the effect of foreign currency translation adjustments, partially offset by the net property and equipment of businesses acquired in the 2009 fiscal year.
Goodwill increased $69.2 million to $494.1 million at September 30, 2009 compared to $425.0 million at September 30, 2008, primarily due to acquisitions (please see Note 17 of the "Notes to Consolidated Financial Statements" in Item 8"Financial Statements and Supplementary Data"), partially offset by the effect of foreign currency translation adjustments.
Intangible assets decreased $6.7 million to $78.7 million at September 30, 2009 compared to $85.4 million at September 30, 2008, primarily due to current fiscal year amortization expense and the effect of foreign currency translation adjustments, partially offset by the effect of businesses acquired in the 2009 fiscal year.
Other assets decreased $4.0 million to $50.7 million at September 30, 2009 compared to $54.7 million at September 30, 2008, primarily due to amortization of the costs associated with the fiscal year 2007 issuance of debt, which are being amortized as interest expense over the term of the debt.
Long-term debt (excluding current maturities) decreased by $71.7 million to $1,653.0 million at September 30, 2009 compared to $1,724.7 million at September 30, 2008 due primarily to repayments of principal under our senior term loan facilities made during the fiscal year ended September 30, 2009 (please see Liquidity and Capital Resources below).
Deferred income tax liabilities, net, decreased $3.7 million to $33.6 million at September 30, 2009 compared to $37.3 million at September 30, 2008. This decrease was primarily due to differences between depreciation included for tax purposes versus depreciation included in our consolidated statements of earnings, and the tax effect of deferred (losses) gains on certain interest rate swaps.
Stock options subject to redemption decreased $4.1 million to $1.8 million at September 30, 2009 compared to $5.9 million as of September 30, 2008, primarily due to exercises, cancellations and other adjustments in connections with these options.
Total stockholders' deficit decreased by $87.5 million to $615.5 million at September 30, 2009, as a result of net earnings of $99.1 million and an increase in additional paid-in capital of $13.0 million (as described below), partially offset by cumulative translation adjustments and deferred losses on interest rate swaps, as described below.
Additional paid-in capital increased by $13.0 million to $635.5 million at September 30, 2009, as a result of share-based compensation expense and the exercise of stock options and the exercise, cancelation and adjustments of certain stock options subject to redemption.
Accumulated other comprehensive (loss) income changed by $24.6 million, to a loss of $15.9 million at September 30, 2009, due to foreign currency translation adjustments of $14.4 million and deferred losses on hedged interest rate swaps of $10.2 million, net of income tax.
Liquidity and Capital Resources
We broadly define liquidity as our ability to generate sufficient cash flow from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that
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consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments.
We are highly leveraged and a substantial portion of our liquidity needs will arise from debt service on indebtedness incurred primarily in connection with the Separation Transactions and from funding the costs of operations, working capital and capital expenditures. As a holding company, we depend on our subsidiaries, including Sally Holdings, to distribute funds to us so that we may pay our obligations and expenses. The ability of our subsidiaries to make such distributions will be subject to their operating results, cash requirements and financial condition and their compliance with covenants and financial ratios related to their existing or future indebtedness, including covenants restricting Sally Holdings' ability to pay dividends to us. In addition, under Delaware law, the ability of each of Sally Holdings and its subsidiaries to make distributions to us will be limited to the extent: (i) of its surplus, or if there is no surplus, of its net earnings for the fiscal year in which the distribution is declared and/or the preceding fiscal year, if such subsidiary is a corporation; or (ii) the fair value of its assets exceeds its liabilities, in the case of Sally Holdings or such subsidiary that is a limited liability company. If, as a consequence of these limitations, we cannot receive sufficient distributions from our subsidiaries, we may not be able to meet our obligations to fund general corporate expenses. Please see "Risk FactorsRisks Relating to Our Business," and "Risks Relating to Our Substantial Indebtedness."
We may from time to time repurchase or otherwise retire our debt (through our subsidiaries) and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases of our notes, prepayments of our term loans or other retirements of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, would be decided upon at the sole discretion of our Board of Directors and will depend on market conditions, trading levels of the Company's debt from time to time, the Company's cash position and other considerations.
During the fiscal year ended September 30, 2009, the Company made scheduled payments in the aggregate amount of $6.1 million on its senior term loans. The senior term loan facilities may be prepaid at the option of Sally Holdings at any time without premium or penalty and are subject to mandatory repayment in an amount equal to 50% of excess cash flow (as defined in the agreement governing the term loan facilities) for any fiscal year unless a specified leverage ratio is met. In January 2009, the Company made a mandatory repayment on the senior term loan facilities in the amount of $16.7 million and expects to make a mandatory repayment in the amount of $22.3 million in January of 2010. Amounts paid pursuant to said provision may be applied, at the option of Sally Holdings, against minimum loan repayments otherwise required of it over the twelve-month period following any such payment under the terms of the loan agreement. During the fiscal year ended September 30, 2009, the Company also made optional repayments in the aggregate amount of $45.0 million on its senior term loans. In addition, in May 2009, the Company repurchased $5.0 million in par value of its 10.5% senior subordinated notes (due in November 2016) for approximately $5.0 million, plus accrued interest. In connection with the mandatory and optional repayments made during the fiscal year ended September 30, 2009, the Company recorded losses on extinguishment of debt in the aggregate amount of $1.0 million, which are included in net interest expense in the Company's consolidated statements of earnings.
Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances, funds expected to be generated by operations, and funds available under the ABL facility will be sufficient to meet our working capital requirements and to finance anticipated capital expenditures over the next 12 months.
There can be no assurance that our business will generate sufficient cash flows from operations, that anticipated net sales and operating improvements will be realized, or that future borrowings will be available under our ABL facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. In addition, our ability to meet our debt service obligations and liquidity needs are subject to certain risks, which include, but are not limited to, increases in competitive activity, the loss
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of key suppliers, rising interest rates, the loss of key personnel, the ability to execute our business strategy and general economic conditions. Please see "Risk Factors."
We utilize our ABL facility for the issuance of letters of credit as well as to manage normal fluctuations in operational cash flow. In that regard, we may from time to time draw funds under the revolving credit facility for general corporate purposes including acquisitions and interest payments due on our indebtedness. The funds drawn on individual occasions during the fiscal year ended September 30, 2009 have varied in amounts of up to $20.0 million, with total amounts outstanding ranging from zero up to $120.0 million. The amounts drawn are generally paid down with cash provided by our operating activities.
As of September 30, 2009, Sally Holdings had $325.6 million available for additional borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.
We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.
Under the agreements and indentures governing the term loan facilities and the notes, Sally Holdings may not make certain restricted payments to us if a default then exists under the credit agreement or the indentures or if its consolidated interest coverage ratio is less than 2.0 to 1.0 at the time of the making of such restricted payment. As of September 30, 2009, its consolidated interest coverage ratio exceeded 2.0 to 1.0. Further, the aggregate amount of restricted payments it is able to make is limited pursuant to various baskets as calculated pursuant to the credit agreement and indentures.
The agreements governing our ABL facility generally permit the making of distributions and certain other restricted payments so long as borrowing availability under the facility equals or exceeds $60 million. If borrowing availability falls below this amount, Sally Holdings may nevertheless make restricted payments to us in the aggregate since the date of the Separation Transactions, together with the aggregate cash amount paid in acquisitions since said date, of not greater than $50 million, together with certain other exceptions. As of September 30, 2009, borrowing availability under the ABL facility exceeded $60 million. As of September 30, 2009, the net assets of our consolidated subsidiaries that were unrestricted from transfer under our credit arrangements totaled $225.3 million, subject to certain adjustments.
During the fiscal year ended September 30, 2009, we completed several acquisitions at an aggregate cost of $82.3 million. In general, we funded these acquisitions with cash from operations. For example, on September 4, 2009, we acquired Distribuidora Intersalon Limitada, a leading distributor of premier beauty supply products with 16 stores located in Chile for approximately $6.4 million and, on September 30, 2009, we acquired Schoeneman Beauty Supply, Inc. ("Schoeneman"), a 43-store beauty supply chain located in the central northeast United States, for approximately $71.0 million, subject to certain adjustments.
During the fiscal year ended September 30, 2008, we completed several acquisitions at an aggregate cost of $53.4 million. In general, we funded these acquisitions with cash from operations and, when necessary, with borrowings under our ABL facility. For example, in May of 2008, we acquired Pro-Duo, a 40-store beauty supply chain located in Belgium, France and Spain, for €19.3 million (approximately $29.8 million plus incidental costs capitalized) subject to certain adjustments. We also assumed €3.0 million (approximately $4.7 million) of pre-acquisition debt of Pro-Duo in connection with the acquisition.
Historical Cash Flows
Our primary source of cash has been from funds provided by operating activities and, for fiscal years 2009, 2008 and 2007, from borrowings. The primary uses of cash during the past three years were for acquisitions and capital expenditures and, for fiscal year 2007, for the cash dividend paid in connection with the
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Separation Transactions. The following table shows our sources and uses of funds for the fiscal years ended September 30, 2009, 2008 and 2007 (in thousands):
|
Fiscal Year Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | Change | 2008 | 2007 | Change | |||||||||||||
Cash provided by operating activities |
$ | 223,333 | $ | 110,480 | $ | 112,853 | $ | 110,480 | $ | 192,336 | $ | (81,856 | ) | ||||||
Cash used by investing activities |
(118,562 | ) | (98,162 | ) | (20,400 | ) | (98,162 | ) | (121,364 | ) | 23,202 | ||||||||
Cash (used) provided by financing activities |
(149,262 | ) | 48,069 | (197,331 | ) | 48,069 | (141,883 | ) | 189,952 | ||||||||||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
(850 | ) | 1,129 | (1,979 | ) | 1,129 | 1,612 | (483 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents |
$ | (45,341 | ) | $ | 61,516 | $ | (106,857 | ) | $ | 61,516 | $ | (69,299 | ) | $ | 130,815 | ||||
Cash Provided by Operating Activities
Net cash provided by operating activities, which excludes cash used for acquisitions completed during the period, during the fiscal year ended September 30, 2009 increased by $112.9 million to $223.3 million compared to $110.5 million during the fiscal year ended September 30, 2008. The increase was primarily due to a reduction of approximately $75.7 million in inventory levels, an increase in accounts payable and accrued expenses of approximately $29.1 million, and an improvement of approximately $21.5 million in earnings, partially offset by a change in other liabilities of $12.4 million for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008.
Net cash provided by operating activities, which excludes the effects of acquisitions, during the fiscal year ended September 30, 2008 decreased by $81.9 million to $110.5 million compared to $192.3 million during the fiscal year ended September 30, 2007. The decrease was due primarily to an increase in cash used to purchase inventory of approximately $69.6 million as our inventory levels increased and a reduction in accounts payable and accrued expenses of $35.8 million. This decrease was offset, in part, by improved earnings for the fiscal year ended September 30, 2008 of approximately $33.1 million.
Cash Used by Investing Activities
Net cash used by investing activities during the fiscal year ended September 30, 2009 increased by $20.4 million to $118.6 million compared to $98.2 million during the fiscal year ended September 30, 2008. This increase was primarily due to $28.6 million more in cash used for acquisitions, partially offset by lower capital expenditures (primarily as a result of fewer store openings) for the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2008.
Net cash used by investing activities during the fiscal year ended September 30, 2008 decreased by $23.2 million to $98.2 million compared to $121.4 million during the fiscal year ended September 30, 2007. This decrease was due primarily to a reduction in cash used for acquisitions of $23.5 million (including approximately $29.8 million in connection with the acquisition of Pro-Duo in 2008 and approximately $57.7 million in connection with the acquisition of Salon Services in 2007) partially offset by proceeds from the sale of property and equipment in 2007 of $8.4 million.
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Cash (Used) Provided by Financing Activities
Net cash (used) provided by financing activities during the fiscal year ended September 30, 2009 changed by $197.3 million to cash used of $149.3 million compared to cash provided of $48.1 million during the fiscal year ended September 30, 2008. The change was primarily due to net borrowings of $63.6 million under our ABL facility during the fiscal year ended September 30, 2008 compared to net repayments of $75.0 million during the fiscal year ended September 30, 2009. In addition, during the fiscal year ended September 30, 2009, the Company made scheduled payments in the aggregate amount of $6.1 million, a mandatory repayment in the amount of $16.7 million and optional repayments in the aggregate amount of $45.0 million on its term loan facilities and the Company repurchased $5.0 million in par value of its senior subordinated notes (please see Liquidity and Capital Resources above).
Net cash provided by financing activities during the fiscal year ended September 30, 2008 increased by $190.0 million to $48.1 million compared to cash used of $141.9 million during the fiscal year ended September 30, 2007. The increase was due primarily to the absence, during the fiscal year ended September 30, 2008, of distributions to Alberto-Culver and costs associated with the Separation Transactions (including debt issuance costs and the special cash dividend paid) during the fiscal year ended September 30, 2007. These increases were offset, in part, by the absence, during the fiscal year ended September 30, 2008, of equity contributions and proceeds from the issuance of debt in connection with the Separation Transactions during the fiscal year ended September 30, 2007.
Credit Facilities
In connection with the Separation Transactions, we, through our subsidiaries: (i) entered into the Term Loans in an aggregate amount of $1,070.0 million; (ii) issued senior notes in an aggregate amount of $430.0 million and senior subordinated notes in an aggregate amount of $280.0 million (the Notes); and (iii) entered into the $400.0 million ABL facility, subject to borrowing base limitations, of which approximately $70.0 million was drawn at closing, which resulted in the incurrence of aggregate indebtedness in connection with the Separation Transactions of approximately $1,850.0 million. Proceeds from this new debt and the $575.0 million equity investment by the CDR Investors were used to pay a $25.00 per share cash dividend to holders of record of Alberto-Culver shares as of the record date for the Separation Transactions. Please see "Risk FactorsRisks Relating to Our Substantial Indebtedness."
As of September 30, 2009, there were outstanding borrowings of $968.9 million under the Term Loans, at a weighted average interest rate of 2.52%, and outstanding borrowings of $705.0 million under the Notes, at a weighted average interest rate of 9.75%. As of September 30, 2009, we had $325.6 million available for additional borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.
The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business. These restrictions and limitations relate to:
disposal of assets
|
making investments (including joint ventures)
|
In addition, the ABL facility contains restrictions and limitations related to: (i) changing our line of business; (ii) changing our fiscal year; and (iii) creating or incurring negative pledges.
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The Term Loans and the ABL facility are secured by substantially all of our assets, those of Sally Investment Holdings LLC, those of our domestic subsidiaries and, in the case of the ABL facility, those of our Canadian subsidiaries. The Term Loans may be prepaid at our option at any time without premium or penalty and are subject to mandatory prepayment in an amount equal to 50% of excess cash flow (as defined in the agreement governing the Term Loans) for any fiscal year unless a specified leverage ratio is met. Additionally, the Term Loans are subject to mandatory prepayment in an amount equal to 100% of the proceeds of specified asset sales that are not reinvested in the business or applied to repay borrowings under the ABL facility.
The Term Loans contain a covenant requiring Sally Holdings and its subsidiaries to meet certain maximum consolidated secured leverage ratio levels, which decline over time. The consolidated secured leverage ratio is a ratio of (A) net consolidated secured debt to (B) Consolidated EBITDA as defined in the agreement underlying the Term Loans. Compliance with the consolidated secured leverage ratio is tested quarterly, with a maximum ratio of 4.50 as of September 30, 2009. Failure to comply with the consolidated secured leverage ratio covenant under the Term Loans would result in a default under such facilities.
The ABL facility contains a covenant requiring Sally Holdings and its subsidiaries to maintain a fixed-charge coverage ratio of at least 1.0 to 1.0 in the event that availability under the ABL facility falls below $40.0 million. The fixed-charge coverage ratio is defined as the ratio of (A) EBITDA (as defined in the agreement underlying 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 in the agreement governing the ABL facility).
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 fixed-charge coverage ratio covenant (if and when applicable) under the ABL facility would result in a default under such facility. 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, the Term Loans 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 earnings, 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 or reported by us in our quarterly earnings releases.
We believe that we are currently in compliance with the agreements and instruments governing our debt, including our financial covenants. Our ability to comply with these covenants in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these covenants in future periods will also depend substantially on the pricing of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy. Please see "Risk FactorsRisks Relating to Our Substantial Indebtedness."
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Capital Requirements
During the fiscal year 2009, we had total capital expenditures of approximately $37.3 million which were primarily to fund the addition of new stores; the remodel, expansion or relocation of existing stores in the ordinary course of our business; and corporate projects. For the fiscal year 2010, we anticipate capital expenditures in the range of approximately $45.0 million to $50.0 million, excluding acquisitions. Capital expenditures will be primarily for the addition of new stores; the remodel, expansion or relocation of existing stores in the ordinary course of our business; and corporate projects.
Contractual Obligations
The following table is a summary of our contractual cash obligations and commitments outstanding by future payment dates at September 30, 2009 (in thousands):
|
Payments Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Less than 1
year |
1-3 years | 3-5 years |
More than 5
years |
Total | |||||||||||
Long-term debt obligations, including interest obligations(a) |
$ | 117,310 | $ | 268,187 | $ | 1,026,306 | $ | 771,331 | $ | 2,183,134 | ||||||
Operating leases obligations(b) |
128,417 | 197,876 | 99,332 | 63,351 | 488,976 | |||||||||||
Purchase obligations(c) |
66,176 | 55,169 | | | 121,345 | |||||||||||
Other long-term obligations(d) |
12,300 | 30,343 | 8,340 | 4,930 | 55,913 | |||||||||||
Total |
$ | 324,203 | $ | 551,575 | $ | 1,133,978 | $ | 839,612 | $ | 2,849,368 | ||||||
The table above excludes amounts included in current liabilities, other than the current portion of long-term debt, as these items will be paid within one year, and long-term liabilities not requiring cash payments, such as deferred lease incentives.
Our assumptions with respect to the interest rates applicable to the Term Loans and the ABL facility are subject to changes that may be material. In addition, other future events could cause actual payments to differ materially from these amounts. Please see Note 14 of the "Notes to Consolidated Financial Statements" in "Item 8Financial Statements and Supplementary Data" of this Annual Report and "Item 7AQuantitative and Qualitative Disclosures about Market RiskInterest rate risk" for a discussion of interest rate swap agreements.
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The majority of our operating leases are for Sally Beauty Supply and BSG stores, which typically are located in strip shopping centers. The use of operating leases allows us to expand our business to new locations without making significant up-front cash outlays for the purchase of land and buildings.
Off-Balance Sheet Financing Arrangements
At September 30, 2009 and 2008, we had no off-balance sheet financing arrangements other than operating leases incurred in the ordinary course of business, as well as outstanding letters of credit related to inventory purchases and self insurance programs, which totaled $13.4 million and $12.1 million, respectively.
Inflation
We believe that inflation currently does not have a material effect on our results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements. Actual results may differ from these estimates. We believe these estimates and assumptions are reasonable. We consider accounting policies to be critical when they require us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made and when different estimates that our management reasonably could have used have a material effect on the presentation of our financial condition, changes in financial condition or results of operations.
Our critical accounting policies include but are not limited to the valuation of inventories, vendor concessions, retention of risk, income taxes, long-lived assets impairment assessment and share-based payments.
Valuation of Inventories
When necessary, we adjust the carrying value of inventories to the lower of cost or market, including costs to sell or dispose, and for estimated inventory shrinkage. Inventories are stated at the lower of cost (first in, first out method) or market (net realizable value). Estimates of the future demand for our products, age of the inventory and changes in stock-keeping units are some of the key factors used by our management in assessing the net realizable value of inventories. We estimate inventory shrinkage based upon our historical experience. Actual results differing from these estimates could significantly affect our inventories and cost of products sold and distribution expenses. Inventory shrinkage averaged approximately 1.0% of consolidated net sales in fiscal years 2009, 2008 and 2007. A 10% increase or decrease in our estimate of inventory shrinkage at September 30, 2009, would impact net earnings by approximately $1.5 million, net of income tax.
Vendor Rebates and Concessions
We account for cash consideration received from vendors under ACS 605-50, Customer Payments and Incentives . This standard states that cash consideration received by a customer is presumed to be a reduction of the cost of sales unless it is for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the customer in selling the vendor's products. The majority of cash consideration we receive is considered to be a reduction of the cost of sales and is allocated to cost of products sold and distribution expenses as the related inventory is sold. We consider the facts and circumstances of the various contractual agreements with vendors in order to determine the appropriate classification of amounts received in the consolidated statements of earnings. We record cash consideration expected to be received from vendors in other receivables. These receivables are recorded at
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the amount we believe will be collected based on the provisions of the programs in place and are computed by estimating the point in time that we have completed our performance under the agreements and the amounts earned. These receivables could be significantly affected if actual results differ from management's expectations. A 10% increase or decrease in these receivables at September 30, 2009, would impact net earnings by approximately $1.4 million, net of income tax.
Retention of Risk
Employee Health Insurance Liability
We maintain a largely self-funded program for healthcare benefits for employees who work for us on a full-time basis. We cover the majority of expenses associated with these benefits, other than payroll deductions and out-of pocket expenses paid by the employees. Payments for healthcare benefits below specified amounts (currently $350,000 per individual per year and $1,000,000 per individual for a lifetime maximum) are self-insured by us. We base our estimate of ultimate liability on trends in claim payment history, historical trends in claims incurred but not yet reported, and other components such as expected increases in medical costs, projected premium costs and the number of plan participants. We review our liability on a regular basis and adjust our accruals accordingly. As of September 30, 2009 and 2008, we accrued an estimated liability relating to employee health insurance of $5.6 million and $7.1 million, respectively. Prior to the Separation Transactions, our employees were covered by healthcare plans provided by Alberto-Culver.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs of our employee healthcare benefits. Estimates of medical costs and trends in claims are some of the key factors used by our management in determining our employee health insurance liability. This liability could be significantly affected if actual results differ from management's expectations. A 10% increase or decrease in our employee health insurance liability at September 30, 2009 would impact net earnings by approximately $0.3 million, net of income tax.
Workers' Compensation Liability, General Liability and Automobile and Property Liability
We maintain a large deductible insurance plan for workers' compensation liability, general liability and automobile and property liability loss exposures. We base our estimates of the ultimate liability on an actuarial analysis performed by an independent third-party actuary. We review our liability on a regular basis and adjust our accruals accordingly. As of September 30, 2009 and 2008, our balance sheet included an estimated liability related to the deductible and retention limits of approximately $19.7 million and $16.5 million, respectively. Prior to the Separation Transactions, we were covered by the workers' compensation, general liability and automobile and property liability plans provided by Alberto-Culver.
Changes in facts and circumstances may lead to a change in the estimated liability due to revisions of the estimated ultimate costs that affect our workers' compensation, general liability and automobile and property liability insurance coverage. Changes in estimates occur over time due to such factors as claims incidence and severity of injury or damages. Our liabilities could be significantly affected if actual results differ from management's expectations or actuarial analyses. A 10% increase or decrease in our workers' compensation liability, general liability and automobile and property liability at September 30, 2009 would impact net earnings by approximately $1.2 million, net of income tax.
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The change in the self-insurance liability was as follows (in thousands):
|
Year Ended
September 30, |
||||||
---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||
Balance at beginning of period |
$ | 25,415 | $ | 18,663 | |||
Self-insurance expense |
54,566 | 46,511 | |||||
Self-insurance liability of businesses acquired |
214 | | |||||
Payments, net of employee contributions |
(53,275 | ) | (39,759 | ) | |||
Balance at end of period |
$ | 26,920 | $ | 25,415 | |||
Income Taxes
We record tax provisions in our consolidated financial statements based on an estimation of current income tax liabilities. The development of these provisions requires judgments about tax issues, potential outcomes and timing. If we prevail in tax matters for which provisions have been established or are required to settle matters in excess of established provisions, our effective tax rate for a particular period could be significantly affected.
Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. We believe that it is more likely than not that our results of operations in the future will generate sufficient taxable income to realize our deferred tax assets, net of the valuation allowance currently recorded. In the future, if we determine that certain deferred tax assets will not be realizable, the related adjustments could significantly affect our effective tax rate at that time. The estimated tax benefit of an uncertain tax position is recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.
Long-Lived Assets Impairment Assessment
Long-lived assets, such as property and equipment, including store equipment, and purchased intangibles subject to depreciation or amortization, are reviewed for impairment annually, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no significant impairments in the current or prior fiscal years presented in the accompanying financial statements.
Share-Based Payments
We account for stock-based compensation under ASC 718. We recognize compensation expense on a straight-line basis over the vesting period or to the date a participant becomes eligible for retirement, if earlier. For fiscal years 2009, 2008 and 2007, total compensation cost charged against income and included in selling, general and administrative expenses for share-based compensation arrangements was $8.6 million, $10.2 million and $13.1 million, respectively.
The amount of stock option expense is determined based on the fair value of each stock option grant, which is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected life, volatility, risk-free interest rate and dividend yield. The expected life of stock
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options represents the period of time that the stock options granted are expected to be outstanding. We estimate the expected life based on historical exercise trends. We estimate expected volatility by using an industry group that we belong to since it is not practicable to estimate the expected volatility due to our lack of trading history. The risk-free interest rate is based on the zero-coupon U.S. Treasury issue at the date of the grant for the expected life of the stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stock options. The amount of stock option expense recorded is significantly affected by these estimates. In addition, we record stock option expense based on an estimate of the total number of stock options expected to vest, which requires us to estimate future forfeitures. We use historical forfeiture experience as a basis for this estimate. Actual forfeitures differing from these estimates could significantly affect the timing of the recognition of stock option expense. We have based all these estimates on our assumptions as of September 30, 2009. Our estimates for future periods may be based on different assumptions and accordingly may differ.
We believe that our stock-based compensation expense is based on reasonable estimates and assumptions. However, if actual results are not consistent with our estimate or assumptions, we may be exposed to changes in stock-based compensation expense that could be material. A 10% change in our stock based compensation expense for the year ended September 30, 2009 would affect earnings by approximately $0.5 million, net of income tax.
Recent Accounting Pronouncements
In June 2009, the FASB issued a new accounting standard named The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles . This pronouncement, among other things, identified the previously issued accounting standards that were considered authoritative generally accepted accounting principles in the U.S. and replaced all previously issued accounting pronouncements of the FASB, and its predecessor rule-making bodies, with the ASC. This standard was effective prospectively for reporting periods ended after September 15, 2009 and, accordingly, the Company adopted it during the fourth quarter of the fiscal year 2009. The adoption of this standard did not have an effect on the Company's consolidated financial position, results of operations or cash flows. As a result of adopting this standard, the Company's references to GAAP standards have been changed to refer to topics, subtopics, sections or subsections of the ASC, as appropriate.
In May 2009, the FASB issued ASC 855, Subsequent Events ("ASC 855"). ASC 855 establishes standards of accounting for and disclosure of transactions and events that occur after the balance sheet date but before the financial statements are issued. This accounting standard requires the disclosure, among other things, of the date through which an entity has evaluated subsequent events and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. This accounting standard must be applied prospectively for interim and annual periods ended after June 15, 2009 and, accordingly, the Company adopted its provisions effective for the quarter ended June 30, 2009. In connection therewith, the Company has evaluated all material transactions and events through November 18, 2009, the last full business day before this Annual Report was filed with the SEC.
Effective on January 1, 2009, the Company adopted the amendment to ASC 815 contained in ASC 815-10-65, Derivatives and Hedging, Transition ("ASC 815-10-65"). ASC 815-10-65 established, among other things, the disclosure requirements for derivative instruments and for hedging activities. This standard amended and expanded those disclosures to also require qualitative disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about the fair value of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features contained in the derivative instruments. This standard also requires companies to disclose information about how derivatives and related hedges are accounted for and how the hedges affect the entity's financial position, financial performance and cash flows, including the location and amounts of derivative instruments in the entity's financial statements.
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As required by ASC 815, the Company records all derivative instruments on its balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative, whether the Company has elected to designate a derivative instrument in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the impact on earnings of the hedged transaction or transactions. The Company may from time to time enter into derivative contracts that are intended to hedge certain economic risks even though hedge accounting does not apply or the Company elects not to apply hedge accounting to such derivative contracts. Please see Note 14 of the "Notes to Consolidated Financial Statements" in Item 8"Financial Statements and Supplementary Data" for more details about the Company's derivative instruments and hedging activities as of September 30, 2009.
The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), as it relates to its financial instruments, effective on October 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This standard defines "fair value" as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This standard establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data
Level 3 Unobservable inputs for the asset or liability
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including interest rate swaps. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the valuation hierarchy. In accordance with ASC 820, the Company categorized certain of its financial assets and liabilities based on priority of the inputs to the valuation technique for the instruments, as follows (in thousands):
|
As of September 30, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total | Level 1 | Level 2 | Level 3 | ||||||||||
Liabilities |
||||||||||||||
Long-term debt(1) |
$ | 1,655,076 | $ | 727,719 | $ | 927,357 | ||||||||
Hedged interest rate swaps(2) |
15,365 | 15,365 | ||||||||||||
Non-hedged interest rate swaps(2) |
2,356 | 2,356 | ||||||||||||
Total |
$ | 1,672,797 | $ | 727,719 | $ | 945,078 | ||||||||
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In April 2009, the FASB amended ASC 825, Financial Instruments . This amendment, currently contained in ASC 825-10-50, extended to interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amended prior accounting standards to require those disclosures in summarized financial information at interim reporting periods. This amendment was effective for interim reporting periods ending after June 15, 2009 and its adoption, during the third quarter of the fiscal year 2009, did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
We have not yet adopted and are currently assessing any potential effect of the following pronouncements on our consolidated financial statements:
In August 2009, the FASB issued Accounting Standards Update 2009-05 which amended ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), as it relates to the measurement of liabilities at fair value, effective for interim reporting periods beginning after August 26, 2009. This update provides clarification for liabilities in which a quoted price in an active market for an identical liability is not available.
In April 2008, the FASB amended ASC 350, Intangibles and Other . This new accounting standard, currently contained in ASC 350-30-35, specifically amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of this amendment is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This new standard is effective for fiscal years beginning after December 15, 2008. Early application is not permitted.
In December 2007, the FASB revised the accounting standards for business combinations. This new standard, currently contained in ASC 805, Business Combinations ("ASC 805"), among other things, generally requires that an acquirer recognize the assets acquired and liabilities assumed measured at their "full fair values" on the acquisition date. This practice replaces the practice, under predecessor accounting standards, of allocating the cost of an acquisition to the individual assets acquired and liabilities assumed based on their relative estimated fair values. This new standard further requires that acquisition-related costs be recognized separately from the related acquisition and must be applied prospectively to business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted.
In April 2009, the FASB issued ASC 805-20 Business CombinationsIdentifiable Assets and Liabilities and Any Non-controlling Interest . This new accounting standard amends and clarifies ASC 805 and applies to assets acquired and liabilities assumed that arise from contingencies in a business combination. This amendment must also be applied prospectively to business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a multinational corporation, we are subject to certain market risks including foreign currency fluctuations, interest rates and credit risk. We consider a variety of practices to manage these market risks, including, when deemed appropriate, the occasional use of derivative financial instruments.
Foreign currency exchange rate risk
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the British pound sterling, Canadian dollar, Euro and Mexican peso. Our various foreign currency exposures at times offset each other providing a natural hedge against foreign currency
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risk. For fiscal year 2009, 2008 and 2007, approximately 16%, 18% and 16%, respectively, of our sales were made in currencies other than the U.S. dollar. Consolidated net sales for the fiscal year ended September 30, 2009, are inclusive of approximately $86.0 million in negative impact from changes in foreign currency exchange rates. In addition, for the fiscal year ended September 30, 2009, other comprehensive income reflects $14.4 million in foreign currency translation adjustments. Fluctuations in the U.S. dollar exchange rates for the fiscal years 2009, 2008 and 2007 did not otherwise have a material effect on our consolidated financial condition and consolidated results of operations.
We currently have no derivative financial instruments intended to manage foreign currency exchange rate risk. A 10% increase or decrease in the exchange rates for the U.S. dollar versus the foreign currencies to which we have exposure, would have impacted consolidated net sales by approximately 1.6% in the fiscal year 2009, and would have impacted consolidated net assets by 2.3% at September 30, 2009.
Interest rate risk
As a result of the debt financing incurred in connection with the Separation Transactions, we are subject to interest rate market risk in connection with our long-term debt. The principal interest rate exposure relates to amounts borrowed under the Term Loans and the ABL facility. Based on the approximately $968.9 million of borrowings under the Term Loans and the ABL facility as of September 30, 2009, a change in the estimated applicable interest rate up or down by 1 / 8 % will increase or decrease earnings before provision for income taxes by approximately $1.2 million on an annual basis, without considering the effect of any interest rate swap agreements we may have from time to time.
We and certain of our subsidiaries are sensitive to interest rate fluctuations. In order to enhance our ability to manage risk relating to cash flow and interest rate exposure, we and/or our other subsidiaries who are borrowers under the ABL facility may from time to time enter into and maintain derivative instruments, such as interest rate swap agreements, for periods consistent with the related underlying exposures. In addition, pursuant to the agreement underlying our Term Loans we and/or certain of our other subsidiaries hedge a portion of our floating interest rate exposure for a specified period as more fully described below. We do not purchase or hold any derivative instruments for speculative or trading purposes.
In November of 2006, we entered into four interest rate swap agreements with an aggregate notional amount of $500 million. Interest rate swap agreements with an aggregate notional amount of $150 million expired in November 2008 and interest rate swap agreements with a notional amount of $350 million expire in November 2009. The agreements outstanding at September 30, 2009 enable us to convert a portion of our variable interest rate obligations to fixed rate obligations with interest rates ranging from 7.19% to 7.44%. These interest rate swap agreements do not currently qualify as hedges and, therefore, the change in the fair value of these interest rate swap agreements, which are adjusted quarterly, are recorded in net interest expense in the Company's results of operations. As discussed in Item 1A "Risk Factors," changes in the fair value of these interest rate swap agreements are mainly driven by interest rate changes and will increase or decrease our net interest expense and may therefore affect our earnings.
In May of 2008, we entered into two additional interest rate swap agreements with an aggregate notional amount of $300 million (each agreement with a notional amount of $150 million). These agreements expire on May 31, 2012 and enable us to convert a portion of our variable interest rate obligations to fixed rate obligations with interest ranging from 5.818% to 6.090%. These agreements are designated as effective hedges consistent with ASC 815. Adjustments to reflect the change in the fair values of these interest rate swap agreements, which are adjusted quarterly, are recorded in accumulated other comprehensive (loss) income until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any ineffectiveness of these interest rate swaps is recognized in earnings.
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Credit risk
We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. We believe that the credit risk associated with cash equivalents and short-term investments, if any, is largely mitigated by our policy of investing in a diversified portfolio of securities with high credit ratings.
We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by our broad customer base. We believe our allowance for doubtful accounts is sufficient to cover customer credit risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please see "Index to Financial Statements" which is located on page 84 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Background. Attached as exhibits to this Annual Report on Form 10-K are certifications of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), which are required in accordance with Rule 13a-14 of the Exchange Act. This "Controls and Procedures" section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8Financial Statements and Supplementary Data of this Annual Report on Form 10-K sets forth the attestation report of KPMG LLP, our independent registered public accounting firm, regarding its audit of our internal control over financial reporting. This section should be read in conjunction with the certifications and the KPMG attestation report for a more complete understanding of the topics presented.
Controls Evaluation and Related CEO and CFO Certifications. Our management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. The controls evaluation was conducted by our Disclosure Committee, comprised of senior representatives from our finance, accounting, internal audit, and legal departments under the supervision of our CEO and CFO.
Certifications of our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Annual Report. This "Controls and Procedures" section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.
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Scope of the Controls Evaluation. The evaluation of our disclosure controls and procedures included a review of their objectives and design, our implementation of the controls and procedures and the effect of the controls and procedures on the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify whether we had any data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, was being undertaken if needed. This type of evaluation is performed on a quarterly basis so that conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated by our internal audit department, by our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis, and to maintain them as dynamic systems that change as conditions warrant.
Conclusions regarding Disclosure Controls. Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of September 30, 2009, we maintain disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management's Annual Report on Internal Control over Financial Reporting.
Management of the Company, including the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to management and our Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. A system of internal controls may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2009 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on this assessment, management has concluded that, as of September 30, 2009 our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles based on such criteria.
Report of Independent Registered Public Accounting Firm. Please refer to KPMG's Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting on page F-1 of the financial statements, which begin on page 84 of this Annual Report.
Changes in Internal Control over Financial Reporting. During our last fiscal quarter, there have been no changes in our internal control over financial reporting identified in connection with the evaluation described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2010 Annual Meeting of Stockholders under the headings "Proposal 1Election of Directors," "Executive Officers of the Registrant," "Information Regarding Corporate Governance, the Board, and Its Committees," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Report of the Audit Committee."
The Board of Directors has adopted: (i) Corporate Governance Guidelines and a (ii) Code of Business Conduct and Ethics that apply to directors, officers and employees. Copies of these documents and the committee charters are available on our website at www.sallybeautyholdings.com and are available in print to any person, without charge, upon written request to our Vice President of Investor Relations. We intend to disclose on our website at www.sallybeautyholdings.com any substantive amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics that applies to these individuals or persons performing similar functions.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2010 Annual Meeting of Stockholders under the headings "Information on the Compensation of Directors," "Compensation Discussion and Analysis," "Compensation Committee Report," "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 of this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2010 Annual Meeting of Stockholders under the headings "Ownership of Securities" and "Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2010 Annual Meeting of Stockholders under the headings "Information Regarding Corporate Governance, the Board, and Its Committees," "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2010 Annual Meeting of Stockholders under the headings "Proposal 2Ratification of Selection of Auditors."
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Annual Report:
(a) Financial Statements and Financial Statement Schedules
Please see "Index to Financial Statements" which is located on page 84 of this Annual Report.
(b) Exhibits Required by Securities and Exchange Commission Regulation S-K
The following exhibits are filed as part of this Annual Report or are incorporated herein by reference:
Exhibits
Exhibit No. | Description | |
---|---|---|
2.1 | Investment Agreement, dated as of June 19, 2006, among Alberto-Culver Company, New Aristotle Company, Sally Holdings, Inc., New Sally Holdings, Inc. and CDRS Acquisition LLC, which is incorporated herein by reference from Exhibit 2.1 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 | |
2.2 |
|
First Amendment to the Investment Agreement, dated as of October 3, 2006, among Alberto-Culver Company, New Aristotle Company, Sally Holdings, Inc., New Sally Holdings, Inc. and CDRS Acquisition LLC, which is incorporated herein by reference from Exhibit 2.2 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 |
2.3 |
|
Second Amendment to the Investment Agreement, dated as of October 26, 2006, among Alberto-Culver Company, New Aristotle Company, Sally Holdings, Inc., New Sally Holdings, Inc. and CDRS Acquisition LLC, which is incorporated herein by reference from Exhibit 2.02 to the Company's Current Report on Form 8-K filed on October 30, 2006 |
2.4 |
|
Separation Agreement, dated as of June 19, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.3 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 |
2.5 |
|
First Amendment to the Separation Agreement, dated as of October 3, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.4 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 |
2.6 |
|
Second Amendment to the Separation Agreement, dated as of October 26, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.01 to the Company's Current Report on Form 8-K filed on October 30, 2006 |
3.1 |
|
Amended and Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated November 16, 2006, which is incorporated herein by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed on November 20, 2006 |
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3.2 | Third Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated October 23, 2008, which is incorporated herein by reference from Exhibit 3.1 to the Company's Current Report on Form 8-K filed on October 23, 2008. | |
4.1 |
|
Stockholders Agreement, dated as of November 16, 2006, by and among the Company, CDRS Acquisition LLC, CD&R Parallel Fund VII, L.P. and the other stockholders party thereto, which is incorporated herein by reference from Exhibit 4.8 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.2 |
|
First Amendment to the Stockholders Agreement, dated as of December 13, 2006, between the Company and CDRS Acquisition LLC and Carol L. Bernick, as representative of the other stockholders, which is incorporated herein by reference from Exhibit 4.2 to the Company's Annual Report on Form 10-K filed on December 22, 2006 |
4.3 |
|
Indenture, dated as of November 16, 2006, by and among Sally Holdings LLC and Sally Capital Inc., as Co-Issuers, the Subsidiary Guarantors from time to time parties thereto, and Wells Fargo Bank, National Association, as Trustee, governing the 9.25% Senior Notes due 2014, which is incorporated herein by reference from Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.4 |
|
First Supplemental Indenture, dated as of May 30, 2007, by and among Sally Holdings LLC and Sally Capital Inc., as co-Issuers, the Subsidiary Guarantors named therein, and Wells Fargo Bank, National Association, as trustee, governing the 9.25% Senior Notes due 2014, which is incorporated herein by reference from Exhibit 4.2 from the Registration Statement on Form S-4 (File No. 333-144427) of Sally Holdings LLC and Sally Capital Inc. filed on July 9, 2007 |
4.5 |
|
Indenture, dated as of November 16, 2006, by and among Sally Holdings LLC and Sally Capital Inc., as Co-Issuers, the Subsidiary Guarantors from time to time parties thereto, and Wells Fargo Bank, National Association, as Trustee, governing the 10.5% Senior Subordinated Notes due 2016, which is incorporated herein by reference from Exhibit 4.2 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.6 |
|
First Supplemental Indenture, dated as of May 30, 2007, by and among Sally Holdings LLC and Sally Capital Inc., as co-Issuers, the Subsidiary Guarantors named therein, and Wells Fargo Bank, National Association, as trustee, governing the 10.5% Senior Subordinated Notes due 2016, which is incorporated herein by reference from Exhibit 4.4 from the Registration Statement on Form S-4 (File No. 333-144427) of Sally Holdings LLC and Sally Capital Inc. filed on July 9, 2007 |
4.7 |
|
Exchange and Registration Rights Agreement, dated as of November 16, 2006, by and among Sally Holdings LLC, Sally Capital Inc., the Subsidiary Guarantors parties thereto, Merrill Lynch, Pierce, Fenner & Smith, Incorporated and the other financial institutions named therein, relating to the 9.25% Senior Notes due 2014, which is incorporated herein by reference from Exhibit 4.3 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.8 |
|
Exchange and Registration Rights Agreement, dated as of November 16, 2006, by and among Sally Holdings LLC, Sally Capital Inc., the Subsidiary Guarantors parties thereto, Merrill Lynch, Pierce, Fenner & Smith, Incorporated and the other financial institutions named therein, relating to the 10.5% Senior Subordinated Notes due 2016, which is incorporated herein by reference from Exhibit 4.4 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
77
4.9 | Credit Agreement, dated November 16, 2006, with respect to a Term Loan Facility, by and among Sally Holdings LLC, the several lenders from time to time parties thereto, and Merrill Lynch Capital Corporation, as Administrative Agent and Collateral Agent, which is incorporated herein by reference from Exhibit 4.5.1 to the Company's Current Report on Form 8-K filed on November 22, 2006 | |
4.10 |
|
Guarantee and Collateral Agreement, dated as of November 16, 2006, made by Sally Investment Holdings LLC, Sally Holdings LLC and certain subsidiaries of Sally Holdings LLC in favor of Merrill Lynch Capital Corporation, as Administrative Agent and Collateral Agent, which is incorporated herein by reference from Exhibit 4.5.2 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.11 |
|
Credit Agreement, dated November 16, 2006, with respect to an Asset-Based Loan Facility, among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, any Canadian Borrower from time to time party thereto, certain subsidiaries of Sally Holdings LLC, the several lenders from time to time parties thereto, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and Collateral Agent, and Merrill Lynch Capital Canada Inc., as Canadian Agent and Canadian Collateral Agent, which is incorporated herein by reference from Exhibit 4.6.1 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.12 |
|
U.S. Guarantee and Collateral Agreement, dated as of November 16, 2006, made by Sally Investment Holdings LLC, Sally Holdings LLC and certain subsidiaries of Sally Holdings LLC in favor of Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and Collateral Agent, which is incorporated herein by reference from Exhibit 4.6.2 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.13 |
|
Canadian Guarantee and Collateral Agreement, dated as of November 16, 2006, made by Sally Beauty (Canada) Corporation, Beauty Systems Group (Canada), Inc., Sally Beauty Canada Holdings Inc. and certain of their respective subsidiaries in favor of Merrill Lynch Capital Canada Inc., as Canadian Agent and Canadian Collateral Agent, which is incorporated herein by reference from Exhibit 4.6.3 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.14 |
|
Intercreditor Agreement, dated as of November 16, 2006, by and between Merrill Lynch Capital Corporation, as Administrative Agent and Collateral Agent under the Term Loan Facility, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and Collateral Agent under the Asset-Based Loan Facility, which is incorporated herein by reference from Exhibit 4.7 to the Company's Current Report on Form 8-K filed on November 22, 2006 |
4.15 |
|
Assignment and Acceptance of that certain Credit Agreement, dated as of November 16, 2006, among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, the Canadian Borrowers (as defined in the Credit Agreement), the several banks and other financial institutions from time to time parties thereto, Merrill Lynch Capital, a division of' Merrill Lynch Business Financial Services Inc., as administrative agent and collateral agent for the Lenders and Merrill Lynch Capital Canada, Inc., as Canadian agent and Canadian collateral agent for the Lenders* |
78
10.1 | Tax Allocation Agreement, dated as of June 19, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc. and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.1 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 | |
10.2 |
|
First Amendment to the Tax Allocation Agreement, dated as of October 3, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc. and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.2 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 |
10.3 |
|
Second Amendment to the Tax Allocation Agreement, dated as of October 26, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc. and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.01 to the Company's Current Report on Form 8-K filed on October 30, 2006 |
10.4 |
|
Employee Matters Agreement, dated as of June 19, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc. and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.3 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 |
10.5 |
|
First Amendment to the Employee Matters Agreement, dated October 3, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc. and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.4 to Amendment No. 3 to the Company's Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006 |
10.6 |
|
Second Amendment to the Employee Matters Agreement, dated as of October 26, 2006, among Alberto-Culver Company, New Aristotle Holdings, Inc., New Sally Holdings, Inc. and Sally Holdings, Inc., which is incorporated herein by reference from Exhibit 10.02 to the Company's Current Report on Form 8-K filed on October 30, 2006 |
10.7 |
|
Support Agreement, dated as of June 19, 2006, among CDRS Acquisition LLC, Alberto-Culver Company, New Sally Holdings, Inc. and the stockholders party thereto, which is incorporated herein by reference from Exhibit 10.10 to the Current Report on Form 8-K filed by Alberto-Culver Company on June 22, 2006 |
10.8 |
|
Support Agreement, dated as of June 19, 2006, among CDRS Acquisition LLC, Alberto-Culver Company, New Sally Holdings, Inc. and Howard B. Bernick, which is incorporated herein by reference from Exhibit 10.11 to the Current Report on Form 8-K filed by Alberto-Culver Company on June 22, 2006 |
10.9 |
|
Termination Agreement, dated as of June 18, 2006, among Alberto-Culver Company, Sally Holdings, Inc. and Gary G. Winterhalter, which is incorporated herein by reference from Exhibit 10.9 to the Current Report on Form 8-K filed by Alberto-Culver Company on June 22, 2006 |
10.10 |
|
Form of First Amendment to the Termination Agreement with Gary G. Winterhalter, which is incorporated herein by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 29, 2007 |
79
10.11 | Form of Amended and Restated Severance Agreement for Executive Officers (Gary G. Winterhalter, Michael G. Spinozzi, John R. Golliher, W. Richard Dowd, Bennie L. Lowery, Raal H. Roos) effective as of October 3, 2008, which is incorporated herein by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 6, 2008 | |
10.12 |
|
Sally Beauty Holdings, Inc. Independent Director Compensation Policy* |
10.13 |
|
Alberto-Culver Company 2003 Stock Option Plan for Non-Employee Directors, which is incorporated herein by reference from Exhibit 10.17 to the Registration Statement on Form S-4 (File No. 333-144427) of Sally Holdings LLC and Sally Capital Inc. filed on July 9, 2007 |
10.14 |
|
Alberto-Culver Company 2003 Restricted Stock Plan, which is incorporated herein by reference from Exhibit 10.18 to the Registration Statement on Form S-4 (File No. 333-144427) of Sally Holdings LLC and Sally Capital Inc. filed on July 9, 2007 |
10.15 |
|
Sally Beauty Holdings, Inc. Annual Incentive Plan, which is incorporated herein by reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 8, 2008 |
10.16 |
|
Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 4.4 to the Company's Registration Statement on Form S-8 filed on May 3, 2007 |
10.17 |
|
Form of Stock Option Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference form Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 27, 2007 |
10.18 |
|
2007 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 27, 2007 |
10.19 |
|
2007 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 27, 2007 |
10.20 |
|
2007 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference form Exhibit 10.4 to the Company's Current Report on Form 8-K filed on April 27, 2007 |
10.21 |
|
2009 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.23 to the Company's Annual Report on Form 10-K filed on November 20, 2008 |
10.22 |
|
2009 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.24 to the Company's Annual Report on Form 10-K filed on November 20, 2008 |
80
10.23 | 2009 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.25 to the Company's Annual Report on Form 10-K filed on November 20, 2008 | |
10.24 |
|
Tax Sharing Agreement, dated as of November 16, 2006, made and entered into by and among Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Sally Holdings LLC, which is incorporated herein by reference from Exhibit 10.14 of the Quarterly Report on Form 10-Q of Sally Holdings LLC and Sally Capital Inc. filed on August 29, 2007 |
10.25 |
|
Release and Separation Agreement by and between Sally Beauty Holdings, Inc. and Walter Richard Dowd, which is incorporated herein by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on May 6, 2009 |
10.26 |
|
Form of Option Exercise Period Extension Agreement for Retired Executives, which is incorporated herein by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed on May 6, 2009 |
10.27 |
|
Agreement and Plan of Merger by and among Beauty Systems Group LLC, Lady Lynn Enterprises, Inc., Schoeneman Beauty Supply, Inc., the Shareholders and F. Dale Schoeneman, dated September 30, 2009* |
10.28 |
|
Amendment and Restated Alberto-Culver Company Employee Stock Option Plan of 2003* |
10.29 |
|
2010 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan* |
10.30 |
|
2010 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan* |
10.31 |
|
2010 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan* |
10.32 |
|
2010 Form of Stock Option Agreement for Employees pursuant to the Alberto-Culver Company Employee Stock Option Plan of 2003* |
10.33 |
|
Form of Amended and Restated Indemnification Agreement with Directors* |
21.1 |
|
List of Subsidiaries of Sally Beauty Holdings, Inc.* |
23.1 |
|
Consent of KPMG* |
31.1 |
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Gary G. Winterhalter* |
31.2 |
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Mark J. Flaherty* |
32.1 |
|
Section 1350 Certification of Gary G. Winterhalter* |
32.2 |
|
Section 1350 Certification of Mark J. Flaherty* |
PLEASE NOTE: In reviewing the agreements included as exhibits to this Annual Report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the
81
applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this filing and in the Company's other public filings, which are available without charge through the SEC's website at http://www.sec.gov. Please see "Where You Can Find More Information."
82
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 19th day of November, 2009.
SALLY BEAUTY HOLDINGS, INC. | ||||
|
|
By: |
|
/s/ GARY G. WINTERHALTER Gary G. Winterhalter President, Chief Executive Officer and Director |
|
|
By: |
|
/s/ MARK J. FLAHERTY Mark J. Flaherty Senior Vice President and Chief Financial Officer |
|
|
By: |
|
/s/ JANNA S. MINTON Janna S. Minton Vice President, Chief Accounting Officer and Controller |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
---|---|---|---|---|
|
|
|
|
|
/s/ JAMES G. BERGES
James G. Berges |
Chairman of the Board and Director | November 19, 2009 | ||
/s/ KATHLEEN J. AFFELDT Kathleen J. Affeldt |
|
Director |
|
November 19, 2009 |
/s/ MARSHALL E. EISENBERG Marshall E. Eisenberg |
|
Director |
|
November 19, 2009 |
/s/ KENNETH A. GIURICEO Kenneth A. Giuriceo |
|
Director |
|
November 19, 2009 |
/s/ ROBERT R. MCMASTER Robert R. McMaster |
|
Director |
|
November 19, 2009 |
/s/ WALTER METCALFE Walter Metcalfe |
|
Director |
|
November 19, 2009 |
/s/ JOHN A. MILLER John A. Miller |
|
Director |
|
November 19, 2009 |
/s/ MARTHA MILLER DE LOMBERA Martha Miller de Lombera |
|
Director |
|
November 19, 2009 |
/s/ EDWARD W. RABIN Edward W. Rabin |
|
Director |
|
November 19, 2009 |
/s/ RICHARD J. SCHNALL Richard J. Schnall |
|
Director |
|
November 19, 2009 |
83
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Financial Statements
Years ended September 30, 2009, 2008 and 2007
84
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Sally Beauty Holdings, Inc.:
We have audited Sally Beauty Holdings, Inc.'s internal control over financial reporting as of September 30, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Sally Beauty Holdings, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sally Beauty Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sally Beauty Holdings, Inc. (prior to November 16, 2006, Sally Holdings, Inc.) and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of earnings, cash flows and stockholders' (deficit) equity for each of the years in the three-year period ended September 30, 2009, and our report dated November 18, 2009 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
November 18, 2009
F-1
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Sally Beauty Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Sally Beauty Holdings, Inc. (the Company) (prior to November 16, 2006, Sally Holdings, Inc.) and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of earnings, cash flows and stockholders' (deficit) equity for each of the years in the three-year period ended September 30, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sally Beauty Holdings, Inc. and subsidiaries as of September 30, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sally Beauty Holdings, Inc.'s internal control over financial reporting as of September 30, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 18, 2009 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
November 18, 2009
F-2
Consolidated Financial Statements
The following consolidated balance sheets as of September 30, 2009 and 2008 and the related consolidated statements of earnings, cash flows and stockholders' (deficit) equity for each of the fiscal years in the three-year period ended September 30, 2009 are those of Sally Beauty Holdings, Inc. (prior to November 16, 2006, Sally Holdings, Inc.) and its consolidated subsidiaries. In November of 2006, Sally Holdings, Inc. was converted to a Delaware limited liability company, was renamed "Sally Holdings LLC" and became an indirect wholly-owned subsidiary of Sally Beauty Holdings, Inc. in connection with our separation from the Alberto-Culver Company ("Alberto-Culver"). In these financial statements and elsewhere in this Annual Report on Form 10-K, we refer to these transactions as the Separation Transactions. Sally Beauty Holdings, Inc. was formed on June 16, 2006 in connection with the separation of our business from Alberto-Culver.
F-3
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2009 and 2008
(In thousands, except par value data)
|
2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 54,447 | $ | 99,788 | |||||
Trade accounts receivable, less allowance for doubtful accounts of $2,266 and $2,702 at September 30, 2009 and 2008, respectively |
43,649 | 44,481 | |||||||
Other receivables |
24,090 | 22,692 | |||||||
Inventories |
559,689 | 598,195 | |||||||
Prepaid expenses |
18,492 | 19,748 | |||||||
Deferred income tax assets, net |
15,551 | 20,742 | |||||||
Total current assets |
715,918 | 805,646 | |||||||
Property and equipment, net of accumulated depreciation of $265,329 and $243,185 at September 30, 2009 and 2008, respectively |
151,252 | 156,260 | |||||||
Goodwill |
494,135 | 424,963 | |||||||
Intangible assets, net of accumulated amortization of $24,357 and $18,203 at September 30, 2009 and 2008, respectively |
78,685 | 85,434 | |||||||
Other assets |
50,742 | 54,720 | |||||||
Total assets |
$ | 1,490,732 | $ | 1,527,023 | |||||
Liabilities and Stockholders' Deficit |
|||||||||
Current liabilities: |
|||||||||
Current maturities of long-term debt |
$ | 24,517 | $ | 100,601 | |||||
Accounts payable |
193,592 | 171,962 | |||||||
Accrued expenses |
154,162 | 154,708 | |||||||
Income taxes |
1,914 | 11,177 | |||||||
Total current liabilities |
374,185 | 438,448 | |||||||
Long-term debt |
1,653,013 | 1,724,684 | |||||||
Other liabilities |
43,586 | 23,711 | |||||||
Deferred income tax liabilities, net |
33,599 | 37,256 | |||||||
Total liabilities |
2,104,383 | 2,224,099 | |||||||
Stock options subject to redemption |
1,800 |
5,884 |
|||||||
Stockholders' deficit: |
|||||||||
Common stock, $0.01 par value. Authorized 400,000 shares; 182,189 and 181,812 shares issued and 181,858 and 181,516 shares outstanding at September 30, 2009 and 2008, respectively |
1,819 | 1,815 | |||||||
Additional paid-in capital |
635,519 | 622,511 | |||||||
Accumulated deficit |
(1,236,858 | ) | (1,335,975 | ) | |||||
Treasury stock, 6 shares, at cost |
(33 | ) | | ||||||
Accumulated other comprehensive (loss) income |
(15,898 | ) | 8,689 | ||||||
Total stockholders' deficit |
(615,451 | ) | (702,960 | ) | |||||
Total liabilities and stockholders' deficit |
$ | 1,490,732 | $ | 1,527,023 | |||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-4
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Fiscal Years ended September 30, 2009, 2008 and 2007
(In thousands, except per share data)
|
2009 | 2008 | 2007 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | 2,636,600 | $ | 2,648,191 | $ | 2,513,772 | ||||||
Cost of products sold and distribution expenses |
1,393,283 | 1,413,597 | 1,360,025 | |||||||||
Gross profit |
1,243,317 | 1,234,594 | 1,153,747 | |||||||||
Selling, general and administrative expenses |
899,415 | 903,146 | 857,276 | |||||||||
Depreciation and amortization |
47,066 | 48,533 | 42,605 | |||||||||
Sales-based service fee charged by Alberto-Culver |
| | 3,779 | |||||||||
Transaction expenses |
| | 21,502 | |||||||||
Operating earnings |
296,836 | 282,915 | 228,585 | |||||||||
Interest expense, net(a) |
132,022 | 159,116 | 145,972 | |||||||||
Earnings before provision for income taxes |
164,814 | 123,799 | 82,613 | |||||||||
Provision for income taxes |
65,697 | 46,222 | 38,121 | |||||||||
Net earnings |
$ | 99,117 | $ | 77,577 | $ | 44,492 | ||||||
Net earnings per share: |
||||||||||||
Basic |
$ | 0.55 | $ | 0.43 | $ | 0.25 | ||||||
Diluted |
$ | 0.54 | $ | 0.42 | $ | 0.24 | ||||||
Weighted average shares:(b) |
||||||||||||
Basic |
181,691 | 181,189 | 180,392 | |||||||||
Diluted |
183,306 | 182,704 | 182,375 | |||||||||
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-5
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years ended September 30, 2009, 2008 and 2007
(In thousands)
|
2009 | 2008 | 2007 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash Flows from Operating Activities: |
|||||||||||||
Net earnings |
$ | 99,117 | $ | 77,577 | $ | 44,492 | |||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|||||||||||||
Depreciation and amortization |
47,066 | 48,533 | 42,605 | ||||||||||
Share-based compensation expense (net of deferred tax benefit of $2,142, $2,514 and $5,106 in 2009, 2008 and 2007, respectively) |
6,476 | 7,728 | 7,959 | ||||||||||
Amortization of deferred financing costs |
8,319 | 8,469 | 7,407 | ||||||||||
Excess tax shortfall (benefit) from share-based compensation |
194 | (451 | ) | (780 | ) | ||||||||
Net (gain) loss on disposal of leaseholds and other property |
(56 | ) | 116 | 1,820 | |||||||||
Net loss on extinguishment of debt |
1,017 | | | ||||||||||
Deferred income taxes |
10,271 | 3,057 | 4,441 | ||||||||||
Changes in (exclusive of effects of acquisitions): |
|||||||||||||
Trade accounts receivable |
3,708 | 7,629 | 2,297 | ||||||||||
Other receivables |
9 | (1,152 | ) | 359 | |||||||||
Inventories |
46,208 | (29,527 | ) | 40,035 | |||||||||
Prepaid expenses |
832 | (4,634 | ) | (2,417 | ) | ||||||||
Other assets |
558 | 61 | (1,005 | ) | |||||||||
Accounts payable and accrued expenses |
17,946 | (11,176 | ) | 24,582 | |||||||||
Income taxes |
(11,628 | ) | (1,471 | ) | 8,793 | ||||||||
Other liabilities |
(6,704 | ) | 5,721 | 11,748 | |||||||||
Net cash provided by operating activities |
223,333 | 110,480 | 192,336 | ||||||||||
Cash Flows from Investing Activities: |
|||||||||||||
Capital expenditures |
(37,320 | ) | (45,576 | ) | (53,345 | ) | |||||||
Proceeds from sale of property and equipment |
217 | 288 | 8,395 | ||||||||||
Acquisitions, net of cash acquired |
(81,459 | ) | (52,874 | ) | (76,414 | ) | |||||||
Net cash used by investing activities |
(118,562 | ) | (98,162 | ) | (121,364 | ) | |||||||
Cash Flows from Financing Activities: |
|||||||||||||
Change in book cash overdraft |
(1,633 | ) | 1,633 | (6,515 | ) | ||||||||
Proceeds from issuance of long-term debt |
95,577 | 527,735 | 2,204,625 | ||||||||||
Repayments of long-term debt |
(243,666 | ) | (482,685 | ) | (430,012 | ) | |||||||
Debt issuance costs |
| | (58,541 | ) | |||||||||
Equity contributions |
| | 575,000 | ||||||||||
Equity issuance costs |
| | (42,378 | ) | |||||||||
Proceeds from exercises of stock options |
687 | 935 | 1,717 | ||||||||||
Excess tax (shortfall) benefit from share-based compensation |
(194 | ) | 451 | 780 | |||||||||
Special cash dividend paid |
| | (2,342,148 | ) | |||||||||
Distributions to Alberto-Culver |
| | (44,411 | ) | |||||||||
Purchases of treasury stock |
(33 | ) | | | |||||||||
Net cash (used) provided by financing activities |
(149,262 | ) | 48,069 | (141,883 | ) | ||||||||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
(850 | ) | 1,129 | 1,612 | |||||||||
Net (decrease) increase in cash and cash equivalents |
(45,341 | ) | 61,516 | (69,299 | ) | ||||||||
Cash and cash equivalents, beginning of year |
99,788 | 38,272 | 107,571 | ||||||||||
Cash and cash equivalents, end of year |
$ | 54,447 | $ | 99,788 | $ | 38,272 | |||||||
Supplemental Cash Flow Information: |
|||||||||||||
Cash paid for: |
|||||||||||||
Interest |
$ | 130,204 | $ | 150,060 | $ | 111,336 | |||||||
Income taxes |
$ | 67,463 | $ | 46,973 | $ | 42,732 |
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-6
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit) Equity
Fiscal Years ended September 30, 2009, 2008 and 2007
(In thousands)
|
Common Stock |
|
Retained
Earnings (Accumulated Deficit) |
|
Accumulated
Other Comprehensive (Loss) Income |
Total
Stockholders' (Deficit) Equity |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional
Paid-in Capital |
Treasury
Stock |
||||||||||||||||||||||
|
Shares | Amount | ||||||||||||||||||||||
Balance at September 30, 2006 |
1 | $ | | $ | 62,172 | $ | 927,512 | $ | | $ | 16,283 | $ | 1,005,967 | |||||||||||
Net earnings |
| | | 44,492 | | | 44,492 | |||||||||||||||||
Foreign currency translation |
| | | | | 18,239 | 18,239 | |||||||||||||||||
Total comprehensive income |
62,731 | |||||||||||||||||||||||
Adjustment to stockholder contribution |
| | 1,067 | | | | 1,067 | |||||||||||||||||
Retirement of common stock |
(1 | ) | | (1 | ) | 1 | | | | |||||||||||||||
Distributions to Alberto-Culver |
| | | (44,411 | ) | | | (44,411 | ) | |||||||||||||||
Stock issued in connection with separation including equity contribution |
180,050 | 1,801 | 573,199 | | | | 575,000 | |||||||||||||||||
Equity issuance costs |
| | (42,378 | ) | | | | (42,378 | ) | |||||||||||||||
Special cash dividend |
| | | (2,342,148 | ) | | | (2,342,148 | ) | |||||||||||||||
Share-based compensation |
| | 13,065 | | | | 13,065 | |||||||||||||||||
Stock issued for stock options |
859 | 8 | 3,389 | | | | 3,397 | |||||||||||||||||
Balance at September 30, 2007 |
180,909 | 1,809 | 610,513 | (1,414,554 | ) | | 34,522 | (767,710 | ) | |||||||||||||||
Net earnings |
| | | 77,577 | | | 77,577 | |||||||||||||||||
Deferred gains on interest rate swaps, net of income taxes of $509 |
| | | | | 793 | 793 | |||||||||||||||||
Foreign currency translation |
| | | | | (26,626 | ) | (26,626 | ) | |||||||||||||||
Total comprehensive income |
51,744 | |||||||||||||||||||||||
Adjustment to distributions to Alberto-Culver |
| | | 1,002 | | | 1,002 | |||||||||||||||||
Share-based compensation |
70 | | 10,242 | | | | 10,242 | |||||||||||||||||
Stock issued for stock options |
537 | 6 | 1,756 | | | | 1,762 | |||||||||||||||||
Balance at September 30, 2008 |
181,516 | 1,815 | 622,511 | (1,335,975 | ) | | 8,689 | (702,960 | ) | |||||||||||||||
Net earnings |
| | | 99,117 | | | 99,117 | |||||||||||||||||
Deferred losses on interest rate swaps, net of income taxes of $6,471 |
| | | | | (10,196 | ) | (10,196 | ) | |||||||||||||||
Foreign currency translation |
| | | | | (14,391 | ) | (14,391 | ) | |||||||||||||||
Total comprehensive income |
74,530 | |||||||||||||||||||||||
Stock options subject to redemption |
| | 4,083 | | | | 4,083 | |||||||||||||||||
Share-based compensation |
67 | 1 | 8,618 | | | | 8,619 | |||||||||||||||||
Purchases of treasury stock |
| | | | (33 | ) | | (33 | ) | |||||||||||||||
Stock issued for stock options |
275 | 3 | 307 | | | | 310 | |||||||||||||||||
Balance at September 30, 2009 |
181,858 | $ | 1,819 | $ | 635,519 | $ | (1,236,858 | ) | $ | (33 | ) | $ | (15,898 | ) | $ | (615,451 | ) | |||||||
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
F-7
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Description of Business
Sally Beauty Holdings, Inc. and its consolidated subsidiaries ("Sally Beauty" or "the Company") sell professional beauty supplies, primarily through its Sally Beauty Supply retail stores, in the U.S., Puerto Rico, Belgium, Canada, Chile, Mexico, the United Kingdom and certain other countries in Europe. Additionally, the Company distributes professional beauty products to salons and professional cosmetologists through its Beauty Systems Group ("BSG") store operations and a commissioned direct sales force that calls on salons primarily in the U.S., Puerto Rico, Canada, the United Kingdom and certain other countries in Europe, and to franchises in the southern and southwestern U.S. and in Mexico through the operations of its subsidiary Armstrong McCall, L.P. ("Armstrong McCall"). Certain beauty products sold by BSG and Armstrong McCall are sold through exclusive territory agreements with the manufacturers of the products.
In November 2006, the stockholders of Alberto-Culver approved a plan to separate its consumer products business and its Sally Beauty Supply/BSG distribution business into two separate, publicly-traded companies. As more fully discussed in Note 3, the separation was completed on November 16, 2006 (the "Separation Transactions") and was effected pursuant to an investment agreement dated as of June 19, 2006 (the "Investment Agreement") among Alberto-Culver and certain of its subsidiaries, including Sally Holdings, Inc. ("Sally Holdings") and CDRS Acquisition LLC ("CDRS"). Sally Holdings was a wholly-owned subsidiary of Alberto-Culver until November 16, 2006, when it was converted to a Delaware limited liability company, was renamed "Sally Holdings LLC," and became an indirect wholly-owned subsidiary of Sally Beauty. Sally Beauty was formed on June 16, 2006, and became the accounting successor company to Sally Holdings, Inc. upon the completion of the Separation Transactions.
Basis of Presentation
The consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements of our business prior to November 16, 2006 have been prepared from financial statements and accounting records maintained by Alberto-Culver and reflect assumptions and allocations made by Alberto-Culver. The historical consolidated financial statements may not necessarily be indicative of the financial position that would have existed or the results of operations or cash flows that would have resulted if the Company had been operated as an unaffiliated entity.
All references in these notes to "management" are to the management of Sally Beauty. All references in these notes to "the Company" are to Sally Beauty and, prior to November 16, 2006, to Sally Holdings, Inc.
2. Significant Accounting Policies
The preparation of financial statements in conformity with GAAP requires us to interpret and apply accounting standards and to develop and follow accounting policies consistent with such standards. The following is a summary of the significant accounting policies used in preparing the Company's consolidated financial statements.
Principles of Consolidation
These consolidated financial statements include the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
F-8
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results may differ from these estimates in amounts that may be material to the financial statements. Management believes that the estimates and assumptions used are reasonable.
Cash and Cash Equivalents
All highly liquid investments purchased by the Company from time to time which have an original maturity of three months or less are considered to be cash equivalents. These investments are stated at cost, which approximates market value. Also included in cash equivalents are proceeds due from customer credit and debit card transactions, which generally settle within two to five days, and were approximately $7.2 million and $6.8 million at September 30, 2009 and 2008, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, trade and other accounts receivable, accounts payable, interest rate swap agreements and long-term borrowings.
The carrying amounts of cash and cash equivalents, trade and other accounts receivable and accounts payable approximate fair value due to the short-term nature of these financial instruments.
The aggregate fair value of all interest rate swap agreements held at September 30, 2009 was a liability of $17.7 million, consisting of $2.3 million included in accrued expenses and $15.4 million included in other liabilities. The aggregate fair value of all interest rate swap agreements held at September 30, 2008 was a net liability of $6.4 million, consisting of $0.5 million included in accrued expenses, $7.2 million included in other liabilities and $1.3 million included in other assets. Fair value amounts reported for the swap agreements are based on third-party information and were determined using proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Please see Recent Accounting Pronouncements below.
The fair value of the Company's long-term borrowings was approximately $1,655.1 million and $1,676.1 million at September 30, 2009 and 2008. The fair values of the Company's long-term borrowings are based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.
Derivative Instruments and Hedging Activities
The Company utilizes interest rate swap agreements to manage its cash flow exposure associated with changing interest rates in connection with its term loan obligations and accounts for them in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815, Derivatives and Hedging ("ASC 815"). The Company does not purchase or hold any derivative instruments for speculative or trading purposes. Certain interest rate swap agreements owned by the Company at September 30, 2009 are designated as effective cash flow hedges and adjustments to reflect the change in their fair values, which are adjusted quarterly, are recorded, net of income tax, in
F-9
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
accumulated other comprehensive income until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any hedge ineffectiveness, as this term is used in ASC 815, is recognized in net interest expense in the consolidated statements of earnings. Certain other interest rate swap agreements owned by the Company at September 30, 2009 are not designated as hedges and, accordingly, adjustments to reflect changes in their fair values, which are adjusted quarterly, are recorded in net interest expense.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of investments in cash equivalents and accounts receivable. The Company invests from time to time in securities of financial institutions with high-credit quality. Accounts receivable are generally diversified due to the high number of entities comprising the Company's customer base and their dispersion across diverse geographical regions. The Company believes no significant concentration of credit risk exists with respect to its investments in cash equivalents and its accounts receivable.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the values invoiced to customers and do not bear interest. Trade accounts receivable are stated net of the allowance for doubtful accounts. The allowance for doubtful accounts requires management to estimate future amounts of receivables to be collected. Management records allowances for doubtful accounts based on historical collection data and current customer information. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
In the consolidated statements of earnings, bad debt expense is included in selling, general and administrative expenses. The Company's exposure to credit risk with respect to trade receivables is mitigated by the Company's broad customer base and their dispersion across diverse geographical regions.
Other Receivables
Other receivables consist primarily of amounts expected to be received from vendors under various contractual agreements. Other receivables are recorded at the amount management estimates will be collected.
Inventories
Inventories consist primarily of beauty supplies and related accessories and salon equipment for sale in the normal course of our business and are stated at the lower of cost, determined using the first-in, first-out (FIFO) method, or market (net realizable value). When necessary, the Company adjusts the carrying value of inventories to the lower of cost or market, including costs to sell or dispose, and for estimated inventory shrinkage. Estimates of the future demand for the Company's products, age of the inventory and changes in stock keeping units ("SKUs") are some of the key factors used by management in assessing the net realizable value of inventories. The Company estimates inventory shrinkage based on historical experience. Inventory shrinkage averaged approximately 1.0% of consolidated net sales in fiscal years 2009, 2008 and 2007.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method based on estimated useful lives of the respective classes of assets and is reflected in depreciation and amortization expense in the consolidated statements of earnings. Buildings and
F-10
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
building improvements are depreciated over periods ranging from five to 40 years. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the term of the related lease, including renewals determined to be reasonably assured. Furniture, fixtures and equipment are depreciated over periods ranging from three to ten years. Expenditures for maintenance and repairs are expensed as incurred while expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts.
Lease Accounting
The Company's lease agreements for office space, retail stores and warehouse/distribution facilities are accounted for as operating leases. Rent expense (including any rent abatements or escalation charges) is recognized on a straight-line basis from the date the Company takes possession of the property to begin preparation of the site for occupancy to the end of the lease term, including renewal options determined to be reasonably assured. Certain leases provide for contingent rents that are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability along with the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
Certain lease agreements to which the Company is a party provide for tenant improvement allowances. Such allowances are recorded as deferred lease credits, included in accrued expenses and other liabilities, as appropriate, on the balance sheet and amortized on a straight-line basis over the lease term (including renewal options determined to be reasonably assured) as a reduction of rent expense; which is generally consistent with the amortization period used for the constructed leasehold improvement asset.
Valuation of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangibles subject to depreciation or amortization, are reviewed for impairment annually, and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of an asset to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no significant impairments in the current or prior fiscal years presented in the accompanying financial statements.
Goodwill and Other Intangibles
Goodwill is the cost of an acquisition less the fair value of the net assets of the acquired business. Goodwill is reviewed for impairment at least annually, and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, in accordance with ASC 350. Management considers whether there has been a permanent impairment to the value of goodwill and other intangibles by evaluating if various factors, including current operating results, anticipated future results and cash flows, and market and economic conditions, indicate possible impairment. Based on the annual reviews performed, after taking into account the recent economic downturn in certain geographies in which we operate, there was no impairment in the current or prior fiscal years presented.
Other intangibles with indefinite lives include trade names and certain distribution rights. Other intangible assets subject to amortization include customer relationships, certain distribution rights and
F-11
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
non-competition agreements, and are amortized over periods of one to twelve years. The weighted average amortization period is approximately six years.
Deferred Financing Costs
Expenses incurred with the issuance of long-term debt are capitalized and amortized over the life of the related debt agreements on a straight line-basis or by using the effective interest method. These capitalized expenses are recorded on the consolidated balance sheet as other assets.
Insurance/Self-Insurance Programs
The Company retains a substantial portion of the risk related to certain of its workers' compensation, general and auto liability and property damage insurable loss exposure. Predetermined loss limits have been arranged with insurance companies to limit the Company's exposure per occurrence and aggregate cash outlay. Certain of our employees and their dependents are also covered by a self-insurance program for healthcare benefit purposes, up to a certain maximum lifetime limit. Currently these self-insurance costs, less amounts recovered through payroll deductions and certain out-of-pocket amounts in connection with the employee healthcare program, are funded by the Company. The Company maintains an annual stop-loss insurance policy for the healthcare benefits plan.
The Company records an estimated liability for the ultimate cost of claims incurred and unpaid as of the balance sheet date, which includes both claims filed and estimated losses incurred but not yet reported. The Company estimates the ultimate cost based on an analysis of historical data and actuarial estimates. Workers' compensation, general and auto liability and property damage insurable loss liabilities are recorded at the estimate of their net present value, while healthcare plan liabilities are not discounted. These estimates are reviewed on a regular basis to ensure that the recorded liability is adequate. The Company believes the amounts accrued at September 30, 2009 and 2008 are adequate, although actual losses may differ from the amounts provided.
Advertising Costs
Advertising costs relate mainly to print, radio and television advertisements and trade shows. Advertising costs incurred in connection with print, radio and television advertisements are expensed the first time the advertisement is run. Other advertising costs are expensed when incurred. Advertising costs were approximately $55.2 million; $50.6 million and $49.2 million in the fiscal years ended September 30, 2009, 2008 and 2007, respectively, and are included in selling, general and administrative expenses in the Company's consolidated statements of earnings.
Vendor Rebates and Concessions
The Company accounts for cash consideration received from vendors under ASC 605-50, Customer Payments and Incentives. This accounting standard states that cash consideration received by a customer is presumed to be a reduction of the cost of sales unless it is for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the customer in selling the vendor's products. The majority of cash consideration received by the Company is considered to be a reduction of the cost of sales and is allocated to cost of products sold and distribution expenses as the related inventory is sold.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"). Under ASC 740, deferred income taxes are recognized for the estimated future tax consequences attributable to
F-12
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are estimated to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of earnings in the period of enactment. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized in full. The estimated tax benefit of an uncertain tax position is recorded in our financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.
Effective October 1, 2007, the Company adopted the provisions of ASC 740-10-25, Income TaxesRecognition, an interpretative amendment of ASC 740. The adoption of this amendment did not require a change to the Company's liability for unrecognized tax benefits and had no impact on the Company's opening balance of accumulated deficit. Please see Note 16 for additional information.
Foreign Currency
The functional currency of each of the Company's foreign operations is generally the respective local currency. Balance sheet accounts are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date, while the results of operations are translated using the average exchange rates during the period presented. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders' (deficit) equity. Foreign currency transaction gains or losses are included in the consolidated statements of earnings when incurred and were not significant in any of the periods presented in the accompanying financial statements.
Net Earnings per Share
Basic net earnings per share is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. For the fiscal year 2007, the weighted average shares were calculated from November 16, 2006 through September 30, 2007, which represents the actual number of days that shares of the Company's common stock were publicly traded. Diluted net earnings per share is calculated similarly but includes potential dilution from the exercise of stock options and stock awards, except when the effect would be anti-dilutive.
Revenue Recognition
The Company recognizes revenue when a customer consummates a point of sale transaction in a store. The cost of sales incentive programs, such as customer and consumer coupons, are recognized as a reduction of revenue at the time of sale. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and are excluded from revenue. The Company also recognizes revenue on merchandise shipped to customers when title and risk of loss pass to the customer. Appropriate provisions for sales returns and cash discounts are made at the time the sales are recorded. Sales returns and allowances averaged approximately 2.2% of net sales over each of the past three fiscal years.
Cost of Products Sold and Distribution Expenses
Cost of products sold and distribution expenses include actual product costs, the cost of transportation to the Company's distribution centers and certain shipping and handling costs, such as freight from the distribution centers to the stores and handling costs incurred at the distribution centers. All other shipping and handling costs are included in selling, general and administrative expenses.
F-13
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Shipping and Handling
Shipping and handling costs related to freight and distribution expenses for delivery to customers are included in selling, general and administrative expenses in the consolidated statements of earnings and amounted to $30.3 million, $35.8 million and $38.3 million for the fiscal years 2009, 2008 and 2007, respectively.
Share-Based Compensation
The Company accounts for stock option and stock awards, which include share-based payment plans in accordance with ASC 718, CompensationStock Compensation. Accordingly, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes compensation expense on a straight-line basis over the vesting period or to the date a participant becomes eligible for retirement, if earlier.
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 107, Share-Based Payment , requires public companies to apply the rules of Accounting Series Release No. 268 ("ASR 268"), Presentation in Financial Statements of Redeemable Preferred Stocks , to stock options with contingent cash settlement provisions. ASR 268 requires securities with contingent cash settlement provisions, which are not solely in the control of the issuer, without regard to probability of occurrence, to be classified outside of stockholders' equity. Prior to November 16, 2006, the Company was a subsidiary of Alberto-Culver and had no share-based compensation plans of its own. Prior to the Company's separation from Alberto-Culver, Alberto-Culver granted stock options to Company employees with a contingent cash settlement provision upon the occurrence of certain change in control events, pursuant to its stock option plans. As such, the contingent cash settlement of the stock options as a result of such event would not be solely in the control of the Company. In accordance with ASR 268, the Company reported $1.8 million and $5.9 million in "Stock options subject to redemption" outside of accumulated stockholders' (deficit) equity on its consolidated balance sheet as of September 30, 2009 and 2008, respectively, and this amount will be reclassified back into additional paid-in capital in future periods as the related stock options are exercised or canceled or otherwise terminated.
Comprehensive Income
Comprehensive income reflects changes in accumulated stockholders' (deficit) equity from sources other than transactions with stockholders and, as such, includes net earnings and certain other specified components. The Company's only components of comprehensive income, other than net earnings, are the cumulative foreign currency translation adjustments and deferred gains (losses) on certain interest rate swap agreements, net of income tax.
F-14
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income at September 30, 2009 and 2008, are as follows (in thousands):
|
As of September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||||||||||||
|
Amount
Before Tax |
Deferred
Tax |
Net
Amount |
Amount
Before Tax |
Deferred
Tax |
Net
Amount |
|||||||||||||
Cumulative foreign currency translation adjustments |
$ | (6,495 | ) | | $ | (6,495 | ) | $ | 7,896 | | $ | 7,896 | |||||||
Deferred (losses) gains on interest rate swaps(a) |
(15,365 | ) | 5,962 | (9,403 | ) | 1,302 | (509 | ) | 793 | ||||||||||
Accumulated other comprehensive (loss) income |
$ | (21,860 | ) | $ | 5,962 | $ | (15,898 | ) | $ | 9,198 | $ | (509 | ) | $ | 8,689 | ||||
Recent Accounting Pronouncements
In June 2009, the FASB issued a new accounting standard named The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles . This pronouncement, among other things, identified the previously issued accounting standards that were considered authoritative generally accepted accounting principles in the U.S. and replaced all previously issued accounting pronouncements of the FASB, and its predecessor rule-making bodies, with the ASC. This standard was effective prospectively for reporting periods ended after September 15, 2009 and, accordingly, the Company adopted it during the fourth quarter of the fiscal year 2009. The adoption of this standard did not have an effect on the Company's consolidated financial position, results of operations or cash flows. As a result of adopting this standard, the Company's references to GAAP standards have been changed to refer to topics, subtopics, sections or subsections of the ASC, as appropriate.
In May 2009, the FASB issued ASC 855, Subsequent Events ("ASC 855"). ASC 855 establishes standards of accounting for and disclosure of transactions and events that occur after the balance sheet date but before the financial statements are issued. This accounting standard requires the disclosure, among other things, of the date through which an entity has evaluated subsequent events and whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. This accounting standard must be applied prospectively for interim and annual periods ended after June 15, 2009 and, accordingly, the Company adopted its provisions effective for the quarter ended June 30, 2009. In connection therewith, the Company has evaluated all material transactions and events through November 18, 2009, the last full business day before this Annual Report was filed with the SEC.
Effective on January 1, 2009, the Company adopted the amendment to ASC 815 contained in ASC 815-10-65, Derivatives and Hedging, Transition ("ASC 815-10-65"). ASC 815-10-65 established, among other things, the disclosure requirements for derivative instruments and for hedging activities. This standard amended and expanded those disclosures to also require qualitative disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about the fair value of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features contained in the derivative instruments. This standard also requires companies to disclose information about how derivatives and related hedges are accounted for and how the hedges affect the entity's financial position,
F-15
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
financial performance and cash flows, including the location and amounts of derivative instruments in the entity's financial statements.
As required by ASC 815, the Company records all derivative instruments on its balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative, whether the Company has elected to designate a derivative instrument in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the impact on earnings of the hedged transaction or transactions. The Company may from time to time enter into derivative contracts that are intended to hedge certain economic risks even though hedge accounting does not apply or the Company elects not to apply hedge accounting to such derivative contracts. Please see Note 14 for more details about the Company's derivative instruments and hedging activities as of September 30, 2009.
The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), as it relates to its financial instruments, effective on October 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard defines "fair value" as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This standard establishes a three-level hierarchy for measuring fair value and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels of that hierarchy are defined as follows:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data
Level 3 Unobservable inputs for the asset or liability
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including interest rate swaps. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the valuation hierarchy. In accordance with ASC 820, the Company
F-16
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
categorized certain of its financial assets and liabilities based on priority of the inputs to the valuation technique for the instruments, as follows (in thousands):
|
As of September 30, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total | Level 1 | Level 2 | Level 3 | ||||||||||
Liabilities |
||||||||||||||
Long-term debt(1) |
$ | 1,655,076 | $ | 727,719 | $ | 927,357 | ||||||||
Hedged interest rate swaps(2) |
15,365 | 15,365 | ||||||||||||
Non-hedged interest rate swaps(2) |
2,356 | 2,356 | ||||||||||||
Total |
$ | 1,672,797 | $ | 727,719 | $ | 945,078 | ||||||||
In April 2009, the FASB amended ASC 825, Financial Instruments . This amendment, currently contained in ASC 825-10-50, extended to interim periods certain disclosures about fair value of financial instruments for publicly traded companies and amended prior accounting standards to require those disclosures in summarized financial information at interim reporting periods. This amendment was effective for interim reporting periods ending after June 15, 2009 and its adoption, during the third quarter of the fiscal year 2009, did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
We have not yet adopted and are currently assessing any potential effect of the following pronouncements on our consolidated financial statements:
In August 2009, the FASB issued Accounting Standards Update 2009-05 which amended ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), as it relates to the measurement of liabilities at fair value, effective for interim reporting periods beginning after August 26, 2009. This update provides clarification for liabilities in which a quoted price in an active market for an identical liability is not available.
In April 2008, the FASB amended ASC 350, Intangibles and Other . This new accounting standard, currently contained in ASC 350-30-35, specifically amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The objective of this amendment is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. This new standard is effective for fiscal years beginning after December 15, 2008. Early application is not permitted.
In December 2007, the FASB revised the accounting standards for business combinations. This new standard (currently contained in ASC 805, Business Combinations ("ASC 805")), among other things, generally requires that an acquirer recognize the assets acquired and liabilities assumed measured at their "full fair values" on the acquisition date. This practice replaces the practice, under predecessor accounting standards, of allocating the cost of an acquisition to the individual assets acquired and liabilities assumed based on their relative estimated fair values. This new standard further requires that acquisition-related costs be recognized separately from the related acquisition and must be applied prospectively to business
F-17
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
combinations consummated on or after the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted.
In April 2009, the FASB issued ASC 805-20 Business CombinationsIdentifiable Assets and Liabilities and Any Non-controlling Interest . This new accounting standard amends and clarifies ASC 805 and applies to assets acquired and liabilities assumed that arise from contingencies in a business combination. This amendment must also be applied prospectively to business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted.
3. The Separation Transactions
On November 16, 2006, the Company separated from Alberto-Culver, pursuant to the Investment Agreement. As a result, the Company owns and operates the Sally Beauty Supply and BSG distribution businesses that were previously owned and operated by Alberto-Culver, and Alberto-Culver continues to own and operate its consumer products business. Pursuant to the Investment Agreement: (i) the stockholders of Alberto-Culver immediately prior to the Separation Transactions became the beneficial owners of approximately 52% of the outstanding common stock of the Company on an undiluted basis; and (ii) CDRS, a limited liability company organized by Clayton, Dubilier & Rice Fund VII, L.P., invested $575.0 million to obtain an equity ownership of approximately 48% of the outstanding common stock of the Company. In addition, the Company incurred approximately $1,850.0 million of new debt.
Pursuant to the Investment Agreement, the Company paid a transaction fee of $30.0 million to Clayton, Dubilier & Rice, Inc., the manager of both Clayton, Dubilier & Rice Fund VII, L.P. (the sole member of CDRS) and CDRS, as well as approximately $1.1 million to CDRS in merger and transaction expenses incurred in connection with its investment in the Company and the Separation Transactions. Pursuant to the Investment Agreement, the Company also paid approximately $20.4 million to Alberto-Culver for its expenses incurred in connection with the Separation Transactions. The majority of the transaction fee and the expenses paid, and certain other professional services and due diligence fees were considered to be costs of raising equity and were recorded as a reduction to additional paid-in capital of approximately $42.4 million. The Company also paid approximately $58.5 million in fees for the debt financing incurred in connection with the separation, which were recorded on the consolidated balance sheet as other assets.
In connection with the above transactions, Alberto-Culver and the Company incurred expenses which included transaction fees, professional services, legal and investment banking fees. For fiscal year 2007, the total amount of the Company's transaction expenses was $21.5 million. Most expenses related to the Separation Transactions are not expected to be deductible for tax purposes.
In connection with the Separation Transactions, the Company became the parent company for all U.S. tax returns filed under the employer identification number of Alberto-Culver prior to the completion of the Separation Transactions. All intercompany receivables, payables and loans (other than trade payables and the Company's portion of the transaction expenses described above) between the Company or any of its subsidiaries, on the one hand, and Alberto-Culver or any of its subsidiaries (other than the Company and its subsidiaries), on the other hand, were canceled prior to completion of the Separation Transactions. In addition, prior thereto, all intercompany agreements between the Company or any of its subsidiaries and Alberto-Culver or any of its subsidiaries were terminated, other than certain agreements specifically designated in the Separation Agreement to survive following the transactions.Alberto-Culver treated the transactions as though they constituted a change in control for purposes of Alberto-Culver's stock option and restricted stock plans. As a result, in accordance with the terms of these plans, all outstanding stock options and restricted shares of Alberto-Culver, including those held by the Company's employees, became fully vested upon completion of the Separation Transactions. Due to the Separation Transactions, the
F-18
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Company recorded a charge at that time equal to the amount of future compensation expense of approximately $5.3 million that would have been recognized in subsequent periods as the stock options and restricted shares for the Company's employees vested over the original vesting periods. Upon completion of the Separation Transactions all outstanding Alberto-Culver stock options held by employees of the Company became options to purchase shares of Sally Beauty common stock.
4. Accumulated Stockholders' (Deficit) Equity
The Company is authorized to issue up to 400.0 million shares of common stock with a par value of $0.01 per share. On November 17, 2006, the Company had approximately 180.1 million shares of stock issued and outstanding, and commenced regular-way trading on the New York Stock Exchange ("NYSE") as an independent company under the symbol "SBH." The Company had approximately 182.2 million shares issued and approximately 181.9 million shares outstanding as of September 30, 2009. Please see the Note 3 for additional information about the issuance of shares of the Company's common stock in connection with the Separation Transactions in the fiscal year ended September 30, 2007.
5. Net Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
|
Year ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007(a) | ||||||||
Net earnings: |
$ | 99,117 | $ | 77,577 | $ | 44,492 | |||||
Total weighted average basic shares |
181,691 | 181,189 | 180,392 | ||||||||
Dilutive securities: |
|||||||||||
Stock option and stock award programs |
1,615 | 1,515 | 1,983 | ||||||||
Total weighted average diluted shares |
183,306 | 182,704 | 182,375 | ||||||||
Earnings per share: |
|||||||||||
Basic |
$ | 0.55 | $ | 0.43 | $ | 0.25 | |||||
Diluted |
$ | 0.54 | $ | 0.42 | $ | 0.24 | |||||
At September 30, 2009, 2008 and 2007, options to purchase 6,431,741 shares, 6,641,544 shares and 4,677,894 shares, respectively, of the Company's common stock were outstanding but not included in the computation of diluted earnings per share, as these options' exercise prices, ranging from $7.42 to $9.66, were greater than the respective average market prices per share of the Company's common stock for the fiscal years ended on such dates.
6. Share-Based Payments
During fiscal year 2007, the Company adopted the 2007 Omnibus Incentive Plan (the "2007 Plan"), which allows for the issuance of up to 10.0 million shares of the Company's common stock. During fiscal years 2009, 2008 and 2007, the Company granted to its employees, directors and consultants, approximately
F-19
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2.7 million, 2.8 million and 2.4 million stock options, respectively, and approximately 123,000, 136,000 and 350,000 restricted share awards, respectively, under the 2007 Plan or the 2003 Restricted Stock Plan (the "RSP"). Additionally, during the fiscal years 2009, 2008 and 2007, the Company granted approximately 93,500, 55,700 and 55,600 restricted stock units ("RSUs"), respectively, to certain of its non-employee directors under the 2007 Plan.
For the fiscal years 2009, 2008 and 2007, total compensation cost charged against income and included in selling, general and administrative expenses, for share-based compensation arrangements was $8.6 million, $10.2 million and $13.1 million, respectively, and resulted in an increase in additional paid-in capital by the same amounts. These amounts included, for the fiscal years 2009 and 2008, $2.0 million and $3.1 million, respectively, of accelerated expense related to certain retirement eligible employees who are eligible to continue vesting awards upon retirement and, for fiscal year 2007, $5.3 million of accelerated expense related to the Separation Transactions and $2.6 million of accelerated expense related to certain retirement eligible employees who are eligible to continue vesting awards upon retirement, under the terms of the 2007 Plan. For fiscal years 2009, 2008 and 2007, the total income tax benefit recognized in the consolidated statements of earnings from these plans was $2.1 million, $2.5 million and $5.1 million, respectively.
Prior to November 16, 2006, the Company was a subsidiary of Alberto-Culver and had no share-based compensation plans of its own. However, certain employees of the Company had been granted stock options and stock awards under share-based compensation plans of Alberto-Culver. Alberto-Culver treated the Separation Transactions as though they constituted a change in control for purposes of Alberto-Culver's stock options and stock awards. As a result, in accordance with the terms of these plans, all outstanding stock options and stock awards of Alberto-Culver, including those held by the Company's employees, became fully vested upon completion of the Separation Transactions on November 16, 2006. Due to the Separation Transactions, the Company recorded a charge at that time equal to the amount of future compensation expense of approximately $5.3 million that would have been recognized in subsequent periods as the stock options and stock awards for the Company's employees vested over the original vesting periods. Upon completion of the Separation Transactions, all outstanding Alberto-Culver stock options and stock awards held by employees of the Company became options to purchase shares of Sally Beauty's common stock.
As a result of the Separation Transactions, the Employee Stock Option Plan of 2003, the 2003 Stock Option Plan for Non-Employee Directors and the 2003 Restricted Stock Plan that were previously plans of Alberto-Culver became plans of the Company. During fiscal year 2007, the Company granted approximately 2.8 million stock options to its employees and directors, and granted approximately 350,000 restricted share awards to its employees under these plans. The Company from time to time may grant stock option awards to employees and consultants under the Employee Stock Option Plan of 2003, the 2003 Stock Option Plan for Non-Employee Directors and under the 2007 Plan.
Stock Options
Each option has an exercise price which equals 100% of the market price of the Company's common stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over a four year period and are subject to forfeiture until the four year vesting period is complete.
F-20
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table presents a summary of the activity for the Company's stock option plans for the fiscal year ended September 30, 2009:
|
Number of
Outstanding Options (in Thousands) |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term (in Years) |
Aggregate
Intrinsic Value (in Thousands) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at September 30, 2008 |
8,272 | 8.01 | 8.1 | $ | 9,680 | |||||||||
Granted |
2,707 | 5.23 | ||||||||||||
Exercised |
(273 | ) | 2.00 | |||||||||||
Forfeited or expired |
(547 | ) | 8.19 | |||||||||||
Outstanding at September 30, 2009 |
10,159 | $ | 7.43 | 7.7 | $ | 10,678 | ||||||||
Exercisable at September 30, 2009 |
4,313 | $ | 7.44 | 6.8 | $ | 5,847 | ||||||||
The following table summarizes information about stock options under the Company's option plans at September 30, 2009 (shares in thousands):
|
Options Outstanding | Options Exercisable | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices
|
Number
Outstanding at September 30, 2009 |
Weighted
Average Remaining Contractual Term (In Years) |
Weighted
Average Exercise Price |
Number
Exercisable at September 30, 2009 |
Weighted
Average Exercise Price |
||||||||||||
$2.00 |
1,144 | 4.8 | $ | 2.00 | 1,144 | $ | 2.00 | ||||||||||
$5.24 - 9.66 |
9,015 | 8.1 | 8.11 | 3,169 | 9.41 | ||||||||||||
Total |
10,159 | 7.7 | $ | 7.43 | 4,313 | $ | 7.44 | ||||||||||
The Company uses the Black-Scholes option pricing model to value the Company's stock options for each stock option award. Using this option pricing model, the fair value of each stock option award is estimated on the date of grant. The fair value of the Company's stock option awards, which generally vest ratably over a four-year period, is expensed on a straight-line basis over the vesting period of the stock options or to the date a participant becomes eligible for retirement, if earlier.
F-21
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The weighted average assumptions relating to the valuation of the Company's stock options are as follows:
|
Year Ended September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||
Expected lives (years) |
5.0 | 5.0 | 5.0 | |||||||
Expected volatility |
47.9% | 37.5% - 41.3% | 41.2% - 41.9% | |||||||
Risk-free interest rate |
2.6% | 3.5% - 4.0% | 4.4% - 4.6% | |||||||
Dividend yield |
0.0% | 0.0% | 0.0% |
The expected life of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience of employees of the Company that have been granted stock options under stock option plans of Alberto-Culver. Expected volatility is derived by using the average volatility of similar companies since it is not practicable to estimate the Company's expected volatility due to a lack of trading history. The risk-free interest rate is based on the zero-coupon U.S. Treasury issue as of the date of the grant. Since the Company does not currently expect to pay dividends, the dividend yield is 0%.
The weighted average fair value per option at the date of grant for all stock options issued to Company employees in the fiscal years 2009, 2008 and 2007 was $2.33, $3.73 and $4.11, respectively.
The total intrinsic value of options exercised during the fiscal years 2009, 2008 and 2007 was $1.0 million, $3.3 million and $5.9 million, respectively; and the tax benefit realized for the tax deductions from these option exercises was $0.4 million, $1.2 million and $2.3 million, respectively. The total cash received from these option exercises was $0.7 million, $0.9 million and $1.7 million during the fiscal years 2009, 2008 and 2007, respectively. The total fair value of stock options issued to Company employees that vested during the fiscal years 2009, 2008 and 2007 was $6.2 million, $4.7 million and $7.3 million, respectively.
At September 30, 2009, unrecognized compensation cost related to non-vested stock option awards of approximately $9.0 million is expected to be recognized over the weighted average period of 2.3 years.
Stock Awards
Restricted Stock Awards
The Company from time to time may grant restricted stock awards to employees and consultants under the RSP and under the 2007 Plan. A restricted stock award is an award of shares of the Company's common stock (which have full voting rights but are restricted with regard to sale or transfer), the restrictions over which lapse ratably over a specified period of time (generally five years). Restricted stock awards are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to these restrictions lapsing, subject to certain retirement provisions of the 2007 Plan. Participants have full voting and dividend rights with respect to unvested shares from restricted stock awards.
The Company expenses the cost of the restricted stock awards, which is determined to be the fair value of the restricted stock award at the date of grant, on a straight-line basis over the period (the "vesting period") in which the restrictions on these stock awards lapse ("vesting"). For these purposes, the fair value of the restricted stock award is determined based on the closing price of the Company's common stock on the grant date.
F-22
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table presents a summary of the activity for the Company's restricted stock awards for the fiscal year ended September 30, 2009:
Restricted Stock Awards
|
Number of
Shares (In Thousands) |
Weighted
Average Fair Value Per Share |
Weighted
Average Remaining Vesting Term (In Years) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Non-vested at September 30, 2008 |
296 | $ | 8.44 | 3.8 | |||||||
Granted |
123 | 5.17 | |||||||||
Vested |
(68 | ) | 8.44 | ||||||||
Forfeited or expired |
(20 | ) | 4.79 | ||||||||
Non-vested at September 30, 2009 |
331 | $ | 7.45 | 3.3 | |||||||
At September 30, 2009, unrecognized compensation expense related to non-vested restricted stock awards of approximately $2.0 million is expected to be recognized over the weighted average period of 3.3 years.
Restricted Stock Units
The Company grants RSUs which generally vest less than one year from the date of grant pursuant to the 2007 Plan. To date, the Company has only granted RSU awards to its non-employee directors. RSUs represent an unsecured promise of the Company to issue shares of common stock of the Company. Upon vesting, such RSUs are retained by the Company as deferred stock units that are not distributed until six months after the director's service as a director terminates. RSUs are independent of stock option grants and are generally subject to forfeiture if service terminates prior to the vesting of the units. Participants have no voting rights with respect to non-vested RSUs. The 2007 Plan requires the Company to settle the vested deferred stock units with common stock and not with cash or a cash-equivalent.
The Company expenses the cost of the RSUs (which is determined to be the fair value of the RSUs at the date of grant) on a straight-line basis over the vesting period (generally less than one year). For these purposes, the fair value of the RSU is determined based on the closing price of the Company's common stock on the grant date.
The following table presents a summary of the activity for the Company's RSUs for the fiscal year ended September 30, 2009:
Restricted Stock Units
|
Number of
Shares (in Thousands) |
Weighted
Average Fair Value Per Share |
Weighted
Average Remaining Vesting Term (In Years) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Non-vested at September 30, 2008 |
| $ | | | ||||||
Granted |
94 | 5.24 | ||||||||
Vested |
(94 | ) | 5.24 | |||||||
Forfeited |
| | ||||||||
Non-vested at September 30, 2009 |
| | | |||||||
During fiscal year 2009, all RSUs vested. Therefore, there is no remaining unrecognized compensation cost to be expensed as of September 30, 2009.
F-23
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Allowance for Doubtful Accounts
The change in the allowance for doubtful accounts was as follows (in thousands):
|
Year Ended September 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||
Balance at beginning of period |
$ | 2,702 | $ | 2,564 | $ | 2,246 | ||||
Bad debt expense |
1,859 | 2,353 | 2,632 | |||||||
Uncollected accounts written off, net of recoveries |
(2,648 | ) | (2,218 | ) | (2,568 | ) | ||||
Allowance for doubtful accounts of acquired companies |
353 | 3 | 254 | |||||||
Balance at end of period |
$ | 2,266 | $ | 2,702 | $ | 2,564 | ||||
8. Property and Equipment, Net
Property and equipment, net consists of the following (in thousands):
|
September 30, | |||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Land |
$ | 9,672 | $ | 9,774 | ||||
Buildings and building improvements |
49,608 | 49,139 | ||||||
Leasehold improvements |
139,642 | 130,945 | ||||||
Furniture, fixtures and equipment |
217,659 | 209,587 | ||||||
Total property and equipment, gross |
416,581 | 399,445 | ||||||
Less accumulated depreciation and amortization |
(265,329 | ) | (243,185 | ) | ||||
Total property and equipment, net |
$ | 151,252 | $ | 156,260 | ||||
Depreciation expense for fiscal years 2009, 2008 and 2007 was $40.9 million, $42.2 million and $38.9 million, respectively. As further described in Note 12, the term loan facilities and the ABL facility are secured by substantially all of our assets, those of Sally Investment Holdings LLC, a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings, those of our domestic subsidiaries and, in the case of the ABL facility, those of our Canadian subsidiaries.
F-24
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Goodwill and Other Intangibles
The changes in the carrying amounts of goodwill by operating segment for the fiscal years 2009 and 2008 are as follows (in thousands):
|
Sally Beauty
Supply |
Beauty Systems
Group |
Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance at September 30, 2007 |
$ | 44,548 | $ | 362,075 | $ | 406,623 | ||||
Additions, net of purchase price adjustments |
27,000 | 1,876 | 28,876 | |||||||
Foreign currency translation |
(6,360 | ) | (4,176 | ) | (10,536 | ) | ||||
Balance at September 30, 2008 |
65,188 | 359,775 | 424,963 | |||||||
Additions, net of purchase price adjustments |
10,264 | 62,388 | 72,652 | |||||||
Foreign currency translation |
(2,244 | ) | (1,236 | ) | (3,480 | ) | ||||
Balance at September 30, 2009 |
$ | 73,208 | $ | 420,927 | $ | 494,135 | ||||
As described in Note 17, during the fiscal year 2009, $61.0 million of the increase in BSG's goodwill was attributable to the acquisition of Schoeneman Beauty Supply, Inc. on September 30, 2009, and the remaining $1.4 million was attributable to other acquisitions not individually material. Further, during the fiscal year 2009, the increase in Sally Beauty Supply's goodwill was attributable to certain acquisitions which were not individually material. As further described in Note 17, during the fiscal year 2008, $23.9 million of the increase in Sally Beauty Supply's goodwill was attributable to the acquisition of Pro-Duo in May of 2008, net of purchase price adjustments, and the remaining $3.1 million was attributable to other acquisitions not individually material. Additionally, the increase in BSG's goodwill, during the fiscal year 2008, was attributable to certain acquisitions which were not individually material.
F-25
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following table provides the carrying value for intangible assets with indefinite lives and the gross carrying value and accumulated amortization for intangible assets subject to amortization by operating segment at September 30, 2009 and 2008 (in thousands):
|
Sally Beauty
Supply |
Beauty Systems
Group |
Total | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at September 30, 2009: |
|||||||||||||
Intangible assets with indefinite lives: |
|||||||||||||
Trade names |
$ | 20,183 | $ | 33,815 | $ | 53,998 | |||||||
Other intangibles |
| 5,700 | 5,700 | ||||||||||
Total |
20,183 | 39,515 | 59,698 | ||||||||||
Intangible assets subject to amortization: |
|||||||||||||
Gross carrying amount |
6,933 | 36,411 | 43,344 | ||||||||||
Accumulated amortization |
(2,299 | ) | (22,058 | ) | (24,357 | ) | |||||||
Net value |
4,634 | 14,353 | 18,987 | ||||||||||
Total intangible assets, net |
$ | 24,817 | $ | 53,868 | $ | 78,685 | |||||||
Balance at September 30, 2008: |
|||||||||||||
Intangible assets with indefinite lives: |
|||||||||||||
Trade names |
$ | 21,182 | $ | 34,246 | $ | 55,428 | |||||||
Other intangibles |
| 6,053 | 6,053 | ||||||||||
Total |
21,182 | 40,299 | 61,481 | ||||||||||
Intangible assets subject to amortization: |
|||||||||||||
Gross carrying amount |
7,070 | 35,086 | 42,156 | ||||||||||
Accumulated amortization |
(1,247 | ) | (16,956 | ) | (18,203 | ) | |||||||
Net value |
5,823 | 18,130 | 23,953 | ||||||||||
Total intangible assets, net |
$ | 27,005 | $ | 58,429 | $ | 85,434 | |||||||
Amortization expense totaled $6.2 million, $6.3 million and $3.7 million in fiscal years 2009, 2008 and 2007, respectively. As of September 30, 2009, future amortization expense related to intangible assets subject to amortization is estimated to be as follows (in thousands):
Fiscal Year:
|
|
|||
---|---|---|---|---|
2010 |
$ | 4,795 | ||
2011 |
3,752 | |||
2012 |
2,242 | |||
2013 |
1,642 | |||
2014 |
1,550 | |||
Thereafter |
5,006 | |||
|
$ | 18,987 | ||
The weighted average amortization period for intangible assets subject to amortization is approximately 6.0 years.
F-26
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Accounts Payable and Accrued Expenses
Accounts payable at September 30, 2009 and 2008 include book cash overdrafts of $0.0 million and $1.6 million, respectively.
Accrued expenses consist of the following (in thousands):
|
September 30, | |||||||
---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | ||||||
Compensation and benefits |
$ | 60,811 | $ | 58,873 | ||||
Interest payable |
28,612 | 31,013 | ||||||
Deferred revenue |
12,392 | 11,003 | ||||||
Rental obligations |
10,708 | 10,139 | ||||||
Property and other taxes |
4,414 | 7,012 | ||||||
Insurance reserves |
6,805 | 5,973 | ||||||
Acquisition related payables |
1,950 | 3,121 | ||||||
Operating accruals and other |
28,470 | 27,574 | ||||||
Total accrued expenses |
$ | 154,162 | $ | 154,708 | ||||
11. Lease Commitments and Contingencies
Lease Commitments
The Company's principal leases relate to retail stores and warehousing properties. At September 30, 2009, future minimum payments under non-cancelable operating leases, net of sublease income, are as follows (in thousands):
Fiscal Year:
|
|
|||
---|---|---|---|---|
2010 |
$ | 128,417 | ||
2011 |
110,298 | |||
2012 |
87,578 | |||
2013 |
62,808 | |||
2014 |
36,524 | |||
Thereafter |
63,351 | |||
|
$ | 488,976 | ||
Certain leases require the Company to pay its respective portion of real estate taxes, insurance, maintenance and special assessments. Also, certain of the Company's leases include renewal options and escalation clauses.
Total rental expense for operating leases amounted to approximately $166.3 million, $163.7 million and $147.3 million in the fiscal years 2009, 2008 and 2007, respectively, and is included in selling, general and administrative expenses in the consolidated statements of earnings. Included in this amount is $0.4 million, $0.8 million and $0.8 million for contingent rents for the fiscal years ended September 30, 2009, 2008 and 2007, respectively.
F-27
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Contingencies
Legal Proceedings
There were no material legal proceedings pending against the Company or its subsidiaries, as of September 30, 2009. The Company is involved in various claims and lawsuits incidental to the conduct of its business in the ordinary course. The Company does not believe that the ultimate resolution of these matters will have a material adverse impact on its consolidated financial position, statements of earnings or cash flows.
On February 25, 2008, we disclosed in a Current Report on Form 8-K that on February 21, 2008, L'Oreal filed a lawsuit in the Superior Court of the State of California in and for the County of San DiegoCentral Division naming, among others, SD Hair, Ltd. and Hair of Nevada, LLC (collectively, "SD Hair"), franchisees of our subsidiary Armstrong McCall division ("AMLP") of our BSG business unit, as defendants. The suit alleged, among other things, that SD Hair breached its franchise agreement with AMLP by diverting (selling) Matrix branded products to unauthorized buyers, and that L'Oreal is entitled to make claims against SD Hair under the franchise agreement as a third-party beneficiary of that agreement. On March 24, 2008, SD Hair filed a cross-complaint in the same case naming AMLP and BSG as cross-defendants, seeking, among other things, i) declaratory relief from BSG and AMLP in the form of a judicial finding that SD Hair is not in breach of its franchise agreement and that L'Oreal has no rights as a third-party beneficiary to SD Hair's franchise agreement, and ii) injunctive relief in the form of a judicial order compelling AMLP and BSG to take appropriate legal action against L'Oreal to enforce SD Hair's claimed rights under AMLP's Matrix distribution agreement. We have answered the cross-complaint and the lawsuit has been set for a jury trial in June of 2010.
On July 30, 2009, we disclosed in a Current Report on Form 8-K that L'Oreal filed a Second Amended Complaint in connection with the previously disclosed lawsuit described above. The Second Amended Complaint alleges, among other things, that AMLP, certain of its employees and others were involved in selling Matrix branded products to unauthorized buyers and that certain of its employees (and others) engaged in improper business transactions for personal benefit during 2005 through 2007. L'Oreal seeks money damages, certain injunctive relief and a declaration that L'Oreal is entitled to terminate the 1981 Matrix Distributor Agreement now in effect between L'Oreal and AMLP. None of the employees involved in the allegations are executive officers of the Company. Substantially all of these allegations were made known by L'Oreal to the Company prior to the filing of the Second Amended Complaint. L'Oreal also provided the Company with documents allegedly supporting the allegations.
As a result of these allegations made by L'Oreal, many of which are incorporated into the Second Amended Complaint, the Audit Committee of the Board of Directors of the Company engaged independent special counsel to investigate whether certain employees engaged in improper business transactions for personal benefit. After extensive review, the Audit Committee and independent special counsel found insufficient evidence to support a conclusion that Company employees entered into improper transactions for personal benefit.
On September 8, 2009, AMLP and BSG filed a cross-complaint against L'Oreal. In the cross-complaint, AMLP and BSG allege that L'Oreal does not have a genuine interest in stopping diversion, and that L'Oreal's anti-diversion policies have been discriminatorily applied to AMLP and BSG. AMLP further alleges that L'Oreal is using diversion as a pretext to attempt to terminate the Distributor Agreement with AMLP.
F-28
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Other Contingencies
The Company provides healthcare benefits to essentially all of its full-time employees. The Company is largely self-funded for the cost of the healthcare plan, other than certain fees and out-of-pocket amounts paid by the employees. In addition, the Company retains a substantial portion of the risk related to certain workers' compensation, general liability and automobile and property insurance. The Company records an estimated liability for the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is included in accrued expenses (current portion) and other liabilities (long-term portion) in our consolidated balance sheets. The Company carries insurance coverage in such amounts in excess of its self-insured retention which management believes to be reasonable.
Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. The Company has no significant liabilities for loss contingencies at September 30, 2009 and 2008.
12. Long-Term Debt
Details of long-term debt are as follows (in thousands):
|
September 30,
2009 |
Maturity dates | Interest Rates | ||||||
---|---|---|---|---|---|---|---|---|---|
ABL facility |
$ | | | (i) Prime and up to 0.50% or; | |||||
|
(ii) LIBOR (a) plus (1.00% to 1.50%) | ||||||||
Term Loan A |
105,000 | Nov. 2012 | (i) Prime plus (1.00% to 1.50%) or; | ||||||
|
(ii) LIBOR plus (2.00% to 2.50%) | ||||||||
Term Loan B |
863,856 | Nov. 2013 | (i) Prime plus (1.25% to 1.50%) or; | ||||||
|
(ii) LIBOR plus (2.25% to 2.50%) | ||||||||
Other (b) |
3,135 | 2010-2014 | 4.05% to 7.00% | ||||||
Total |
$ | 971,991 | |||||||
Senior notes |
$ | 430,000 | Nov. 2014 | 9.25% | |||||
Senior subordinated notes |
275,000 | Nov. 2016 | 10.50% | ||||||
Total |
$ | 705,000 | |||||||
Capitalized leases and other |
$ | 539 | |||||||
Less: current portion |
(24,517 | ) | |||||||
Total long-term debt |
$ | 1,653,013 | |||||||
In connection with the Separation Transactions on November 16, 2006, the Company, through its subsidiaries (Sally Investment Holdings LLC and Sally Holdings LLC) incurred $1,850.0 million of indebtedness by: (i) drawing on a $400.0 million revolving (asset-based lending ("ABL")) facility in an amount equal to $70.0 million; (ii) entering into two term loan facilities (term loans A and B) in an aggregate amount of $1,070.0 million; and (iii) together (jointly and severally) with another of the
F-29
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Company's indirect subsidiaries, Sally Capital Inc., issuing senior notes in an aggregate amount of $430.0 million and senior subordinated notes in an aggregate amount of $280.0 million. The Company incurred approximately $58.5 million in costs related to the issuance of the debt, which was capitalized and is being amortized to interest expense over the life of the related debt instruments. Proceeds from the initial debt were used primarily to pay the $25.00 per share special cash dividend to holders of record of Alberto-Culver stockholders and for certain expenses associated with the Separation Transactions.
The ABL facility provides for senior secured revolving loans up to a maximum aggregate principal amount of $400.0 million, subject to borrowing base limitations. The availability of funds under the ABL facility is subject to a borrowing base calculation, which is based on specified percentages of the value of eligible inventory and eligible accounts receivables, subject to certain reserves and other adjustments and reduced by certain outstanding letters of credit. At September 30, 2009, the Company had $325.6 million available for borrowing under the ABL facility. Additionally, the Company is required to pay a commitment fee ranging from 0.20% to 0.35% on the unused portion of the ABL facility. At September 30, 2009, the commitment fee rate was 0.20%.
The ABL facility contains a covenant requiring Sally Holdings and its subsidiaries to maintain a fixed-charge coverage ratio of at least 1.0 to 1.0 when availability under the ABL facility falls below $40.0 million. The fixed-charge coverage ratio is defined as the ratio of EBITDA (as defined in the agreement underlying the ABL facility, or Credit Agreement EBITDA) less unfinanced capital expenditures to fixed charges (as included in the definition of the fixed-charge coverage ratio in the agreement governing the ABL facility).
The senior term loan facilities consist of (i) a $150.0 million senior term loan A facility and (ii) a $920.0 million senior term loan B facility. Principal and interest is payable on a quarterly basis.
The Term Loans contain a covenant requiring Sally Holdings and its subsidiaries to meet certain maximum consolidated secured leverage ratio levels, which decline over time. The consolidated secured leverage ratio is a ratio of (A) net consolidated secured debt to (B) Consolidated EBITDA as defined in the agreement underlying the Term Loans. Compliance with the consolidated secured leverage ratio is tested quarterly, with a maximum ratio of 4.50 as of September 30, 2009. Failure to comply with the consolidated secured leverage ratio covenant under the Term Loans would result in a default under such facilities.
The senior term loan facilities and the ABL facility are secured by substantially all of our assets, those of Sally Investment Holdings LLC, a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings, those of our domestic subsidiaries and, in the case of the ABL facility, those of our Canadian subsidiaries. During the fiscal year ended September 30, 2009, the Company made scheduled payments in the aggregate amount of $6.1 million on its senior term loans. The borrowings under the senior term loan facilities may be prepaid at the option of Sally Holdings at any time without premium or penalty and are subject to mandatory repayment in an amount equal to 50% of excess cash flow (as defined in the agreement governing the senior term loan facilities) for any fiscal year, unless a specified leverage ratio is met. In January of 2009, the Company made a mandatory repayment on the senior term loans in the aggregate amount of $16.7 million and expects to make a mandatory repayment in the amount of $22.3 million in January of 2010. Amounts paid pursuant to said provision may be applied, at the option of the Company, against minimum loan repayments otherwise required of us over the twelve-month period following any such repayment under the terms of the loan agreement. Additionally, borrowings under the term loan facility would be subject to mandatory repayment in an amount equal to 100% of the proceeds of specified asset sales that are not reinvested in the business or applied to repay borrowings under the ABL facility. We believe that the Company is currently in compliance with the agreements and instruments governing our debt, including our financial covenants.
F-30
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
During the fiscal year ended September 30, 2009, the Company also made optional repayments in the aggregate amount of $45.0 million on its senior term loans. In addition, in May 2009, the Company repurchased $5.0 million in par value of its 10.5% senior subordinated notes (due in November of 2016) for approximately $5.0 million, plus accrued interest. In connection with the mandatory and optional repayments made during the fiscal year ended September 30, 2009, the Company recorded losses on extinguishment of debt in the aggregate amount of $1.0 million, which are included in net interest expense in the Company's consolidated statements of earnings.
The senior notes and senior subordinated notes are unsecured obligations of the issuers and are guaranteed on a senior basis (in the case of the senior notes) and on a senior subordinated basis (in the case of the senior subordinated notes) by each material domestic subsidiary of the Company. The senior notes and the senior subordinated notes carry optional redemption features whereby the Company has the option to redeem the notes on or before November 15, 2010 and November 15, 2011, respectively, at par plus a premium, plus accrued and unpaid interest, and on or after November 15, 2010 and November 15, 2011, respectively, at par plus a premium declining ratably to par, plus accrued and unpaid interest. Interest on the senior notes and senior subordinated notes is payable semi-annually. Furthermore, the agreements underlying the Company's credit facilities contain terms, which significantly restrict the ability of Sally Beauty's subsidiaries to pay dividends or otherwise transfer assets to Sally Beauty.
In November of 2006, the Company entered into four interest rate swap agreements with an aggregate notional amount of $500.0 million in connection with its cash flow risk associated with changing interest rates related to its Term Loans. In May of 2008, the Company entered into two additional interest rate swap agreements with an aggregate notional amount of $300.0 million. Please see Note 14 for further information on the interest rate swap agreements.
Maturities of the Company's long-term debt are as follows at September 30, 2009 (in thousands):
Fiscal Year:
|
|
||||
---|---|---|---|---|---|
2010 |
$ | 24,241 | |||
2011 |
8,188 | ||||
2012 |
75,347 | ||||
2013 |
8,454 | ||||
2014 |
855,761 | ||||
Thereafter |
705,000 | ||||
|
$ | 1,676,991 | |||
Capital leases and other |
539 | ||||
Less: current portion |
(24,517 | ) | |||
Total |
$ | 1,653,013 | |||
F-31
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.
Under the agreements and indentures governing the term loan facilities and the notes, Sally Holdings may not make certain restricted payments to us if a default then exists under the credit agreement or the indentures or if its consolidated interest coverage ratio is less than 2.0 to 1.0 at the time of the making of such restricted payment. As of September 30, 2009, its consolidated interest coverage ratio exceeded 2.0 to 1.0. Further, the aggregate amount of restricted payments it is able to make is limited pursuant to various baskets as calculated pursuant to the credit agreement and indentures.
The agreements governing our ABL facility generally permit the making of distributions and certain other restricted payments so long as borrowing availability under the facility equals or exceeds $60.0 million. If borrowing availability falls below this amount, Sally Holdings may nevertheless make restricted payments to us in the aggregate since the date of the Separation Transactions, together with the aggregate cash amount paid in acquisitions since said date, of not greater than $50.0 million, together with certain other exceptions. As of September 30, 2009, borrowing availability under the ABL facility exceeded $60.0 million. As of September 30, 2009, the net assets of our consolidated subsidiaries that were unrestricted from transfer under our credit arrangements totaled $225.3 million, subject to certain adjustments.
At September 30, 2009 and 2008, the Company had no off balance sheet financing arrangements other than operating leases incurred in the ordinary course of business as disclosed in Note 11, and outstanding letters of credit related to inventory purchases and self-insurance programs which totaled $13.4 million and $12.1 million at September 30, 2009 and 2008, respectively.
F-32
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Sally Beauty Holdings, Inc. Stand-Alone Financial Information
Sally Beauty Holdings, Inc. is a holding company and has no material assets or operations other than the ownership interests in its subsidiaries. The Company's operations are conducted almost entirely through its subsidiaries. As such, Sally Beauty depends on its subsidiaries for cash to meet its obligations or to pay dividends.
Sally Investment Holdings LLC, which is a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings LLC, does not have any assets or operations of any kind. Prior to the Separation Transactions, Sally Beauty had no assets or operations of any kind. Summary financial data for Sally Beauty Holdings, Inc. on a stand-alone basis as of and for each of the years ended September 30, 2009 and 2008 is as follows (in thousands):
|
2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|
Balance Sheet |
|||||||||
Assets: |
|||||||||
Deferred income tax assets |
$ | 829 | $ | 684 | |||||
Income taxes receivable |
3,915 | | |||||||
Other |
22,342 | 18,847 | |||||||
Investment in subsidiaries |
(642,139 | ) | (722,282 | ) | |||||
Total assets |
$ | (615,053 | ) | $ | (702,751 | ) | |||
Liabilities: |
|||||||||
Deferred income tax liabilities |
$ | 78 | $ | 30 | |||||
Other |
320 | 179 | |||||||
Total liabilities |
398 | 209 | |||||||
Stockholders' deficit: |
(615,451 | ) | (702,960 | ) | |||||
Total liabilities and stockholders' deficit |
$ | (615,053 | ) | $ | (702,751 | ) | |||
Statement of Earnings |
|||||||||
Operating loss |
$ | (8,359 | ) | $ | (7,514 | ) | |||
Interest income, net |
22 | (219 | ) | ||||||
Loss before provision for income taxes |
(8,337 | ) | (7,733 | ) | |||||
Provision (benefit) for income taxes |
(2,726 | ) | (2,442 | ) | |||||
Net loss |
$ | (5,611 | ) | $ | (5,291 | ) | |||
Statement of Cash Flows |
|||||||||
Net cash used by operating activities |
$ | (651 | ) | $ | (935 | ) | |||
Net cash used by investing activities: |
|||||||||
Capital expenditures |
(3 | ) | | ||||||
Net cash used by investing activities |
(3 | ) | | ||||||
Net cash provided by financing activities: |
|||||||||
Proceeds from exercise of stock options |
687 | 935 | |||||||
Purchases of treasury stock |
(33 | ) | | ||||||
Net cash provided by financing activities |
654 | 935 | |||||||
Net change in cash |
| | |||||||
Cash and cash equivalents, beginning of year |
| | |||||||
Cash and cash equivalents, end of year |
$ | | $ | | |||||
F-33
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
14. Interest Rate Swaps
The Company is exposed to a wide variety of risks, including risks arising from changing economic conditions. The Company manages its exposure to certain economic risks (including liquidity, credit risk and changes in interest rates) primarily (a) by closely managing its cash flows from operating and investing activities and the amounts and sources of its debt obligations; (b) by assessing periodically the creditworthiness of its business partners; and (c) through the use of interest rate swaps by Sally Holdings. The Company uses interest rate swaps, as part of its overall economic risk management strategy to add stability to the interest payments due in connection with its term loan obligations. Interest payments related to the term loans are impacted by changes in LIBOR. Interest rate swap agreements involve the periodic receipt by Sally Holdings of amounts based on a variable rate in exchange for Sally Holdings making payments based on a fixed rate over the term of the interest rate swap agreements, without exchange of the underlying notional amount. At September 30, 2009, the Company did not hold any other derivative instruments or hold any derivative instruments for trading or speculative purposes.
Designated Cash Flow Hedges of Interest Rate Risk
In May of 2008, Sally Holdings entered into two interest rate swap agreements with an aggregate notional amount of $300 million. These interest rate swap agreements expire in May of 2012 and are designated and qualify as effective cash flow hedges, in accordance with ASC 815. Accordingly, changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded quarterly, net of income tax, in accumulated other comprehensive (loss) income ("OCI") until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any hedge ineffectiveness, as this term is used in ASC 815, is recognized in net interest expense in our consolidated statements of earnings. No hedge ineffectiveness on cash flow hedges was recognized during the fiscal years ended September 30, 2009 and 2008.
Amounts reported in OCI related to interest rate swaps are reclassified into net interest expense, as a yield adjustment, in the same period in which interest on the Company's variable-rate debt obligations affect earnings. During the fiscal years ended September 30, 2009 and 2008, net interest expense of $7.9 million and $1.2 million, respectively, resulted from such reclassifications. During the twelve months ending September 30, 2010, the Company estimates that an additional $8.9 million of the amount reported in OCI will be reclassified into interest expense.
Non-designated Cash Flow Hedges of Interest Rate Risk
Interest rate swaps not designated as hedges are used to manage the Company's exposure to interest rate movements but do not meet the hedge accounting requirements of ASC 815. In connection with the Separation Transactions, in November 2006, Sally Holdings entered into four interest rate swap agreements with an aggregate notional amount of $500 million. Interest rate swap agreements with an aggregate notional amount of $150 million expired in November 2008 and interest rate swap agreements with a notional amount of $350 million expire in November 2009. These interest rate swap agreements are not designated as hedges and, accordingly, the changes in fair value of these interest rate swap agreements (which are adjusted quarterly) are recorded in net interest expense in our consolidated statements of earnings. During the fiscal years ended September 30, 2009, 2008 and 2007, net interest expense of $7.5 million, $10.5 million and $1.2 million, respectively, resulted from interest rate swaps not designated as hedges.
F-34
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2009 (in thousands):
Tabular Disclosure of Fair Values of Derivative Instruments
|
Asset Derivatives
As of September 30, 2009 |
Liability Derivatives
As of September 30, 2009 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance Sheet
Location |
Fair Value |
Balance Sheet
Location |
Fair Value | ||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Interest Rate Swaps |
Prepaid expenses | $ | | Accrued expenses | $ | | ||||||
Interest Rate Swaps |
Other assets | $ | | Other liabilities | $ | 15,365 | (1) | |||||
Total derivatives designated as hedging instruments |
$ | | $ | 15,365 | ||||||||
Derivatives not designated as hedging instruments: |
||||||||||||
Interest Rate Swaps |
Prepaid expenses | $ | | Accrued expenses | $ | 2,356 | ||||||
Total derivatives not designated as hedging instruments |
$ | | $ | 2,356 | ||||||||
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheet as of September 30, 2008 (in thousands):
Tabular Disclosure of Fair Values of Derivative Instruments
|
Asset Derivatives
As of September 30, 2008 |
Liability Derivatives
As of September 30, 2008 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance Sheet
Location |
Fair Value |
Balance Sheet
Location |
Fair Value | ||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Interest Rate Swaps |
Prepaid expenses | $ | | Accrued expenses | $ | | ||||||
Interest Rate Swaps |
Other assets | $ | 1,302 | Other liabilities | $ | | ||||||
Total derivatives designated as hedging instruments |
$ | 1,302 | $ | | ||||||||
Derivatives not designated as hedging instruments: |
||||||||||||
Interest Rate Swaps |
Prepaid expenses | $ | | Accrued expenses | $ | 487 | ||||||
Interest Rate Swaps |
Other assets | $ | | Other liabilities | $ | 7,167 | ||||||
Total derivatives not designated as hedging instruments |
$ | | $ | 7,654 | ||||||||
F-35
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The tables below present the effect of the Company's derivative financial instruments on the consolidated statements of earnings for the fiscal year ended September 30, 2009 (in thousands):
Tabular Disclosure of the Effect of Derivative Instruments on the Statement of Earnings
for the Fiscal Year Ended September 30, 2009 |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Derivatives in Cash Flow Hedging Relationships
|
Amount of
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion), net of tax |
Location of Gain or
(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain or
(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount of Gain
or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||
Interest Rate Swaps |
$ | (10,196 | ) | Interest expense, net | $ | (7,935 | ) | Interest expense, net | $ | |
Derivatives Not Designated
as Hedging Instruments |
Location of Gain or
(Loss) Recognized in Income on Derivative |
Amount of
Gain or (Loss) Recognized in Income on Derivative |
|
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Interest Rate Swaps |
Interest expense, net | $ | (7,488 | ) |
F-36
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Derivatives Not Designated
as Hedging Instruments |
Location of Gain or
(Loss) Recognized in Income on Derivative |
Amount of
Gain or (Loss) Recognized in Income on Derivative |
|
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Interest Rate Swaps |
Interest expense, net | $ | (10,481 | ) |
Derivatives Not Designated
as Hedging Instruments |
Location of Gain or
(Loss) Recognized in Income on Derivative |
Amount of
Gain or (Loss) Recognized in Income on Derivative |
|
|
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Interest Rate Swaps |
Interest expense, net | $ | (1,221 | ) |
Credit-risk-related Contingent Features
The agreements governing the Company's interest rate swaps contain provisions pursuant to which the Company could be declared in default on its interest rate swap obligations in the event the Company defaulted under certain terms of the loan documents governing the Company's ABL facility. As of September 30, 2009, the fair value of interest rate swaps in a liability position related to these agreements was $17.7 million. As of September 30, 2009, the Company was under no obligation to post and had not posted any collateral related to these agreements. If the Company breached any of these provisions, it would be required to settle its obligations under the agreements at their termination value of $20.1 million, including accrued interest and other termination costs.
The counterparties to all our interest rate swap instruments are deemed by the Company to be of substantial resources and strong creditworthiness. However, these transactions result in exposure to credit risk in the event of default by a counterparty. The recent financial crisis affecting the banking systems and financial markets resulted in many well-known financial institutions becoming less creditworthy or having diminished liquidity, which could expose us to an increased level of counterparty risk. In the event that a counterparty defaults in its obligation under our interest rate swaps, we could incur substantial financial losses. However, at the present time, no such losses are deemed probable.
The Company's foreign operations expose the Company to fluctuations in foreign currency exchange rates and foreign interest rates. These fluctuations may impact, among other things, the amount of the Company's past and future cash flows in terms of the Company's functional currency, the U.S. dollar. From time to time, the Company may enter into derivative instruments, such as foreign currency swaps, intended
F-37
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
to fix the amount of certain foreign assets and obligations relative to its functional currency. At September 30, 2009, the Company did not have any such derivative instruments.
15. 401(k) and Profit Sharing Plan
The Company sponsors the Sally Beauty 401(k) and Profit Sharing Plan (the "401k Plan"), which is a qualified defined contribution plan. The 401k Plan covers employees of the Company who meet certain eligibility requirements and who are not members of a collective bargaining unit. Under the terms of the 401k Plan, employees may contribute a percentage of their annual compensation to the 401k Plan up to certain maximums, as defined by the 401k Plan and by the U. S. Internal Revenue Code. The Company currently matches a percentage of employee contributions. The Company recognized expense of $4.0 million, $3.8 million and $3.3 million in fiscal years 2009, 2008 and 2007, respectively, related to its employer contributions under these plans. These amounts are included in selling, general and administrative expenses.
In addition, pursuant to the 401k Plan, the Company may make profit sharing contributions to the accounts of employees who meet certain eligibility requirements and who are not members of a collective bargaining unit. The Company's profit sharing contributions to the 401k Plan are determined by the Compensation Committee of the Company's Board of Directors. Prior to the Separation Transactions, employees of the Company participated in the Alberto-Culver Profit Sharing Plan and the Company's contributions to the plan were determined at the discretion of the Alberto-Culver board of directors. The Company recognized expense of $2.4 million, $7.1 million and $6.2 million in fiscal years 2009, 2008 and 2007, respectively, related to its profit sharing contributions under these plans. These amounts are included in selling, general and administrative expenses.
16. Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and most state jurisdictions as well as in various foreign countries.
The provision for income taxes for the fiscal years 2009, 2008 and 2007 consists of the following (in thousands):
|
Year Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | |||||||||
Current: |
||||||||||||
Federal |
$ | 48,335 | $ | 30,613 | $ | 28,595 | ||||||
Foreign |
4,276 | 8,763 | 6,446 | |||||||||
State |
5,507 | 4,043 | 3,545 | |||||||||
Total current portion |
58,118 | 43,419 | 38,586 | |||||||||
Deferred: |
||||||||||||
Federal |
8,204 | 2,250 | 517 | |||||||||
Foreign |
(1,676 | ) | 346 | (319 | ) | |||||||
State |
1,051 | 207 | (663 | ) | ||||||||
Total deferred portion |
7,579 | 2,803 | (465 | ) | ||||||||
Total provision for income tax |
$ | 65,697 | $ | 46,222 | $ | 38,121 | ||||||
F-38
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The difference between the U.S. statutory federal income tax rate and the effective income tax rate is summarized below:
|
Year Ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||
Statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | |||||
State income taxes, net of federal tax benefit |
2.8 | 2.3 | 2.1 | ||||||||
Effect of foreign operations |
0.8 | (2.1 | ) | (0.4 | ) | ||||||
Nondeductible transaction costs |
| | 6.9 | ||||||||
Other, net |
1.3 | 2.1 | 2.5 | ||||||||
Effective tax rate |
39.9 | % | 37.3 | % | 46.1 | % | |||||
The tax effects of temporary differences that give rise to the Company's deferred tax assets and liabilities are as follows (in thousands):
|
September 30, | ||||||||
---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | |||||||
Deferred tax assets attributable to: |
|||||||||
Share-based compensation expense |
$ | 12,422 | $ | 10,288 | |||||
Accrued expenses |
18,662 | 19,246 | |||||||
Inventory adjustments |
2,378 | 1,894 | |||||||
Foreign loss carryforwards |
12,593 | 10,250 | |||||||
Long-term liabilities |
913 | 2,969 | |||||||
Unrecognized tax benefits |
1,127 | 2,789 | |||||||
Interest rate swaps |
5,962 | (510 | ) | ||||||
Other |
1,294 | 879 | |||||||
Total deferred tax assets |
55,351 | 47,805 | |||||||
Valuation allowance |
(14,640 | ) | (11,972 | ) | |||||
Total deferred tax assets, net |
40,711 | 35,833 | |||||||
Deferred tax liabilities attributable to: |
|||||||||
Depreciation and amortization |
58,759 | 52,347 | |||||||
Total deferred tax liabilities |
58,759 | 52,347 | |||||||
Net deferred tax liability |
$ | 18,048 | $ | 16,514 | |||||
Management believes that it is more likely than not that the 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 certain foreign loss carryforwards.
In the fiscal year 2007, the Company made certain adjustments in connection with the reconciliation of tax balances transferred to the Company in connection with the Separation Transactions. This amount was included in the settlement of intercompany agreements with Alberto-Culver, as an adjustment to the Company's retained earnings/accumulated deficit. There were no such adjustments in the fiscal years 2008 and 2009.
F-39
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Domestic earnings before provision for income taxes were $165.1 million, $98.7 million and $70.6 million in the fiscal years 2009, 2008 and 2007, respectively. Foreign operations had earnings (losses) before provision for income taxes of $(0.3) million, $25.1 million and $12.0 million in the fiscal years 2009, 2008 and 2007, respectively.
Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits by various taxing jurisdictions and other changes in relevant facts and circumstances evident at each balance sheet date. 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 anticipated future growth and expansion. Accordingly, no U.S. income taxes have been provided on those earnings at September 30, 2009, 2008 and 2007.
The transactions separating us from Alberto-Culver were intended to qualify as a reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code") and a distribution eligible for non-recognition under Sections 355(a) and 361(c) of the Code. In connection with the share distribution of Alberto-Culver common stock in the Separation Transactions, we received: (i) a private letter ruling from the IRS; and (ii) an opinion of Sidley Austin LLP, counsel to Alberto-Culver, in each case, to the effect that the transactions qualify as a reorganization under Section 368(a)(1)(D) of the Code and a distribution eligible for non-recognition under Sections 355(a) and 361(c) of the Code.
Certain internal restructurings also occurred at or immediately prior to the Separation Transactions. As a result of the internal restructurings and Separation Transactions, the Company inherited the federal tax identification number of the old Alberto-Culver parent for U.S. federal income tax purposes. In addition, as the successor entity to Alberto-Culver after the Separation Transactions, the Company relies 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.
The Company and Alberto-Culver entered into a tax allocation agreement as part of the Separation Transactions. The agreement provides generally that the Company is responsible for its pre-separation income tax liabilities, calculated on a stand-alone basis, and Alberto-Culver is responsible for the remainder. In the event an additional U.S federal income tax liability related to the period prior to the Separation Transactions were determined, the Company 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 the Company under the tax allocation agreement if Alberto-Culver was determined to be responsible for these taxes thereunder.
In June 2006, the FASB issued an interpretive amendment to ASC 740, Income Taxes , to create a single model to address accounting for uncertainty in tax positions (currently ASC 740-10-25). This amendment, which became effective for fiscal years beginning after December 15, 2006, clarified the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provided guidance on (1) the recognition, de-recognition, and measurement of uncertain tax positions in a period subsequent to that in which the tax position is taken, (2) the accounting for interest and penalties, (3) the presentation and classification of recorded amounts in the financial statements, and (4) disclosure requirements. The Company adopted the provisions of this amendment on October 1, 2007 and the adoption did not require a change to the Company's liability for unrecognized tax benefits and had no impact on the Company's opening balance of retained earnings/accumulated deficit. The total amount of unrecognized tax benefits (excluding interest accruals) as of the date of adoption on October 1, 2007 was $2.9 million.
F-40
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The changes in the amount of unrecognized tax benefits for the fiscal year ended September 30, 2009 and 2008 are as follows (in thousands):
|
2009 | 2008 | |||||
---|---|---|---|---|---|---|---|
Balance at beginning of the fiscal year |
$ | 4,291 | $ | 2,903 | |||
Increases related to prior year tax positions |
7,379 | 1,872 | |||||
Decreases related to prior year tax positions |
(1,482 | ) | (52 | ) | |||
Increases related to current year tax positions |
4,722 | 552 | |||||
Settlements |
| (571 | ) | ||||
Lapse of statute |
(532 | ) | (413 | ) | |||
Balance at end of fiscal year |
$ | 14,378 | $ | 4,291 | |||
If recognized, these positions would affect the Company's effective tax rate.
The Company classifies and recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The total amount of accrued interest and penalties as of October 1, 2007, September 30, 2008, and September 30, 2009 was $1.0 million, $1.4 million and $4.0 million, respectively.
The balance at September 30, 2008 includes $1.4 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of the deferred tax accounting, other than interest, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months, and the fact that we are routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount or range of such change cannot be made at this time. However, we do not expect the change, if any, to have a material effect on our consolidated financial condition or results of operations within the next 12 months.
The IRS has audited the Company's consolidated federal income tax returns through the tax year ended September 30, 2006, thus our statute remains open from the year ended September 30, 2007 forward. Our foreign subsidiaries are impacted by various statutes of limitations, which are generally open from 2004 forward. Generally, states' statutes in the United States are open for tax reviews from 2005 forward.
The IRS has previously audited the consolidated federal income tax returns of Alberto-Culver through the fiscal year ending September 30, 2006. The Company has not recorded a reserve for Alberto-Culver related tax liabilities because the Company believes any exposure is immaterial.
17. Acquisitions
On September 30, 2009, the Company acquired Schoeneman Beauty Supply, Inc. ("Schoeneman"), at a cost of approximately $71.0 million, subject to certain adjustments. The acquisition of Schoeneman, a 43-store beauty supply chain located in the central northeast United States, was pursuant to a merger agreement between Schoeneman, the former stockholders of Schoeneman and a subsidiary of the Company. The Company currently expects to realize approximately $10 million of future tax savings as a result of anticipated incremental depreciation and amortization tax deductions relating to the assets acquired in this transaction. Goodwill of approximately $61.0 million was recorded as a result of this acquisition. In addition, during the fiscal year 2009, the Company completed several other individually
F-41
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
immaterial acquisitions at an aggregate cost of $11.3 million. The purchase prices of all acquisitions completed during the fiscal year 2009 have been allocated to assets acquired and liabilities assumed based on their preliminary estimated fair values at the date of acquisition. The final valuation of the assets acquired and liabilities assumed will be completed during fiscal year 2010. Generally, we funded these acquisitions with cash from operations.
On May 7, 2008, the Company acquired Pro-Duo, N.V., a 40-store beauty supply chain located in Belgium, France and Spain for €19.3 million (approximately $29.8 million) plus incidental acquisition costs capitalized, subject to certain adjustments. The acquisition was funded through $29.8 million in cash and borrowings on our ABL facility. We also assumed €3.0 million (approximately $4.7 million) of debt from Pro-Duo in connection with the acquisition. Goodwill of $23.9 million and certain identifiable intangible assets of $11.4 million were recorded as a result of such acquisition and are not expected to be deductible for tax purposes. Of this amount, $10.2 million was assigned to registered trade names and $1.2 million to other identifiable intangible assets, which will be amortized over a weighted average life of approximately eight years. In addition, during the fiscal year 2008, the Company completed several other individually immaterial acquisitions at an aggregate cost of $22.9 million of which a significant portion was allocated to intangible assets and goodwill. The purchase prices of these acquisitions have been allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The final valuation of the assets and liabilities acquired was completed during the fiscal year 2009. We funded these acquisitions with cash from operations and borrowings on our ABL facility.
In February 2007, the Company acquired Chapelton 21 Limited, a private company based in Scotland (which we refer to as "Salon Services") for an aggregate cash purchase price of approximately $57.8 million. Certain of the Company's subsidiaries financed the purchase price through a draw-down of approximately $57.0 million under the ABL facility. In addition, the Company extinguished approximately $3.9 million of Salon Services' debt. Salon Services, through its direct and indirect subsidiaries including Salon Services (Hair and Beauty Supplies) Ltd., supplies professional hair and beauty products primarily to salon and spa operators and independent hair and beauty professionals in the United Kingdom, Germany, Ireland, Spain and Norway. Goodwill of $30.0 million and certain identifiable intangible assets of $17.6 million were recorded as a result of such acquisition and are not expected to be deductible for tax purposes. Of this amount, $14.4 million was assigned to registered trade names and $3.2 million to other identifiable intangible assets, which will be amortized over a weighted average life of approximately five years. Salon Services is included in the Sally Beauty Supply segment. The purchase price of Salon Services was allocated to assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition and were subsequently adjusted when more accurate valuations became available.
In addition, during fiscal year 2007 the Company made five other individually immaterial acquisitions, which were accounted for using the purchase method. None of these acquisitions individually had a material impact on the Company's consolidated results of operations. The results of operations for two of the acquisitions are included in the Sally Beauty Supply segment and these acquisitions included the recording of: (i) goodwill in the amount of $3.4 million and (ii) certain intangible assets of $0.6 million. The results of operations for the remaining acquisitions are included in the BSG segment, and these acquisitions included the recording of: (i) goodwill in the amount of $0.3 million and (ii) certain intangible assets of $2.9 million. The intangible assets acquired were amortized over a weighted average life of approximately one year.
The valuation of identifiable intangible assets of Pro-Duo, Salon Services and Salon Success was determined using discounted cash flow methods with the assistance of third-party valuation experts. The acquired entities have been accounted for using the purchase method of accounting and, accordingly, the
F-42
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
results of operations of the entities have been included in the consolidated financial statements since their respective dates of acquisition.
18. Related Party Transactions
In connection with the Separation Transactions, the Company terminated substantially all intercompany agreements with Alberto-Culver and its subsidiaries. All intercompany receivables, payables and loans between the Company, on the one hand, and Alberto-Culver and its subsidiaries, on the other hand, other than those specifically designated to survive following the Separation Transactions, were cancelled. In addition, the Company became the parent company for all U.S. tax returns which were filed under the employer identification number of Alberto-Culver prior to the completion of the Separation Transactions.
Prior to the Separation Transactions, the Company purchased inventory and conducted business with, and/or had transactions with, Alberto-Culver and its subsidiaries. In fiscal year 2007, the Company purchased inventory from Alberto-Culver of approximately $3.7 million.
Alberto-Culver and its affiliates performed certain administrative services for the Company and incurred certain direct expenses on behalf of the Company prior to the Separation Transactions. Costs for certain administrative services and other corporate functions and direct expenses incurred on behalf of the Company were allocated by Alberto-Culver to the Company and totaled $1.0 million in fiscal year 2007. These amounts are included in selling, general and administrative expenses in the consolidated statements of earnings and are classified as part of unallocated expenses for the Company's segment reporting purposes.
Alberto-Culver also charged the Company a sales-based service fee under the consulting, business development and advisory services agreement between Alberto-Culver and certain subsidiaries of the Company. The sales-based service fees totaled $3.8 million in fiscal year 2007. Management believes that had the Company been operating as a stand-alone entity not affiliated with Alberto-Culver during all of fiscal year 2007, the Company likely would not have needed to engage any third party or incur additional costs as a stand-alone company for the services provided to its subsidiaries under these agreements.
The Company also had an agreement with Alberto-Culver that required the Company to make equity distributions to Alberto-Culver whenever employees of the Company exercised Alberto-Culver stock options. During fiscal year 2007, the Company paid $4.8 million to Alberto-Culver in connection with this agreement.
19. Business Segments and Geographic Area Information
The Company's business is organized into two separate segments: (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores, which offers professional beauty supplies to both salon professionals and retail customers; and (ii) BSG, a full service beauty supply distributor, which offers professional brands of beauty products directly to salons through its own sales force and professional only stores in certain exclusive geographical territories primarily in North and South America and parts of Europe.
In connection with the Separation Transactions, in the fiscal year 2007 the Company's management evaluated the structure of its internal organization to identify and separate the costs incurred at the corporate level from the business units, as well as costs incurred that benefit both the Sally Beauty Supply and BSG segments. Accordingly, management defined its reportable segments as Sally Beauty Supply and BSG, to report these segments separately from the Company's shared corporate expenses, and revised the comparable prior years for comparability purposes.
The accounting policies of both of our business segments are the same as described in the summary of significant accounting policies in Note 2. Sales between segments, which were eliminated in consolidation, were not material for the fiscal years ended September 30, 2009, 2008 and 2007.
F-43
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Business Segments Information
Segment data for the fiscal years ended September 30, 2009, 2008 and 2007 is as follows (in thousands):
|
Year Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008(a) | 2007(a) | |||||||||
Net sales: |
||||||||||||
Sally Beauty Supply |
$ | 1,695,652 | $ | 1,672,897 | $ | 1,569,088 | ||||||
BSG |
940,948 | 975,294 | 944,684 | |||||||||
Total |
$ | 2,636,600 | $ | 2,648,191 | $ | 2,513,772 | ||||||
Earnings before provision for income taxes: |
||||||||||||
Segment operating profit: |
||||||||||||
Sally Beauty Supply |
$ | 283,872 | $ | 285,615 | $ | 272,364 | ||||||
BSG |
91,604 | 80,927 | 63,456 | |||||||||
Segment operating profit |
375,476 | 366,542 | 335,820 | |||||||||
Unallocated expenses(b) |
(70,022 | ) | (73,385 | ) | (68,889 | ) | ||||||
Share-based compensation expense |
(8,618 | ) | (10,242 | ) | (13,065 | ) | ||||||
Sales based service fee charges by Alberto-Culver |
| | (3,779 | ) | ||||||||
Transaction expenses(c) |
| | (21,502 | ) | ||||||||
Interest expense, net of interest income |
(132,022 | ) | (159,116 | ) | (145,972 | ) | ||||||
Total |
$ | 164,814 | $ | 123,799 | $ | 82,613 | ||||||
Identifiable assets: |
||||||||||||
Sally Beauty Supply |
$ | 652,184 | $ | 696,780 | $ | 555,252 | ||||||
BSG |
792,879 | 752,029 | 757,276 | |||||||||
Sub-total |
1,445,063 | 1,448,809 | 1,312,528 | |||||||||
Shared services |
45,669 | 78,214 | 91,975 | |||||||||
Total |
$ | 1,490,732 | $ | 1,527,023 | $ | 1,404,503 | ||||||
Depreciation and amortization: |
||||||||||||
Sally Beauty Supply |
$ | 24,175 | $ | 23,134 | $ | 20,377 | ||||||
BSG |
18,735 | 20,666 | 17,686 | |||||||||
Corporate |
4,156 | 4,733 | 4,542 | |||||||||
Total |
$ | 47,066 | $ | 48,533 | $ | 42,605 | ||||||
Capital expenditures: |
||||||||||||
Sally Beauty Supply |
$ | 23,203 | $ | 22,094 | $ | 20,831 | ||||||
BSG |
8,470 | 18,683 | 27,941 | |||||||||
Corporate |
5,647 | 4,799 | 4,573 | |||||||||
Total |
$ | 37,320 | $ | 45,576 | $ | 53,345 | ||||||
F-44
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Geographic Area Information
Geographic data for the fiscal years ended September 30, 2009, 2008 and 2007 is as follows (in thousands):
|
Year Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2009 | 2008 | 2007 | ||||||||||
Net sales:(a) |
|||||||||||||
United States |
$ | 2,202,218 | $ | 2,170,708 | $ | 2,110,864 | |||||||
Foreign |
434,382 | 477,483 | 402,908 | ||||||||||
Total |
$ | 2,636,600 | $ | 2,648,191 | $ | 2,513,772 | |||||||
Identifiable assets: |
|||||||||||||
United States |
$ | 1,105,026 | $ | 1,098,614 | $ | 972,094 | |||||||
Foreign |
340,037 | 350,195 | 340,434 | ||||||||||
Shared services |
45,669 | 78,214 | 91,975 | ||||||||||
Total |
$ | 1,490,732 | $ | 1,527,023 | $ | 1,404,503 | |||||||
20. Quarterly Financial Data (Unaudited)
Unaudited quarterly consolidated statement of earnings information for the fiscal years ended September 30, 2009 and 2008 is summarized below (in thousands, except per share data):
Fiscal Year
|
1st
Quarter |
2nd
Quarter |
3rd
Quarter |
4th
Quarter |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009: |
|||||||||||||||
Net sales |
$ | 645,576 | $ | 641,511 | $ | 673,337 | $ | 676,176 | |||||||
Gross profit |
$ | 303,544 | $ | 302,112 | $ | 317,845 | $ | 319,816 | |||||||
Net earnings |
$ | 16,059 | $ | 24,595 | $ | 31,489 | $ | 26,974 | |||||||
Earnings per common share(a) |
|||||||||||||||
Basic |
$ | 0.09 | $ | 0.14 | $ | 0.17 | $ | 0.15 | |||||||
Diluted |
$ | 0.09 | $ | 0.13 | $ | 0.17 | $ | 0.15 | |||||||
2008: |
|||||||||||||||
Net sales |
$ | 655,787 | $ | 643,346 | $ | 676,830 | $ | 672,228 | |||||||
Gross profit |
$ | 306,169 | $ | 298,424 | $ | 315,066 | $ | 314,935 | |||||||
Net earnings |
$ | 14,343 | $ | 12,396 | $ | 29,359 | $ | 21,479 | |||||||
Earnings per common share(a) |
|||||||||||||||
Basic |
$ | 0.08 | $ | 0.07 | $ | 0.16 | $ | 0.12 | |||||||
Diluted |
$ | 0.08 | $ | 0.07 | $ | 0.16 | $ | 0.12 |
F-45
Exhibit 4.15
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement, dated as of November , 2006, among SALLY HOLDINGS LLC, a Delaware limited liability company, (the Parent Borrower ), BEAUTY SYSTEMS GROUP LLC, a Delaware limited liability company, and SALLY BEAUTY SUPPLY LLC, a Delaware limited liability company, (together with BEAUTY SYSTEMS GROUP LLC and their respective successors and assigns the Subsidiary Borrowers ), the Canadian Borrowers (as defined in the Credit Agreement) (the Canadian Borrowers together with the Parent Borrower and Subsidiary Borrowers, the Borrowers ), the several banks and other financial institutions from time to time parties thereto (the Lenders ), MERRILL LYNCH CAPITAL, a division of Merrill Lynch Business Financial Services Inc., as administrative agent (the Administrative Agent ) and collateral agent for the Lenders. MERRILL LYNCH CAPITAL CANADA INC., as Canadian agent and Canadian collateral agent for the Lenders. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.
MERRILL LYNCH CAPITAL CANADA INC. (the Assignor ) and GE CANADA FINANCE HOLDING COMPANY (the Assignee ) agree as follows:
1. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Transfer Effective Date (as defined below), an interest (the Assigned Interest) as set forth in Schedule 1 in and to the Assignors rights and obligations under the Credit Agreement and the other Loan Documents with respect to those credit facilities provided for in the Credit Agreement as are set forth on Schedule l (individually, an Assigned Facility collectively, the Assigned Facilities ), in a principal amount for each Assigned Facility as set forth on Schedule I.
2. The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the Assigned Interest and that it has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrowers, any of its Subsidiaries or any other obligor or the performance or observance by the Borrowers, any of their Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; and (c) attaches the Note(s) if any held by it evidencing the Assigned Facilities.
3. The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in
subsection 5.1 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (c) agrees that it will, independently and without reliance upon the Assignor, any Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes each applicable Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent and/or the Canadian Agent by the terms thereof, together with such powers as are incidental thereto; (e) hereby affirms the acknowledgements and representations of such Assignee as a Lender contained in subsection 10.5 of the Credit Agreement and confirms that it meets the requirements set forth in subsection 11.6(b)(ii)(D) of the Credit Agreement; and (f) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with the terms of the Credit Agreement all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender, including its obligations pursuant to subsection 11.16 of the Credit Agreement, and, if it is organized under the laws of a jurisdiction outside the United States, its obligations pursuant to subsection 4.11(b) of the Credit Agreement.
4. The effective date of this Assignment and Acceptance shall be February , 2008 (the Transfer Effective Date ). Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance by it and recording by the Administrative Agent pursuant to subsection 11.6 of the Credit Agreement, effective as of the Transfer Effective Date (which shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance and recording by the Administrative Agent).
5. Upon such acceptance and recording, from and after the Transfer Effective Date, the Administrative Agent and/or the Canadian Agent, as applicable, shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignee whether such amounts have accrued prior to the Transfer Effective Date or accrued subsequent to the Transfer Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent and/or the Canadian Agent, as applicable, for periods prior to the Transfer Effective Date or with respect to the making of this assignment directly between themselves.
6. From and after the Transfer Effective Date, (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the other Loan Documents and shall be bound by the provisions thereof and (b) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement, but shall nevertheless continue to be entitled to the benefits of subsections 4.10, 4.11 , 4.12 and 11.5 thereof.
7. Notwithstanding any other provision hereof, if the consents of the Parent Borrower and the Administrative Agent hereto are required under subsection 11.6 of the Credit Agreement, this Assignment and Acceptance shall not be effective unless such consents shall have been obtained.
8. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule I hereto.
SCHEDULE I to the
Assignment and Acceptance
Re: Credit Agreement, dated as of November 2006, among SALLY HOLDINGS LLC, a Delaware limited liability company, BEAUTY SYSTEMS GROUP LLC, a Delaware limited liability company, and SALLY BEAUTY SUPPLY LLC, a Delaware limited liability company, the Canadian Borrowers (as defined in the Credit Agreement), the several banks and other financial institutions from time to time parties thereto, MERRILL LYNCH CAPITAL, a division of Merrill Lynch Business Financial Services Inc., as administrative agent and collateral agent for the Lenders. MERRILL LYNCH CAPITAL CANADA. INC., as Canadian agent and Canadian collateral agent for the Lenders.
Name of Assignor: Merrill Lynch Capital Canada Inc.
Name of Assignee: GE Canada Finance Holding Company
Transfer Effective Date of Assignment: February 4, 2008
|
|
Aggregate Amount of |
|
Amount of |
|
||
|
|
Commitment/Loans |
|
Commitment/Loans |
|
||
Credit Facility |
|
under Canadian |
|
under Canadian |
|
||
Assumed |
|
Facility for all Lenders |
|
Facility Assigned |
|
||
Canadian Facility |
|
$ |
35,000,000.00 |
|
$ |
9,800,000.00 |
|
ASSIGNOR: /s/ Jacquie Alexander |
ASSIGNEE: /s/ Richard Zeni |
|||||
|
|
|||||
MERRILL LYNCH CAPITAL |
GE CANADA FINANCE |
|||||
CANADA INC. |
HOLDING COMPANY |
|||||
|
|
|||||
By: |
/s/ Jacquie Alexander |
By: |
/s/ Richard Zeni |
|||
Name: |
Jacquie Alexander |
Name: |
Richard Zeni |
|||
Title: |
Authorized Signatory |
Title: |
Duly Authorized Signatory |
|||
Consented to :
MERRILL LYNCH CAPITAL, a division of
Merrill Lynch Business Financial Services Inc.,
as Administrative Agent
By: |
/s/ Jennifer Kloud |
|
Name: |
Jennifer Kloud |
|
Title: |
Director |
|
|
|
|
|
||
Consented to : |
||
|
||
SALLY HOLDINGS LLC |
||
|
|
|
By: |
/s/ David L. Rea |
|
Name: |
David L. Rea |
|
Title: |
Senior VP/CFO |
|
Exhibit 10.12
SALLY BEAUTY HOLDINGS, INC.
INDEPENDENT DIRECTOR COMPENSATION POLICY
The Board of Directors (the Board ) of Sally Beauty Holdings, Inc. (the Company ) has adopted the following compensation policy, effective as of June 30, 2009, for independent directors of the Company. The compensation policy has been developed to compensate certain independent directors of the Company for their time, commitment and contributions to the Board. This policy shall apply to directors of the Company who are not Company employees and who are not affiliated with Clayton Dubilier & Rice, Inc., (each an Independent Director ).
CASH COMPENSATION
Retainers for Serving on the Board
Independent Directors shall be paid an annual cash retainer of $35,000, payable in advance in quarterly installments, for each calendar year of service on the Board. Cash retainers for partial years of service shall be pro-rated to reflect the number of days served by an Independent Director during any such quarter.
Retainers for Serving as Chairpersons
An additional annual cash retainer shall be paid to an Independent Director who serves as chairperson of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, or Finance Committee. Such additional retainer shall be payable in advance in quarterly installments, in the following annualized amounts:
|
Audit Committee |
$ |
17,500 |
|
|
|
Compensation Committee |
$ |
7,500 |
|
|
|
Nominating & Corporate Governance Committee |
$ |
5,000 |
|
|
|
Finance Committee |
$ |
5,000 |
|
|
Additional retainers paid to chairpersons for partial years of service shall be pro-rated to reflect the number of days served by an Independent Director during any such quarter.
Meeting Fees
For in-person Board or commit tee meetings, each Independent Director in attendance shall receive $2,000. For telephonic Board or committee meetings for which minutes are kept, each independent director in attendance shall receive $1,000.
EQUITY-BASED COMPENSATION
Initial Grants
Upon the appointment or election of a new Independent Director to the Board, such Independent Director shall receive, in accordance with the Companys Omnibus Incentive Plan then in effect ( Omnibus Plan ), an initial grant of options ( Options ) to purchase shares of common stock of the Company ( Common Stock ). Such Options shall have a grant date present value equal to $70,000, and shall become exercisable in four equal annual installments beginning on the day before the first anniversary of the grant date.
Options granted to Independent Directors shall have an exercise price per share equal to the Fair Market Value (as defined in the Omnibus Plan) of a share of Common Stock on the grant date, and shall have a ten-year maximum term. In the event an Independent Directors Board service terminates because of death, disability or involuntary termination without Cause (as defined in the Omnibus Plan), such Independent Directors unvested Options shall become exercisable upon such termination. If an Independent Directors Board service is terminated for any other reason than the foregoing, unvested Options shall be canceled upon such termination.
Following the termination of an Independent Directors Board service, such Independent Directors vested Options shall remain exercisable until the first to occur of ( i) the third anniversary of such termination or ( ii ) the Options normal expiration date. Notwithstanding the foregoing, if an Independent Directors Board service is terminated for Cause, any outstanding Options shall be forfeited upon such termination.
Annual Grants
Each Independent Director shall be granted an annual equity-based retainer award with a value at the time of issuance of approximately $70,000. Such award shall normally be made at the first Board meeting each Company fiscal year in the form of grants of restricted stock units ( RSUs ), in accordance the Omnibus Plan, and shall vest on the last day of such fiscal year. Independent Directors whose Board service begins after the start of a Company fiscal year shall receive a grant pro-rated to reflect the number of days remaining in such fiscal year. Upon vesting, Independent Director RSUs shall be deferred into deferred stock units that shall be distributed six months after such Independent Directors Board service terminates.
In the event an Independent Directors Board service terminates because of death, disability or involuntary termination without Cause (as defined in the Omnibus
Plan), a pro rata portion of such Independent Directors unvested RSUs shall vest upon such termination. If an Independent Directors Board service is terminated for any other reason than the foregoing RSUs shall be canceled upon such termination.
TRAVEL EXPENSE REIMBURSEMENT
Each of the Independent Directors shall be entitled to receive reimbursement for reasonable travel expenses which they properly incur in connection with their functions and duties as a director. With respect to air travel, reimbursements shall be limited to the cost of first-class commercial airline tickets for the trip and date in question.
EFFECTIVE DATE, AMENDMENT, REVISION AND TERMINATION
This policy may be amended, revised or terminated by the Board at any time and from time-to-time.
Exhibit 10.27
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
by and among
BEAUTY SYSTEMS GROUP LLC,
the Purchaser,
LADY LYNN
ENTERPRISES, INC.,
the Merger Sub,
SCHOENEMAN
BEAUTY SUPPLY, INC.,
the Corporation,
the SHAREHOLDERS (as defined herein)
and
F. DALE
SCHOENEMAN,
as Shareholders Representative,
Dated: September 30, 2009
TABLE OF CONTENTS
Article 1 Definitions |
1 |
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Article 2 The Merger; Conversion of Shares |
13 |
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2.1 |
The Merger |
13 |
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2.2 |
Effect of the Merger |
13 |
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2.3 |
Articles of Incorporation and Bylaws |
13 |
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2.4 |
Directors and Officers |
13 |
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2.5 |
Merger Consideration; Effect on Capital Stock |
14 |
Article 3 Closing and Closing Date; Effective Time |
14 |
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3.1 |
Closing Date; Effective Time |
14 |
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3.2 |
Purchasers Deliveries |
15 |
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3.3 |
Shareholders and the Corporations Deliveries |
16 |
Article 4 Closing Net Assets; Establishment of Escrow |
17 |
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4.1 |
Determination of Closing Net Assets |
17 |
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4.2 |
Excluded Assets; Cash |
19 |
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4.3 |
Regular Escrow and Special Escrow |
19 |
Article 5 Representations and Warranties of the Shareholders |
20 |
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5.1 |
Organization, Power and Authority |
20 |
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5.2 |
No Conflict and Binding Obligations |
20 |
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5.3 |
Compliance With Laws; Environmental, Health and Safety Matters |
21 |
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5.4 |
Financial Statements |
22 |
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5.5 |
Absence Of Certain Changes |
23 |
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5.6 |
Books Of Account |
24 |
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5.7 |
Tax Matters |
24 |
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5.8 |
No Material Adverse Effect |
27 |
|
5.9 |
Title to Assets |
27 |
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5.10 |
Leases |
27 |
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5.11 |
Contracts |
28 |
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5.12 |
Purchase Orders |
28 |
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5.13 |
Customer Orders |
29 |
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5.14 |
Inventory |
29 |
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5.15 |
Permits |
29 |
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5.16 |
Tangible Assets |
29 |
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5.17 |
Legal Proceedings |
29 |
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5.18 |
Intellectual Property |
30 |
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5.19 |
Employees |
30 |
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5.20 |
Labor Contracts and Controversies |
31 |
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5.21 |
Retirement and Benefit Plans; ERISA |
31 |
|
5.22 |
Transactions With Related Parties |
32 |
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5.23 |
Product Warranty |
33 |
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5.24 |
No Broker |
33 |
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5.25 |
Disclosure |
33 |
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5.26 |
Insurance |
33 |
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5.27 |
Indebtedness |
33 |
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5.28 |
Capitalization |
34 |
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5.29 |
Accounts Receivable |
34 |
i
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5.30 |
Bank Accounts |
34 |
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5.31 |
Claims Against Officers and Directors |
34 |
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5.32 |
Recorded Sales Consistent With Manufacturers Directions |
34 |
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5.33 |
Intercompany Accounts; Transactions With Affiliates |
35 |
Article 6 Representations and Warranties of the Purchaser |
35 |
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6.1 |
Organization, Power and Authority |
36 |
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6.2 |
Authority and Binding Obligations |
36 |
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6.3 |
Investment Representation |
36 |
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6.4 |
Litigation |
36 |
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6.5 |
Consents and Governmental Approvals |
36 |
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6.6 |
No Broker |
37 |
Article 7 Covenants and Agreements |
37 |
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7.1 |
Landlords Consents for Store Leases |
37 |
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7.2 |
Supplier Contracts |
39 |
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7.3 |
Restrictive Covenant |
39 |
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7.4 |
Store Cash |
42 |
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7.5 |
Post-Closing Employee Matters |
42 |
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7.6 |
Post-Closing Treatment of Individual Shareholders |
43 |
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7.7 |
Tax Deposit |
44 |
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7.8 |
M&T Indebtedness |
44 |
Article 8 Indemnification |
44 |
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8.1 |
Indemnification by the Shareholder Indemnifying Parties |
44 |
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8.2 |
No Set-Off |
45 |
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8.3 |
Indemnification by the Purchaser |
45 |
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8.4 |
Survival |
45 |
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8.5 |
Limitation on Indemnification and Survival of Representations and Warranties |
45 |
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8.6 |
Method of Asserting Claims, etc. |
46 |
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8.7 |
Losses Net of Insurance, etc. |
48 |
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8.8 |
Workers Compensation Claim |
48 |
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8.9 |
Sole Remedy |
48 |
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8.10 |
Treatment of Indemnification Payments |
48 |
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8.11 |
Materiality Qualifications |
48 |
Article 9 Assignment |
49 |
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Article 10 Notices |
49 |
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Article 11 Integration, Interpretation and Miscellaneous Provisions |
50 |
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11.1 |
Entire Agreement |
50 |
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11.2 |
Waiver |
50 |
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11.3 |
Governing Law |
50 |
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11.4 |
Public Announcement |
50 |
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11.5 |
Expenses |
50 |
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11.6 |
Further Assurances |
50 |
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11.7 |
Counterparts |
51 |
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11.8 |
Facsimile Copies |
51 |
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11.9 |
Miscellaneous |
51 |
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11.10 |
Resolution of Certain Disputes |
51 |
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11.11 |
Notification |
52 |
ii
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11.12 |
Schedules |
52 |
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11.13 |
Shareholders Representative |
52 |
Article 12 Section 12.2 Consideration; Additional Tax Matters |
53 |
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12.1 |
Allocation Schedule; Allocation Methodology |
53 |
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12.2 |
Section 12.2 Consideration |
54 |
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12.3 |
Responsibility for Preparing and Filing Tax Returns |
55 |
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12.4 |
Audits and Other Proceedings |
55 |
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12.5 |
Cooperation on Tax Matters |
56 |
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12.6 |
S Corporation Status |
56 |
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12.7 |
Transfer Taxes |
57 |
Exhibits
Exhibit A |
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Consulting Agreement (F. Dale Schoeneman) |
Exhibit B |
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Consulting Agreement (Kay L. Schoeneman) |
Exhibit C-1 |
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Escrow Agreement (Special Escrow) |
Exhibit C-2 |
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Escrow Agreement (Regular Escrow) |
Exhibit D |
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Warehouse Lease (210 Industrial Park Road) |
Exhibit E |
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Warehouse Lease (222 Industrial Park Road) |
Exhibit F |
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Shareholders Release |
Exhibit G |
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Articles of Incorporation |
Exhibit H |
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Bylaws |
Exhibit I |
|
Territory |
Exhibit J |
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Opinion of Shareholders Counsel |
Exhibit K |
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Allocation Methodology |
Exhibit L |
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Closing Payment and Ownership Percentages |
Exhibit M |
|
Consulting Agreement (Lori Schoeneman) |
Exhibit N |
|
Consulting Agreement (Tara Schoeneman) |
Schedules |
|
Schedule 4.2 Excluded Assets |
Schedule 5.1 Subsidiaries and Equity Positions in Other Companies |
Schedule 5.2 No Conflict and Binding Obligations |
Schedule 5.4 Financial Statements |
Schedule 5.4.2 Liabilities |
Schedule 5.5 Absence of Certain Changes |
Schedule 5.7 Tax Matters |
Schedule 5.9 Title to Assets - Exceptions |
Schedule 5.10.1(a) Personal Property Leases |
Schedule 5.10.1(b) Real Property Leases |
Schedule 5.11.1 Contracts |
Schedule 5.12 Corporation PO List |
Schedule 5.13 Customer PO List |
Schedule 5.15 Permits |
Schedule 5.16 Tangible Assets |
iii
Schedule 5.17 Legal Proceedings |
Schedule 5.18.1 Intellectual Property |
Schedule 5.18.2 Agreements Relating to Intellectual Property |
Schedule 5.18.4 Protection of Intellectual Property |
Schedule 5.19 Employees |
Schedule 5.21.1 Benefit Plans |
Schedule 5.21.7 Increased or Accelerated Compensation upon Change of Control |
Schedule 5.22 Related Party Transactions |
Schedule 5.26 Insurance Policies |
Schedule 5.27 Outstanding Indebtedness |
Schedule 5.28.2 Capitalization |
Schedule 5.30 Financial Institutions |
Schedule 5.33.1 Intercompany Balances & Transactions |
Schedule 5.33.2 Intercompany & Affiliate Agreements |
Schedule 7.5.6 Employees with Special Severance |
iv
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, made and entered into as of this 30 th day of September, 2009, is by and among Beauty Systems Group LLC, a Delaware limited liability company (the Purchaser ); Lady Lynn Enterprises, Inc., a Delaware corporation (the Merger Sub ); Schoeneman Beauty Supply, Inc., a Pennsylvania corporation ( Corporation ); and F. Dale Schoeneman, Kay L. Schoeneman, Lori Schoeneman, Tara Schoeneman, the 2008 Grantor Retained Annuity Trust of F. Dale Schoeneman dated December 26, 2008 and the 2008 Grantor Retained Annuity Trust of Kay L. Schoeneman dated December 26, 2008 (collectively, the Shareholders and individually, a Shareholder ); and F. Dale Schoeneman, in his capacity as Shareholders Representative pursuant to, and in accordance with Section 11.13 hereof.
W I T N E S S E T H :
WHEREAS, the Merger Sub is a wholly owned subsidiary of the Purchaser;
WHEREAS, the Boards of Directors of the Purchaser, the Merger Sub and the Corporation have determined that it would be advisable and in the best interests of the shareholders or members (as appropriate) of their respective companies that the Corporation merge with and into the Merger Sub (the Merger ), with the Merger Sub continuing as the surviving corporation in the Merger and remaining a wholly owned subsidiary of the Purchaser, on the terms and subject to the conditions set forth in this Agreement, and, in furtherance thereof, have approved the Merger, this Agreement and the other transactions contemplated by this Agreement;
WHEREAS, the Shareholders own all of the issued and outstanding capital stock of the Corporation;
WHEREAS, pursuant to the Merger, among other things, all of the issued and outstanding capital stock of the Corporation shall be converted into the right to receive cash in the manner set forth herein; and
WHEREAS, the Purchaser, the Merger Sub, and the Shareholders desire to make certain representations, warranties, covenants and other agreements in connection with the Merger as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth, and subject to the conditions herein set forth, the Parties, intending to be legally bound hereby, agree as follows:
The following terms shall have the meanings set forth below for the purpose of this Agreement:
Accounting Firm shall have the meaning set forth in Section 11.10 .
Affiliate shall mean, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by or is under common control with, such person, firm, corporation, partnership or other entity, with the term control meaning the power, directly or indirectly, either to (i) vote 50% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of a Person or (ii) direct or cause the direction of the management and policies of a Person, whether through the ability to exercise voting power or otherwise. In addition, with respect to the Corporation, the term Affiliate also includes any Person capable of being controlled by any combination of Shareholders, members of one or more Shareholders immediate family, the Corporation and their respective Affiliates.
Affiliate Transaction shall have the meaning set forth in Section 5.33.2 .
Aggregate Escrow Amount shall mean the sum of the Special Escrow Amount ($3,000,000) and the Regular Escrow Amount ($15,000,000), or $18,000,000.
Agreement shall mean this Agreement and Plan of Merger, including all Schedules and Exhibits.
Allocation Methodology shall have the meaning set forth in Section 12.1 .
Allocation Schedule shall have the meaning set forth in Section 12.1 .
Articles of Merger shall have the meaning set forth in Section 3.1(b) .
Assets shall mean, as to a Person, all of the assets, properties, businesses and rights of such Person of every kind, nature, character and description, whether real, personal or mixed, tangible or intangible, accrued or contingent, or otherwise relating to or utilized in such Persons business, directly or indirectly, in whole or in part, whether or not carried on the books and records of such Person, and whether or not owned in the name of such Person or any Affiliate of such Person and wherever located.
Audit shall have the meaning set forth in Section 4.1.1 .
Audited Financial Statements shall mean the audited consolidated financial statements of the Corporation at and for the periods ended September 30, 2006, 2007 and 2008; together with the report of the Corporations independent auditors thereon.
Auditor shall have the meaning set forth in Section 4.1.1 .
Base Purchase Price shall have the meaning set forth in Section 2.5(a) .
Beauty Supply Business shall mean the business of selling beauty supplies, including, but not limited to, the warehousing and sale, through stores and salespeople, of beauty supply products, small electrical appliances and equipment to beauty salons, barber shops, licensed hairdressers, barbers and beauticians, but excluding the Permitted Beauty Supply Business.
2
CERCLA shall have the meaning set forth in the definition of Environmental Laws.
Certificate of Merger shall have the meaning set forth in Section 3.1(b) .
Claim Notice shall have the meaning set forth in Section 8.6 .
Claims shall have the meaning set forth in Section 8.1 .
Closing shall mean the act of completion of the closing of the transactions contemplated by this Agreement on the Closing Date as set forth in Article 3 .
Closing Balance Sheet shall have the meaning set forth in Section 4.1.1 .
Closing Date shall mean the date on which the Closing takes place as set forth in Section 3.1 .
Closing Date Interest Rate shall mean the rate per annum equal to the prime commercial lending rate quoted as of the Closing Date by The Wall Street Journal (Eastern Edition).
Closing Net Assets shall have the meaning set forth in Section 4.1.1 .
Closing Payment shall have the meaning set forth in Section 3.2.1 .
Code shall mean the Internal Revenue Code, as amended.
Collateral Source shall have the meaning set forth in Section 8.7 .
Company Benefit Plans shall mean each written or oral employee benefit plan, scheme, program, policy, arrangement or Contract (including, but not limited to, any employee benefit plan, as defined in Section 3(3) of ERISA, whether or not subject to ERISA, and any bonus, deferred compensation, stock bonus, stock purchase, restricted stock, stock option or other equity-based arrangement, and any employment, termination, retention, bonus, change in control or severance plan, program, policy, arrangement or Contract) for the benefit of any current or former officer, employee or director of the Corporation that is maintained or contributed to by the Corporation or any Related Person which the amount payable thereunder by the Corporation or any Related Person exceeds $2,000 individually or $30,000 in the aggregate, or has a duration of more than twelve (12) months, or with respect to which any of them could incur material Liability under the Code or ERISA or any similar non-U.S. law.
Consulting Agreements shall mean the Consulting Agreement for: (i) F. Dale Schoeneman in the form of Exhibit A ; (ii) Kay L. Schoeneman in the form of Exhibit B ; (iii) Lori Schoeneman in the form of Exhibit M ; and (iv) Tara Schoeneman in the form of Exhibit N .
Contract Date shall mean the date of this Agreement.
3
Contracts shall mean any contract, agreement, open purchase order, indenture, instrument, lease, license, plan, promise, arrangement or undertaking (whether written or oral and whether express or implied) to which any Person is a party or that is legally binding on any Person or its equity interests, Assets or business.
Corporation shall have the meaning set forth in the introductory paragraph hereof.
Corporation PO List shall have the meaning set forth in Section 5.12 .
Corporation Securities shall mean: (i) shares of capital stock of, or other voting or equity interests in, the Corporation; (ii) securities of the Corporation convertible into or exercisable or exchangeable for shares of capital stock of, or other voting or equity interests in, the Corporation; and (iii) options or other rights or agreements, commitments or understandings of any kind to acquire from, or to require the Corporation to issue, transfer or sell, any capital stock of, or other voting or equity interests in, the Corporation or securities convertible into or exercisable or exchangeable for capital stock of, or other voting or equity interests in, the Corporation.
Corporations Knowledge shall mean the actual knowledge of each of the Shareholders, William Wisser, Chief Financial Officer of the Corporation, Karen Roberts, Controller of the Corporation, and Scott Hunyara, Director of Information Technology of the Corporation.
Covered Employee shall have the meaning set forth in Section 7.5.1 .
Customer PO List shall have the meaning set forth in Section 5.13 .
Cutoff Date shall have the meaning set forth in Section 7.1.1.3 .
Deficiency Payment shall have the meaning set forth in Section 4.1.2.2 .
DGCL shall have the meaning set forth in Section 2.1 .
Diversion shall mean the knowing sale of merchandise to customers who will resell the merchandise in a territory or the knowing sale of merchandise to a customer, in each case, outside the channel of trade established by the manufacturer.
Effective Time shall have the meaning set forth in Section 3.1(b) .
Employees shall have the meaning set forth in Section 5.19 .
Environmental Laws shall mean any and all Laws relating to: (i) environmental matters; (ii) the control, use, management, treatment, storage, disposal or transportation of any pollutant or other substance regulated for its potential impact on public health or the environment, or protection of the air, water, or land (including, without limitation, ambient air, indoor air, surface water, ground water, land surface, or subsurface strata); (iii) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation; (iv) exposure to
4
or releases of hazardous, toxic or other harmful substances; (v) the protection, remediation, and enhancement of human health, safety, or the environment (including, without limitation, ambient air, indoor air, surface water, ground water, land surface, or subsurface strata), in each case which is in force as of the Contract Date or prior thereto. Environmental Laws shall include, without limitation, the Clean Air Act, 42 U.S.C. §7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq., the National Environmental Policy Act, 42 U.S.C. § 4321 et seq., the Endangered Species Act, 16 U.S.C. § 1531 et seq., the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq. ( RCRA ), the Safe Drinking Water Act. 42 U.S.C. §300f et seq., the Comprehensive Environmental Response, Compensation, and Liability Act as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. §9601 et seq. ( CERCLA ), the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq., the Oil Pollution Act of 1990, 33 U.S.C. §2701 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. §1801 et seq., the Toxic Substances Control Act, 15 U.S.C. §2601 et seq., the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. §11001 et seq., the Occupational Safety and Health Act, 29 U.S.C. §651, et seq., any state or local Laws similar or analogous to or implementing the foregoing requirements, and any state or local Laws relating to Environmental Permits, in each case which is in force as of the Contract Date.
Environmental Matters shall mean any matter or circumstances related in any manner whatsoever to the Corporation, the Schoeneman Beauty Supply Business, or any Assets (including real property), Stores or Warehouses currently or formerly owned, leased, operated, or used by the Corporation, the Schoeneman Beauty Supply Business, or any predecessors in interest, which matter or circumstance exists on or prior to the Closing Date, and to: (i) the Release or threatened Release of any Hazardous Substance by the Corporation, the Schoeneman Beauty Supply Business or any predecessors in interest into the environment on or prior to the Closing Date; (ii) the transportation, treatment, storage, recycling, distribution, use or other handling of any Hazardous Substance by the Corporation, the Schoeneman Beauty Supply Business or any predecessors in interest on or prior to the Closing Date; (iii) the placement of structures or materials into waters of the United States by the Corporation, the Schoeneman Beauty Supply Business or any predecessors in interest on or prior to the Closing Date; (iv) above-ground or underground storage tanks, oil/water separators, and septic systems located at the Subject Property on or prior to the Closing Date; (v) the presence of any Hazardous Substance in any building or other improvement, equipment, structure or workplace located at the Subject Property on or prior to the Closing Date; or (vi) any violation of or noncompliance with an Environmental Law by the Corporation, the Schoeneman Beauty Supply Business or any predecessors in interest on or prior to the Closing Date.
Environmental Permits shall mean all Permits issued pursuant to or with respect to applicable Environmental Laws.
ERISA shall mean means the Employee Retirement Income Security Act of 1974, as amended.
Escrow Agent shall mean M&T Bank.
5
Escrow Condition Letter shall mean that certain letter between the Shareholders and the Purchaser dated as of the date hereof regarding certain obligations of the Parties related to the Regular Escrow Agreement.
Excess Payment shall have the meaning set forth in Section 4.1.2.1 .
Excluded Assets shall have the meaning set forth in Section 4.2 .
Excluded Contracts shall have the meaning set forth in Section 5.11.1 .
Financial Statements shall mean the Audited Financial Statements and the Unaudited Financial Statements, including in each case, a balance sheet and statements of income or operations, and retained earnings or shareholders equity and, with respect to the Audited Financial Statements only, a statement of cash flows.
GAAP shall mean United States generally accepted accounting principles applied on a consistent basis.
Governmental Authority shall mean any court, tribunal, arbitrator, authority, agency, commission, official, board or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision.
Guaranteed Indebtedness shall mean Indebtedness of a third party that is: (i) guaranteed by the Corporation; (ii) secured by a Lien on any Asset of the Corporation; or (iii) the subject of any other credit support arrangement provided by the Corporation.
Hazardous Substances shall mean: (i) any oil, petroleum or petroleum products or byproducts and any constituents thereof, flammable explosives, radioactive materials, mold, lead in paint or drinking water, radon, pesticides and other agricultural chemicals, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs); (ii) any chemicals or other materials or substances which, as of the Contract Date or prior thereto, are defined as or included in the definition of hazardous substances, hazardous wastes, hazardous materials, extremely hazardous wastes, dangerous wastes, restricted hazardous wastes, toxic substances, toxic pollutants, hazardous air pollutants or words of similar import under any Environmental Law; and (iii) any other chemical, substance, waste, material, pollutant or contaminant defined as or deemed hazardous or toxic, or otherwise regulated under any Environmental Law, including, without limitation, RCRA hazardous wastes and CERCLA hazardous substances.
Indebtedness shall mean: (i) all obligations for borrowed money or with respect to deposits or advances of any kind; (ii) all obligations evidenced by bonds, debentures, notes or similar instruments; (iii) all obligations upon which interest charges are customarily paid (other than trade payables incurred in the ordinary course of business consistent with past practices); (iv) all obligations under conditional sale or other title retention agreements relating to any property purchased; (v) all obligations incurred or assumed as the deferred purchase price of property or services (excluding obligations to creditors for raw materials, inventory, services and
6
supplies incurred in the ordinary course of business consistent with past practices); (vi) all lease obligations capitalized on the books and records of such Person; (vii) all obligations of others secured by a Lien on property or assets owned or acquired, whether or not the obligations secured thereby have been assumed; (viii) all obligations under interest rate, currency or commodity derivatives or hedging transactions; (ix) all letters of credit or performance bonds issued (excluding (A) letters of credit issued for the benefit of suppliers to support accounts payable to suppliers incurred in the ordinary course of business consistent with past practices; (B) standby letters of credit relating to workers compensation insurance; and (C) surety bonds and customs bonds); and (x) Guaranteed Indebtedness.
Indemnifying Party shall mean the party required to indemnify the other party pursuant to Article 8 .
Indemnified Party shall mean the party entitled to indemnification pursuant to pursuant to Article 8 .
Intellectual Property shall means trademarks, service marks, trade names, trade dress, including all goodwill associated with the foregoing, domain names, copyrights, Software, Internet Web sites, mask works and other semiconductor chip rights, patents and patent applications, Trade Secrets and all similar intellectual property rights, and registrations and applications to register or renew the registration of any of the foregoing.
Inventory shall mean all goods held by the Corporation and intended for resale in the ordinary course of the Schoeneman Beauty Supply Business.
Inventory Methodology shall have the meaning set forth in Section 4.1.1 .
IRS shall mean the Internal Revenue Service.
Laws shall mean any and all federal, state, local and foreign laws, statutes, ordinances, rules, regulations, judgments, rule of common law, injunctions, orders and decrees and any and all arbitral findings and rulings.
Legal Proceeding shall mean any lawsuit, arbitration, administrative proceeding (including, without limitation, administrative workers compensation proceedings) or similar formal or informal adversarial civil or criminal action or proceeding of any kind or nature.
Liabilities means any and all liabilities, obligations or commitments of any nature, whether known or unknown, direct or indirect, absolute, accrued, contingent or otherwise, whether due or to become due, and whether or not required to be reflected or reserved against on a balance sheet under GAAP.
Lien shall mean, with respect to any Asset, any mortgage, lien, pledge, charge, security interest, lease, encumbrance or other adverse claim of any kind in respect of such Asset. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such Asset.
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Look Back Period shall have the meaning set forth in Section 7.3.2 .
Losses shall have the meaning set forth in Section 8.1 .
M&T Bank Indebtedness shall have the meaning set forth in Section 7.8 .
Material Adverse Effect shall mean any circumstance, occurrence of any event, or any change in or effect on the Corporation or the Schoeneman Beauty Supply Business that, individually or when taken together with all other circumstances, events, changes in or effects on the Corporation or the Schoeneman Beauty Supply Business, is or would reasonably be expected to be materially adverse to: (i) the condition (financial or otherwise), results of operations, business or Assets of the Corporation or the Schoeneman Beauty Supply Business; or (ii) the ability of the Corporation or any Shareholder to perform her, his or its obligations under this Agreement or to consummate the transactions contemplated by this Agreement; provided , that, Material Adverse Effect shall not be deemed to include the impact of: (a) any changes in Laws of general applicability or interpretations thereof by courts or Governmental Authorities; (b) any changes in GAAP; (c) any changes affecting the general economic conditions in the United States, which changes do not disproportionately affect the Corporation in any material respect; (d) any failure by the Corporation to meet any internal or published projections, forecasts, or revenue or earnings predictions for any period; (e) any adverse effect arising from or relating to actions required to be taken under the Store Leases or Supplier Contracts; or (f) any Permitted Lien. References in this Agreement to dollar amount thresholds shall not be deemed to be evidence of a Material Adverse Effect or materiality.
Maximum Amount shall have the meaning set forth in Section 8.5.1 .
Medical Insurance Cap shall have the meaning set forth in Section 7.6 .
Merger shall have the meaning set forth in the recitals hereof.
Merger Consideration shall have the meaning set forth in Section 2.5(a) .
Merger Filings shall have the meaning set forth in Section 3.1(b) .
Merger Sub shall have the meaning set forth in the introductory paragraph hereof.
Net Assets shall mean the book value of all assets of the Corporation (excluding the Excluded Assets and the Tax Deposit), net of all liabilities of the Corporation, determined in accordance with GAAP, net of elimination of all intercompany transactions.
Notice of Dispute shall have the meaning set forth in Section 4.1.1 .
Notice Period shall have the meaning set forth in Section 8.6 .
Operating Profits shall have the meaning set forth in Section 7.1.3.1.
Operating Profits Per Day shall have the meaning set forth in Section 7.1.3.2 .
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Organizational Documents shall mean the articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, certificate of formation, regulations, operating agreement, certificate of limited partnership, partnership agreement, and all other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of a Person, including any amendments thereto. With respect to the Trusts, Organizational Documents includes any trust agreement and similar documentation.
Owned Intellectual Property shall have the meaning set forth in Section 5.18.1 .
PBCL shall have the meaning set forth in Section 2.1 .
Party and Parties . Party shall mean the Purchaser, the Merger Sub, the Corporation, the Shareholders or the Shareholders Representative, as the case may be, and Parties shall mean the Purchaser, the Merger Sub, the Corporation, the Shareholders and the Shareholders Representative collectively.
Payoff Letters shall have the meaning set forth in Section 7.8 .
Per Share Merger Consideration shall mean the quotient of (x) the Merger Consideration divided by (y) the total number of outstanding voting and non-voting shares of common stock of the Corporation. The parties acknowledge that Per Share Merger Consideration associated with the Base Purchase Price is approximately $711.51 per Share.
Permits shall mean collectively all permits, orders, licenses, variances, certificates, approvals, registrations, franchise rights and other authorizations and all applications thereof, granted or issued by any Governmental Authority having jurisdiction over the Schoeneman Beauty Supply Business.
Permitted Beauty Supply Business shall mean the business of manufacturing beauty supplies and importing beauty supplies, in each case where the sales of such beauty supplies are limited to sales to distributors to licensed professionals and to the general public and manufacturers of beauty supplies.
Permitted Liens shall mean: (i) Liens for Taxes not yet due and payable or that are being contested in good faith and for which adequate accruals or reserves have been established; (ii) Liens of carriers, warehousemen, mechanics, materialmen and other like Liens arising in the ordinary course of business but only to the extent the underlying payment obligations are not past due; (iii) customary easements, rights of way, zoning ordinances and other similar encumbrances affecting real property; and (iv) statutory Liens in favor of lessors arising in connection with any property leased to the Corporation, which Liens and other encumbrances described in clauses (i) (iv) do not, individually or in the aggregate, materially interfere with the use by the Corporation of any of the Assets affected thereby.
Person means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a Government Authority.
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Pre-Closing Tax Period shall mean any taxable year or period (or portion thereof) that ends on or before the Closing Date. For purposes of this Agreement, in the case of any Taxes that are payable with respect to any Tax period beginning before and ending after the Closing Date, such Taxes shall be apportioned between the portion of such period ending on the Closing Date and the portion beginning on the day after the Closing Date: (i) in the case of real and personal property Taxes, on a per diem basis; and (ii) in the case of all other Taxes, on the basis of the actual activities of the Corporation as determined from the books and records of the Corporation for such partial period.
Proprietary Information shall have the meaning set forth in Section 7.3.5 .
Purchaser shall have the meaning set forth in the introductory paragraph hereof.
Purchasers Knowledge shall mean the actual knowledge of John Golliher, Michael Dewey and Tommy Dobrzykowski.
RCRA shall have the meaning set forth in the definition of Environmental Laws.
Regular Escrow shall have the meaning set forth in Section 4.3.1 .
Regular Escrow Agreement shall mean the Escrow Agreement in the form of Exhibit C-2 .
Regular Escrow Amount shall have the meaning set forth in Section 4.3.1 .
Related Person shall mean, with respect to any Person, any trade or business, whether or not incorporated, which, together with such Person, is treated as a single employer under Section 414 of the Code.
Release shall mean any releasing, disposing, discharging, injecting, spilling, leaking, leaching, pumping, dumping, pouring, emitting, escaping, emptying, seeping, dispersal, migration, transporting, placing and the like, including, without limitation, the moving of any materials, including, without limitation, Hazardous Substances, through, into or upon, any land or subsurface strata, soil, surface water, groundwater, wetlands, or air or otherwise entering into the indoor or outdoor environment.
Rent Differential shall have the meaning set forth in Section 7.1.1.3(d) .
Required Lease Consents shall have the meaning set forth in Section 7.1.1 .
Schoeneman Beauty Supply Business shall mean the entire businesses and operations of the Corporation as conducted on the Contract Date, consistent with customary past practices, including, without limitation, the warehousing and sale, through the Corporations stores and salespeople, of beauty supply products, small electrical appliances and equipment to beauty salons, barber shops, licensed hairdressers, barbers and beauticians, conducted in part out of the Stores.
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Schoenemans shall have the meaning set forth in Section 7.3.1 .
Section 12.2 Consideration shall have the meaning set forth in Section 12.2 .
Securities Act shall have the meaning set forth in Section 6.3 .
Shareholder and Shareholders shall have the meaning set forth in the introductory paragraph hereof.
Shareholder Controlled Proceeding shall have the meaning set forth in Section 12.4.1 .
Shareholder Indemnifying Parties shall mean F. Dale Schoeneman, Kay L. Schoeneman, Lori Schoeneman and Tara Schoeneman.
Shareholders Release shall mean the Shareholder Release in the form of Exhibit F .
Shareholders Representative shall mean F. Dale Schoeneman.
Shares shall mean the 98,800 shares of non-voting common stock, $1.00 par value per share, of the Corporation, and 988 shares of voting common stock, $1.00 par value per share, of the Corporation, which non-voting and voting shares of common stock constitute all of the issued and outstanding Corporation Securities.
Software shall mean all computer software, including, but not limited to, application software, system software and firmware, including all source code and object code versions thereof, in any and all forms and media, and all related documentation.
Special Escrow shall have the meaning set forth in Section 4.3.2 .
Special Escrow Agreement shall mean the Escrow Agreement in the form of Exhibit C-1 .
Special Escrow Amount shall have the meaning set forth in Section 4.3.2 .
Special Escrow Letter shall mean that certain letter between the Shareholders and the Purchaser dated as of the date hereof regarding disposition of the Special Escrow Amount.
Stock Certificates shall have the meaning set forth in Section 3.3.5 .
Store Leases shall mean collectively the forty-three (43) real property leases for the Stores.
Stores shall mean the forty-three (43) sales locations operated by the Corporation in connection with the operation of the Schoeneman Beauty Supply Business.
Subject Property shall have the meaning set forth in Section 5.3.2 .
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Supplier Contracts shall mean all Contracts between the Corporation and Persons who supply beauty supply products, small electrical appliances and equipment to the Corporation for sale by the Corporation as part of the Schoeneman Beauty Supply Business.
Surviving Corporation shall have the meaning set forth in Section 2.1 .
Target Net Asset Value shall have the meaning set forth in Section 4.1.1 .
Tax (and with the correlative meaning taxable) shall mean any: (i) federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, intangible, ad valorem, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax or other governmental charge of any kind whatsoever, including any interest, penalty, or addition thereto, and shall also include any fines arising under ERISA or penalties, interest or additions thereto; and, (ii) Liability of the Corporation for the payment of any amounts of the type described in clause (i) as a result of any express or implied obligation to indemnify or otherwise assume or succeed to the Liability of any person or entity or as a result of Treas. Reg. 1.1502-6 (or any similar provision of state, local, or foreign law).
Tax Deposit shall have the meaning set forth in Section 7.7 .
Tax Returns shall mean any return, report or statement required to be filed with or provided to any taxing authority with respect to any Tax (including any attachments thereto and any amendment thereof), including any information return, claim for refund, amended return or declaration of estimated Tax.
Terminated Lease shall have the meaning set forth in Section 7.1.1.3 .
Territory shall mean the geographical area described on Exhibit I .
Threshold Amount shall have the meaning set forth in Section 8.5.1 .
Trade Secrets shall mean all inventions, processes, designs, formulae, trade secrets, know-how, ideas, research and development, data, databases and confidential information.
Transaction Documents shall mean this Agreement and the documents reflecting the transactions contemplated herein.
Transfer Taxes shall have the meaning set forth in Section 12.7 .
Trusts shall mean the: (i) 2008 Grantor Retained Annuity Trust of F. Dale Schoeneman dated December 26, 2008; and (ii) 2008 Grantor Retained Annuity Trust of Kay L. Schoeneman dated December 26, 2008.
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Unaudited Financial Statements shall mean the unaudited interim consolidated financial statements of the Corporation at and for the period ended August 31, 2009.
Warehouses shall mean the warehouse locations at 210 Industrial Park Road (approximately 140,000 square feet) and 222 Industrial Park Road (approximately 20,000 square feet), Pottsville, Pennsylvania.
Warehouse Leases shall mean the leases for the warehouse locations located at: (i) 210 Industrial Park Road, Pottsville, Pennsylvania, in the form of Exhibit D ; and (ii) 222 Industrial Park Road, Pottsville, Pennsylvania, in the form of Exhibit E .
Article 2
The Merger; Conversion of Shares
2.1 The Merger . At the Effective Time, on the terms and subject to the conditions set forth in this Agreement, and in accordance with the applicable provisions of the Pennsylvania Business Corporation Law (the PBCL ), and the Delaware General Corporation Law (the DGCL ), the Corporation shall merge with and into the Merger Sub, the separate corporate existence of the Corporation shall cease and the Merger Sub shall continue as the surviving corporation and shall remain a wholly owned subsidiary of the Purchaser. The Merger Sub, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the Surviving Corporation .
2.2 Effect of the Merger . At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of the PBCL and the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Corporation and the Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Corporation and the Merger Sub shall become debts, liabilities and duties of the Surviving Corporation.
2.3 Articles of Incorporation and Bylaws . Unless otherwise agreed by the parties before the Effective Time, at the Effective Time:
2.4 Directors and Officers .
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2.5 Merger Consideration; Effect on Capital Stock .
3.1 Closing Date; Effective Time .
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3.2 Purchasers Deliveries . At the Closing, the Purchaser shall execute and deliver to the Shareholders, or cause to be executed and delivered to the Shareholders, the following:
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3.3 Shareholders and the Corporations Deliveries . At the Closing, the Shareholders and the Corporation (as appropriate) shall execute and/or deliver to the Purchaser the following:
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4.1 Determination of Closing Net Assets.
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4.2 Excluded Assets; Cash . Expressly excluded from the Closing Net Assets shall be those items listed on Schedule 4.2 (collectively, the Excluded Assets ). The Parties acknowledge and agree that prior to the Closing, the Shareholders shall cause the Corporation to assign and transfer the Excluded Assets to the Shareholders or to one or more Affiliates of the Shareholders by way of a dividend or otherwise. The Parties further acknowledge and agree that prior to the Closing the Shareholders may cause the Corporation to declare and pay one or more cash dividends to the Shareholders prior to the Closing Date. Any cash that is not the subject of such cash dividends shall be included in the Closing Balance Sheet and the Closing Net Assets.
4.3 Regular Escrow and Special Escrow . In order to provide additional assurance to the Purchaser, the Purchaser and the Shareholders Representative shall, at the Closing, execute each of the Special Escrow Agreement and the Regular Escrow Agreement, which shall, in addition to this Agreement, and with respect to the Special Escrow, the Special Escrow Letter, govern the Regular Escrow and the Special Escrow.
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In order to induce the Purchaser to enter into this Agreement and to consummate the transactions contemplated hereunder, the Shareholders represent and warrant the following statements are true and correct as of the Contract Date:
5.1 Organization, Power and Authority . The Corporation is a corporation duly organized and validly subsisting under the laws of the Commonwealth of Pennsylvania. Each Trust is a trust validly existing under the laws of the Commonwealth of Pennsylvania. The Corporation has full corporate power and authority to own or lease its Assets and to carry on the Schoeneman Beauty Supply Business as now conducted by it, and to enter into the Transaction Documents and perform its obligations thereunder. Each Trust has full power and authority to own or lease its Assets (including its Shares), the trustees or trustee of each Trust have the power to execute and deliver on behalf of the applicable Trust each of the Transaction Documents to which such Trust is a party, and each such Trust has the power to perform its obligations thereunder. The Corporation is qualified to do business as a foreign corporation in New Jersey, West Virginia and Delaware. The Corporation is qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which it owns or leases property or conducts any business so as to require such qualification, except where the failure to so qualify does not result in a Material Adverse Effect. Except as set forth on Schedule 5.1 , the Corporation does not have any subsidiaries, direct or indirect, and does not have an equity position (or the option or right to acquire an equity position) in any other entity, except for marketable securities. Exhibits G and H attached hereto contain true and complete copies of the current Articles of Incorporation and By-laws and all amendments thereto of the Corporation.
5.2 No Conflict and Binding Obligations . Except as set forth on Schedule 5.2 , the execution and delivery of this Agreement and the other Transaction Documents required to be executed by any Shareholder and/or the Corporation, and the performance by each Shareholder and the Corporation of his, her or its respective obligations hereunder, do not: (i) violate or conflict with any provisions of the Organizational Documents of the Corporation or any Trust, or any Law which is applicable to, binding upon or enforceable against the Corporation, or its Assets, or the Shareholder; (ii) constitute or result in a breach of any of the terms, provisions, conditions of, or constitute a default under, or an event which, with notice or lapse of time or both would constitute a default under any material Contract to which the Corporation or any Shareholder is a party, or by which any of them or the Corporations Assets may be bound; (iii) result in the creation of any Lien upon any of the Assets of the Corporation; (iv) cause the acceleration of the maturity of any Indebtedness of the Corporation or cause any third party rights under, or the performance required by the Corporation under, any material Contract of the Corporation to accelerate; or (v) require the consent or approval of any Governmental Authority or other Person, except for the consents with respect to the Required Consent Leases and Supplier Contracts. The Transaction Documents and the consummation of the transactions
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contemplated herein have been duly executed and delivered by each of the Shareholders and/or the Corporation that are a party thereto and are legal, valid and binding obligations of each of the Shareholders and the Corporation, enforceable in accordance with their respective terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or equity). No fair price, moratorium, control share acquisition, or similar anti-takeover statute or regulation enacted under any applicable Law is applicable to the Merger or the transactions contemplated by this Agreement. No Shareholder has any dissenters right of appraisal in connection with the consummation of the transactions contemplated hereby, including under the PBCL, the Organizational Documents of the Corporation, or other applicable Law.
5.3 Compliance With Laws; Environmental, Health and Safety Matters .
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5.4 Financial Statements.
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5.5 Absence Of Certain Changes . Since August 31, 2009, except as set forth on Schedule 5.5 , the Schoeneman Beauty Supply Business has been conducted in the ordinary course consistent with past practice and there has not been:
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5.6 Books Of Account . The Corporations books of account and other records fairly present and reflect in all material respects (subject to normal month end and year end adjustments) all of the transactions entered into by the Corporation and as to which the Corporation is a party or may be bound or otherwise affected.
5.7 Tax Matters . Except as set forth on Schedule 5.7 :
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5.8 No Material Adverse Effect . Since August 31, 2009, there has not been any Material Adverse Effect.
5.9 Title to Assets . Except as disclosed on Schedule 5.9 , Corporation owns and has good title to, and is the lawful owner of, all Assets used in connection with the Schoeneman Beauty Supply Business and all of the Assets reflected in the respective Financial Statements (other than assets leased under any lease listed on Schedules 5.10.1(a) or (b) and assets disposed of in the ordinary course of business consistent with customary past practices and not disposed of in violation of any provision hereof), free and clear of all Liens, except Permitted Liens.
5.10 Leases.
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5.11 Contracts.
5.12 Purchase Orders . Set forth on Schedule 5.12 is a list of all unfilled purchase orders of the Corporation, as of a specified date within (ten) 10 days prior to the Contract Date (the Corporation PO List ). The Corporation has delivered true and correct copies of all open
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purchase orders listed on the Corporation PO List to the Purchaser (including all amendments and modifications thereto).
5.13 Customer Orders . Set forth on Schedule 5.13 is a list of all unfilled customer orders of the Corporation, as of a specified date within (10 days) prior to the Contract Date (the Customer PO List ). The Corporation has delivered true and correct copies of all customer orders listed on the Customer PO List to the Purchaser (including all amendments and modifications thereto).
5.14 Inventory . Subject to the reserves therefor on the Closing Balance Sheet, the Inventory is usable and saleable in the ordinary course of business consistent with customary past practices by the Schoeneman Beauty Supply Business and exists in quantities which do not materially exceed levels which are reasonable in the present circumstances of the Schoeneman Beauty Supply Business; and, subject to adjustment as described on Schedule 4.1.1 , is in good, clean condition, in currently available packaging, not damaged or obsolete and carried on the Unaudited Financial Statements in accordance with Schedule 4.1.1 .
5.15 Permits . Set forth on Schedule 5.15 is a true and correct list of all Permits possessed or used by the Corporation. The Corporation has delivered to the Purchaser true and complete copies of all Permits possessed or used by the Corporation (including all amendments and modifications thereto). The Permits, which are listed on Schedule 5.15 , are all that are necessary to conduct the Schoeneman Beauty Supply Business as presently conducted, and in each case where applicable, to own the Assets owned by the Corporation and lease the Assets leased by the Corporation. The Corporation is in compliance in all material respects with all such Permits, and all such Permits are in full force and effect.
5.16 Tangible Assets . Set forth on Schedule 5.16 are all of the tangible Assets (other than Inventory) owned by the Corporation as of the Contract Date having an original acquisition cost of $1,000 or more.
5.17 Legal Proceedings . Schedule 5.17 sets forth all Legal Proceedings to which the Corporation has been a party during the last three (3) years, to which the Corporation is currently a party or which, for equivalent periods, involves any of the Assets used by the Schoeneman Beauty Supply Business. Except as set forth on Schedule 5.17 , there are no Legal Proceedings pending or threatened in writing or, to the Corporations Knowledge, threatened orally, against the Corporation. The Corporation is not in default with respect to any order, judgment, injunction, decree or consent decree by any Governmental Authority. No such order, judgment, injunction decree or consent decree is now in effect which pertains to the Corporation or any aspect of the Schoeneman Beauty Supply Business or any of the Assets used therein. The Corporation has delivered to the Purchaser true and complete copies of all documentation prepared or generated in connection with all of the Legal Proceedings disclosable in this Section 5.17 , including, without limitation, complaints, orders, and briefs.
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5.18 Intellectual Property.
5.19 Employees . Set forth on Schedule 5.19 is a list of all hourly and salaried employees of the Corporation as of the Contract Date (the Employees ), setting forth as of the Contract Date, for each, his or her title and/or current job description, compensation, a description (individually or collectively) of all fringe benefits of any kind or nature, including all bonus and expense arrangements. All compensation and fringe benefits of any kind or nature which pre-date the Closing Date have been paid, or to the extent not paid, will be fully accrued on the Closing Balance Sheet. Except as set forth on Schedule 5.19 , the employment of each
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Employee and the relationship with each independent contractor of the Corporation is terminable at will by the Corporation without any penalty, severance or other Liability incurred by the Corporation.
5.20 Labor Contracts and Controversies . The Corporation is not a party to any collective bargaining agreement with any labor union or any local or subdivision thereof. To the Corporations Knowledge, there is no current union organizing activity among any of the employees of the Corporation nor any union representation petition pending or threatened before the National Labor Relations Board or any similar agency in any state.
5.21 Retirement and Benefit Plans; ERISA.
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5.22 Transactions With Related Parties . Except as set forth on Schedule 5.22 , no Shareholder, nor any spouse, child, parent, sibling or any other Person Affiliated with any Shareholder, as the case may be: (i) owns any equity interest, directly or indirectly in, or is an officer or director of, any Person which: (a) is a competitor of the Corporation; (b) is a customer or supplier of the Corporation; or (c) has any contractual or business relationship whatsoever
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with the Corporation, except for those relationships between the Corporation and the Shareholders related to the ownership of the Corporation, the management of the Corporation by the Shareholders and the employment by the Corporation of the Shareholders; provided that the foregoing does not apply to the ownership (collectively) by them of not more than two percent (2%) of the outstanding security (or any class thereof) of any corporation or partnership listed on a national securities exchange, the Nasdaq Stock Market or traded over-the-counter; or (ii) has or claims to have any direct or indirect interest in any Asset (other than an Excluded Asset) used or held for use by the Corporation.
5.23 Product Warranty . The Corporation has not extended any express warranties and there are no outstanding express warranties on any products sold by the Corporation except for those from the manufacturers.
5.24 No Broker . Except for Crowe Capital Markets LLC ( CCM ), this Agreement and the transactions contemplated herein have not and will not be brought about through the action of any broker or finder retained or employed by any of the Shareholders or the Corporation who would be entitled to a commission, finders fee or similar compensation. In the event any compensation is payable to such a broker or finder, including, without limitation, CCM, such compensation shall be paid by and be the sole responsibility of, the Shareholders.
5.25 Disclosure . No representation or warranty by any of the Shareholders to the Purchaser contained in this Agreement or any other Transaction Document contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein and therein not misleading in light of the circumstances under which they were made.
5.26 Insurance . Schedule 5.26 lists, and the Shareholders have made available to the Purchaser complete copies of, all insurance policies (including fidelity bonds and other similar instruments) relating to the Corporation, the Assets, the Schoeneman Beauty Supply Business or the employees, officers or directors of the Corporation. There is no claim by or with respect to the Corporation pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies or in respect of which such underwriters have reserved their rights. All premiums payable under such policies have been timely paid, and the Corporation has otherwise complied fully with the terms and conditions of such policies. Such policies (or other policies providing substantially similar insurance coverage) have been in effect continuously since at least January 1, 2004 and remain in full force and effect. To the Corporations Knowledge, there is no threatened termination of, premium increase with respect to, or alteration of coverage under, any of such policies.
5.27 Indebtedness . All Indebtedness of the Corporation outstanding as of August 31, 2009 is described in Schedule 5.27 . Schedule 5.27 sets out in respect of each such liability or obligation, its origination date, the other party or parties thereto, the outstanding principal amount, the amount of accrued interest and the maturity date. The Shareholders have delivered to the Purchaser true and complete copies of all instruments, notes, drafts, and any other document of any kind or description evidencing all of the Indebtedness of the Corporation (including all amendments and modifications thereto).
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5.28 Capitalization.
5.29 Accounts Receivable . All accounts, notes receivable and other receivables (other than receivables collected since the date of the Unaudited Financial Statement (August 31, 2009)) reflected on the Unaudited Financial Statement (August 31, 2009) are, and all accounts and notes receivable arising from or otherwise relating to the business of the Corporation as of the Closing Date will be, valid, genuine and fully collectible in the aggregate amount thereof, subject to normal and customary trade discounts, less any reserves for doubtful accounts recorded on the Financial Statements or the Closing Balance Sheet.
5.30 Bank Accounts . Schedule 5.30 sets forth the names and locations of each bank, brokerage firm or other financial institution at which the Corporation has an account (giving account numbers) or safe deposit box and the names of all persons authorized to draw thereon or have access thereto, and the names of all persons, if any, holding powers of attorney or comparable delegation of authority from the Corporation.
5.31 Claims Against Officers and Directors . There are no pending or, to the Corporations Knowledge, threatened, claims against any director, officer, employee or agent of the Corporation which could give rise to any claim (whether through indemnification, contribution or otherwise) against the Corporation.
5.32 Recorded Sales Consistent With Manufacturers Directions . All sales data provided in the Financial Statements of the Corporation are based upon sales which, to the Corporations Knowledge at the time such sales were made, were made strictly in accordance
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with manufacturers rules and regulations for sales of merchandise established by the respective manufacturers, and does not, to the Corporations Knowledge, contain any recorded sales resulting from Diversion.
5.33 Intercompany Accounts; Transactions With Affiliates.
In order to induce the Shareholders to enter into this Agreement and to consummate the transactions contemplated hereunder, the Purchaser represents and warrants to the Shareholders that the following statements are true and correct as of the Contract Date:
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6.1 Organization, Power and Authority . The Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. The Merger Sub is a corporation duly organized and in good standing under the laws of the State of Delaware. Each of the Purchaser and the Merger Sub has full power and authority to own or lease its Assets and to carry on its business as now conducted by it, and to enter into the Transaction Documents and perform its obligations thereunder.
6.2 Authority and Binding Obligations . The execution and delivery of this Agreement and the other Transaction Documents required to be executed by the Purchaser and/or the Merger Sub, and the performance by the Purchaser and the Merger Sub of its respective obligations hereunder, do not: (i) violate or conflict with any provisions of the Organizational Documents of the Purchaser or the Merger Sub, or of any Law which is applicable to, binding upon or enforceable against the Purchaser or its Assets or the Merger Sub or its Assets; or (ii) constitute or result in any breach of any of the terms, provisions, conditions of, or constitute a default under, or an event which, with notice or lapse of time or both, would constitute a default under any material Contract to which the Purchaser or the Merger Sub is a party, or by which it or its Assets may be bound; or (iii) require the consent or approval of any Governmental Authority or other Person. The Transaction Documents and the consummation of the transactions contemplated herein have been duly executed and delivered by the Purchaser and the Merger Sub, as applicable, and are legal, valid and binding obligations of the Purchaser and the Merger Sub, as applicable, enforceable in accordance with their respective terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar federal or state laws affecting the rights of creditors and the effect or availability of rules of law governing specific performance, injunctive relief or other equitable remedies (regardless of whether any such remedy is considered in a proceeding at law or equity).
6.3 Investment Representation . The Purchaser is acquiring the Shares solely for the purpose of this investment and not with a view to, or for sale in connection with, any distribution thereof in violation of the Securities Act of 1933, as amended (the Securities Act ). The Purchaser acknowledges that the Shares are not registered under the Securities Act or any applicable state securities law or other applicable laws, and that the Shares may not be transferred or sold except pursuant to the registration provisions of such Securities Act or pursuant to an applicable exemption therefrom and pursuant to state securities laws and regulations as applicable. The Purchaser is an accredited investor within the meaning of Rule 501(a) promulgated under the Securities Act.
6.4 Litigation . There is no Legal Proceeding pending or, to the Purchasers Knowledge, threatened before any court, arbitration tribunal, or judicial, governmental or administrative agency, against the Purchaser or any of its Affiliates (including, without limitation, the Merger Sub) which would materially restrict or limit the ability of the Purchaser or the Merger Sub to perform its obligations hereunder or which seeks to prevent the consummation of the transactions contemplated herein.
6.5 Consents and Governmental Approvals . The execution, delivery and performance of this Agreement by the Purchaser or the Merger Sub does not and will not require any consent,
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approval, authorization or other action by, or filing with or notification to, any Governmental Authority or any other Person.
6.6 No Broker . This Agreement and the transactions contemplated herein have not and will not be brought about through the action of any broker or finder retained or employed by the Purchaser or the Merger Sub who is entitled to a commission, finders fee or similar compensation.
7.1 Landlords Consents for Store Leases.
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(a) The reasonable costs of relocating the store subject to the Terminated Lease to a new location with a radius of six (6) miles from the location of the Required Consent Lease in question but not in excess of $54,000;
(b) Any amounts which the lessor of the Terminated Lease collects from the Purchaser, the Corporation or any successor on account of the occurrence of a change of control and/or assignment without the consent of the lessor;
(c) The loss of Operating Profits (as hereinafter defined) applicable to the store that is subject to the Terminated Lease which shall mean and be calculated by the following formula: (i) the number of days (which in no event may be greater than one hundred and eighty (180)) between (A) the date the Corporation or its successor closes the store subject to the Terminated Lease and (B) the date upon which a new store is opened which replaces the store subject to the Terminated Lease multiplied by (ii) the dollar amount of the Operating Profits Per Day (as hereinafter defined) of such store.
(d) The Rent Differential times the number of square feet in the Terminated Lease times a fraction, the numerator of which is the number of days in the period from the date of termination of the Terminated Lease to the end of the current lease term of the Terminated Lease, and the denominator of which is 365. For purposes hereof, the term Rent Differential shall mean the excess, if any, of (A) the effective annual rental per square feet for the new space (taking into consideration any free rent periods for the new space) over (B) the rental per square foot for the balance of the current term of the Terminated Lease.
Notwithstanding the foregoing, the Shareholders shall not have liability to the Purchaser with respect to any Terminated Leases in the following locations, since the Purchaser currently has an existing store within the same geographic locations: (i) Monroeville, Pennsylvania, (ii) Greensburg, Pennsylvania, (iii) Johnstown, Pennsylvania, (iv) Erie, Pennsylvania, (v) Scranton, Pennsylvania, (vi) Butler, Pennsylvania, (vii) Pittsburgh, Pennsylvania (McKnight Road), (viii) West Mifflin, Pennsylvania, (ix) Wheeling, West Virginia and (x) Barboursville, West Virginia.
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7.2 Supplier Contracts . The Purchaser hereby acknowledges that the Supplier Contracts may require consent or notice to the counterparties thereto prior to the consummation of the transactions contemplated hereby. The Parties acknowledge and agree that the receipt of one or more consents applicable to the Supplier Contracts was not a condition to the Closing and that the Shareholders have no obligation after the Closing to obtain any consents applicable to Supplier Contracts.
7.3 Restrictive Covenant . As a material inducement to the Purchaser to enter into and perform its obligations under this Agreement, each of the Shareholders covenant and agree as follows:
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7.4 Store Cash . Any other provision of the Transaction Documents notwithstanding, each Store shall be left with no less that $200 in cash on hand upon Closing.
7.5 Post-Closing Employee Matters.
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7.6 Post-Closing Treatment of Individual Shareholders . The individual Shareholders will continue as employees of the Corporation for at least one (1) month after the Closing on the same terms and conditions and with the same fringe benefits, including the same medical insurance coverage, that they currently enjoy. Beginning November 1, 2009, the Consulting Agreements for Dale and Kay Schoeneman shall become effective. Irrespective of whether individual Shareholders continue as employees and/or consultants of the Corporation, from and after November 1, 2009, the Purchaser shall pay to the individual Shareholders the cost of continuing medical insurance benefits until October 31, 2010, which are identical in amounts and coverage, and with identical deductibles and co-pays, as each of the individual Shareholders currently enjoys under the existing Blue Cross insurance policy (Policy No. 005041420000) that the Corporation has in effect prior to the Closing, in an amount up to $70,000 in the aggregate for all Shareholders (the Medical Insurance Cap ). Each of the individual Shareholders will be entitled to obtain individual insurance policies to begin coverage effective November 1, 2009, and if they do so it will be the cost of such individual policies for which the individual
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Shareholders will be entitled to reimbursement from the Purchaser, subject to the Medical Insurance Cap.
7.7 Tax Deposit . The Parties acknowledge and agree that as of the Contract Date, the Corporation has on deposit with the IRS an amount equal to $591,987 as a required payment within the meaning of Section 7519 of the Code (the Tax Deposit ). The Purchaser shall promptly cause the Surviving Corporation to make a claim for refund of the Tax Deposit as provided by, and in accordance with the rules regarding the timing of such request for refund set forth in, Treasury Regulation Section 1.7519-2T(a)(6). Upon receipt of the Tax Deposit (in whole or in part) by the Surviving Corporation, the Purchaser shall cause the Surviving Corporation to promptly remit such funds to the Shareholders Representative.
7.8 M&T Indebtedness . In the event that, on the Closing Date, Indebtedness owed by the Corporation to M&T Bank (the M&T Indebtedness ) has not been repaid by the Corporation and the Shareholders have elected not to advance funds to the Corporation in order for the M&T Indebtedness to be repaid in full, then the Purchaser shall allocate funds from the Closing Payment to the repayment of the M&T Indebtedness in full (allocated among the Shareholders on an equal per share basis). In such case, for purposes of the Closing Balance Sheet, the M&T Indebtedness shall be deemed paid in full. In the event that M&T Indebtedness remains outstanding on the Closing Date, the Shareholders shall cause the Corporation to deliver to the Purchaser one or more payoff letters (collectively, the Payoff Letters ) executed by one or more authorized representatives of M&T Bank setting forth, in the aggregate, all amounts necessary to be paid in order to fully pay off all of the M&T Indebtedness on the Closing Date and providing that, upon such payment, if it has not already been made, the M&T Indebtedness will be extinguished and all Liens relating thereto will be released.
8.1 Indemnification by the Shareholder Indemnifying Parties . Notwithstanding any investigation by or knowledge of the Purchaser, each of the Shareholder Indemnifying Parties hereby, jointly and severally, agree to defend, indemnify and hold the Purchaser and its Affiliates (including the Surviving Corporation) harmless from and against any and all losses, Liabilities, damages, obligations, judgments, damage, actions, demands, suits, proceedings, claims, penalties, interest, costs and expenses (including reasonable attorneys fees and other expenses relating thereto) ( Losses ), arising out of or in connection with any of the following (hereafter collectively, Claims ): (i) any breach of any representation or warranty or any misrepresentation made by any Shareholder in connection with this Agreement or in any other Transaction Document; provided , however , that each Shareholder shall only be severally responsible with respect to such Shareholders Consulting Agreement; (ii) any breach of covenant, agreement or undertaking of any Shareholder in this Agreement or in any other Transaction Document; provided , however , that each Shareholder shall only be severally responsible with respect to such Shareholders Consulting Agreement; (iii) any Legal Proceeding to the extent that such Legal Proceeding relates to matters occurring prior to the Closing and proves not to be fully reserved on the Closing Balance Sheet; (iv) any and all Environmental Matters; provided , however , for the avoidance of doubt, the Shareholder Indemnifying Parties
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shall not have any defense, indemnification obligation or hold harmless obligation under this Section 8.1 with respect to Hazardous Substances contained in Inventory owned and/or sold by the Corporation in the ordinary course of business and consistent with past practice of the Corporation at the time such Inventory was manufactured; (v) any Losses of any kind or nature arising out of or in connection with the operation of the Corporation or the Schoeneman Beauty Supply Business prior to Closing to the extent not reserved on the Closing Balance Sheet (and therefore not included in the calculation of Closing Net Assets); (vi) all Taxes (or the non-payment thereof) of the Corporation for any Pre-Closing Tax Period, except to the extent accrued on the Closing Balance Sheet; (vii) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Corporation (or any predecessor of any of the foregoing) is or was a member on or prior to the Closing Date, including pursuant to Treasury Regulation §1.1502-6 or any analogous or similar Law; and (viii) any and all Taxes of any Person (other than the Corporation) imposed on the Corporation as a transferee or successor, by contract or pursuant to any Law, which Taxes relate to an event or transaction occurring before the Closing. For the avoidance of doubt, the Shareholder Indemnifying Parties shall not be responsible for any acts or omissions of the Surviving Corporation after the Closing Date.
8.2 No Set-Off . The Purchaser shall not have any right to set-off any Losses against any payments to be made by it to any Shareholder pursuant to any Transaction Document or otherwise.
8.3 Indemnification by the Purchaser . The Purchaser hereby agrees to defend, indemnify and hold harmless any Shareholder from and against any and all Losses, arising out of or in connection with any (i) breach of representation or warranty or any misrepresentation made by the Purchaser in this Agreement or in any other Transaction Document; or (ii) breach of covenant, agreement or undertaking of the Purchaser in this Agreement or in any other Transaction Document.
8.4 Survival . Subject to Section 8.5 , all of the respective representations, warranties, agreements and covenants contained in this Agreement or in any other document or instrument delivered by or on behalf of any Party hereunder or pursuant hereto shall survive the Closing Date.
8.5 Limitation on Indemnification and Survival of Representations and Warranties.
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8.6 Method of Asserting Claims, etc . In the event that any claim or demand for which an Indemnifying Party would be liable to any Indemnified Party hereunder is asserted against or sought to be collected from any Indemnified Party by a third party, such Indemnified Party shall promptly, but in no event more than thirty (30) days following such Indemnified Partys receipt of such claim or demand, which, for purposes of this Section 8.6 , shall mean the actual receipt by any of the Shareholders or, with respect to the Purchaser, the Persons listed in the definition of Purchasers Knowledge or other Persons holding such positions after the Closing and the General Counsel of the Purchaser (or its parent company), notify the Indemnifying Party of such claim or demand and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such claim or demand) (the Claim Notice ); provided , however , that the failure to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder, except to the extent
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such failure shall have adversely prejudiced the Indemnifying Party. The Indemnifying Party shall have forty-five (45) days from the delivery of the Claim Notice in accordance with Article 10 (the Notice Period ) to notify the Indemnified Party whether or not it desires to defend the Indemnified Party against such claim or demand. If the Indemnifying Party elects to assume the defense of such claim or demand, it will be conclusively established for purposes of this Agreement that such claim or demand is within the scope of and subject to indemnification hereunder. If no response is received within the forty-five (45) day period, the Indemnified Party shall be entitled to assume the defense of the third-party claim or demand. All costs and expenses incurred by the Indemnifying Party in defending such claim or demand shall be a liability of, and shall be paid by, the Indemnifying Party, subject to the limitations set forth in this Article 8 . In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such claim or demand, except as hereinafter provided, the Indemnifying Party shall have the right to defend the Indemnified Party by appropriate proceedings (using counsel reasonably acceptable to the Indemnified Party); provided , however , that, notwithstanding any election by the Indemnifying Party, an Indemnified Party may elect to control any defense or settlement if the claim or demand involves an issue or matter which could reasonably have a material adverse effect on the business or assets of the Indemnified Party. If any Indemnified Party desires to participate in, but not control, any such defense or settlement by the Indemnified Party, it may do so at its sole cost and expense. The Indemnified Party shall not settle a claim or demand without the consent of the Indemnifying Party, which shall not be unreasonably withheld. The Indemnifying Party shall not settle a claim or demand without the consent of the Indemnified Party (which shall not be unreasonably withheld), unless such settlement is solely for monetary damages to be paid solely by the Indemnifying Party. If the Indemnifying Party elects not to defend the Indemnified Party against a claim or demand for which the Indemnifying Party has an indemnification obligation hereunder, whether by not giving the Indemnified Party timely notice as provided above or otherwise, and in the event the Indemnifying Party is ultimately determined to be obligated to indemnify, defend or hold the Indemnified Party harmless with respect to the applicable third-party claim, then the amount of any such claim or demand, or, if the same be contested by the Indemnified Party, then that portion thereof as to which such defense of the claim by the Indemnified Party is unsuccessful (and the reasonable costs and expenses pertaining to such defense) shall be the liability of the Indemnifying Party hereunder, subject to the limitations set forth in this Article 8 . To the extent the Indemnifying Party shall control or participate in the defense or settlement of any third party claim or demand, the Indemnified Party will give the Indemnifying Party and its counsel reasonable access to, during normal business hours, the relevant business records and other documents, and shall permit them to consult as reasonably necessary with the employees and counsel of the Indemnified Party. The Party assuming the defense of a Claim hereunder shall competently prosecute and defend all such claims. Any notice of a claim by reason of any of the representations, warranties, agreements or covenants contained in this Agreement shall state as specifically as reasonably practicable the representation, warranty, agreement or covenant with respect to which the claim is made, a summary of the facts giving rise to an alleged basis for the claim, and the estimated amount of the liability asserted against the Indemnifying Party by reason of the claim (which estimate shall not be conclusive of the final amount of such claim or demand). Each Party reserves the right
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either to bring an action in the appropriate court of competent jurisdiction to dispute an indemnity obligation under Section 8.1 or to enforce the indemnity obligation, as appropriate.
8.7 Losses Net of Insurance, etc. The amount of any Loss for which indemnification is provided under Section 8.1 shall be net of: (i) any amounts actually received by the Indemnified Party pursuant to any indemnification by or indemnification agreement with any third party; (ii) any amounts actually received under any insurance or other sources of reimbursement as an offset against such Loss (each source named in clauses (i) and (ii), a Collateral Source ); and (iii) accruals or reserves relevant to the claim or demand included on the Closing Balance Sheet. In addition, the Indemnifying Party shall have no liability in respect of any such Losses to the extent they arise or are incurred as a result of the passing of, or a change in, any applicable Law. The Parties shall take and shall cause their Affiliates to take all reasonable steps to mitigate any Loss upon becoming aware of any event that would reasonably be expected to, or does, give rise thereto. If, after the Indemnifying Party has paid the Indemnified Party any amount pursuant to Article 8 , it is determined that all or portion of such payment should not have been made as a result of the actual payment by one or more Collateral Sources and/or the applicability of one or more of the limitations set forth in this Section 8.7 , then the Indemnified Party shall repay to the Indemnifying Party, promptly after such determination, any amount that the Indemnifying Party would not have had to pay pursuant to this Article 8 had such determination been made at the time of such payment.
8.8 Workers Compensation Claim . The Surviving Corporation shall keep the Shareholders Representative reasonably advised concerning the status of any workers compensation claims for which the Shareholders Indemnifying Parties may have an indemnification obligation under Section 8.1 .
8.9 Sole Remedy . Except in the case of actual fraud or intentional misrepresentation, the Parties acknowledge and agree that the remedies provided for in this Agreement shall be the parties sole and exclusive monetary remedy with respect to the subject matter of this Agreement. For the avoidance of doubt, nothing in this Article 8 limits any Indemnified Partys ability to obtain injunctive or other equitable relief.
8.10 Treatment of Indemnification Payments . Any payments pursuant to this Article 8 shall be treated as an adjustment to the Merger Consideration.
8.11 Materiality Qualifications . For purposes of determining the right of an Indemnified Party to be defended, indemnified or held harmless hereunder with respect to a breach of any representation or warranty pursuant to Section 8.1(i) (including for purposes of determining whether the Threshold Amount has been exceeded), each such representation and warranty shall be read without regard and without giving effect to any materiality qualification or Material Adverse Effect qualification contained in such representation and warranty.
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Neither this Agreement nor the rights or obligations contained herein shall be assignable by any Party except with the written consent of all the Parties. Notwithstanding the preceding sentence, the Purchaser may assign its rights under this Agreement to any successor in interest to its business, or to any Affiliate, but such assignment shall not relieve the Purchaser of its obligations under this Agreement. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, assigns, heirs, executors and representatives, subject to the foregoing provisions of this Article 9 .
All notices, requests, demands and other communications hereunder shall be in writing, and shall be deemed to have been given when delivered in person or by first class, registered or certified mail, return receipt requested, postage and registration or certification fees prepaid, or delivered by reliable overnight delivery service, providing a receipt evidencing delivery, or delivered by facsimile transmission, with a copy also delivered by any of the foregoing means:
If to Purchaser and/or the Merger Sub, to:
Beauty Systems Group LLC
3001 Colorado Boulevard
Denton, Texas 76210
Attention: President
Facsimile: (940) 297-4990
with a copy to: Sally Beauty Holdings, Inc.
3001 Colorado Boulevard
Denton, Texas 76210
Attention: General Counsel
Facsimile: (940) 297-4990
If to Shareholders Representative, the Shareholders or any Shareholder:
Mr. F. Dale Schoeneman
Shareholders Representative
390 Erlane Road
P.O. Box 378
Orwigsburg, PA 17961
Facsimile: (570) 366-5129
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with a copy to:
Richard J. Braemer
Ballard Spahr LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
Facsimile: (215) 864-9044
or at such other address as hereafter shall be furnished by a notice sent in like manner by such addresses to the others.
11.1 Entire Agreement . All prior negotiations and agreements among the Parties are superseded by this Agreement and the other Transaction Documents, and there are no representations, warranties, understandings or agreements other than those expressly set forth herein or therein, in the documents executed and delivered in connection herewith or therewith, except as modified in writing concurrently herewith or subsequent hereto.
11.2 Waiver . Failure or delay on the part of any of the Parties to exercise any right, power or privilege hereunder, or under any instrument executed pursuant hereto, shall not operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or of any other right power or privilege. All waivers hereunder must be in writing.
11.3 Governing Law . This Agreement and the agreements attached as Exhibits hereto shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to its conflict of law provisions.
11.4 Public Announcement . Except as may otherwise be required by Law or the Rules of the New York Stock Exchange, no announcement of this transaction shall be made to the general public until at or after the Closing. The Parties will consult and cooperate with each other to the extent reasonably practicable as to the timing and content of announcements of this transaction to the general public, if any, and to employees, customers and suppliers of the Corporation.
11.5 Expenses . Each of the Parties shall bear its own expenses (including, without limitations, fees and expenses of its attorneys and accountants) in connection with this Agreement or the consummation of the transactions contemplated herein, whether or not the Closing takes place. Expenses of the Corporation and/or the Shareholders related to this transaction chargeable to Corporation shall be reflected in the Closing Balance Sheet.
11.6 Further Assurances . Following the Closing Date, upon the request of the Purchaser and without further consideration, a Shareholder shall execute, or cause to be
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executed, and will deliver to the Purchaser further documents of transfer, conveyance, assignment and consent, and take such other action as may be reasonably necessary or advisable to effectively carry out the other terms and provisions of this Agreement.
11.7 Counterparts . This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
11.8 Facsimile Copies . Facsimile transmissions of signed documents shall be regarded and accepted as if they bore original signatures. Promptly after such Facsimile transmission, the original document bearing the original signatures shall be provided to the other Party.
11.9 Miscellaneous . Gender and number references shall be deemed modified to fit the context. The words hereof, herein, and hereunder and words of similar import, when used in this Agreement, shall, unless otherwise qualified, refer to this Agreement as a whole and not to any particular provision of this Agreement. Whenever the words include, includes or including are used in this Agreement, they shall be deemed to be followed by the words without limitation, whether or not they are in fact followed by those words or words of like import. References to specific Articles and Sections are to the Articles and Sections of this Agreement, unless specifically stated otherwise. All references herein to a particular Schedule shall mean such schedule as it is included in the Disclosure Schedules attached hereto. All references herein to a particular Exhibit shall mean such exhibit attached hereto. The article and section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of the Agreement. All of the Parties have participated substantially in the negotiation and drafting of this Agreement and agree that no ambiguity herein shall be construed against any Party. The Exhibits and Schedules to this Agreement are hereby made a part hereof and shall be construed with and as an integral part of this Agreement. Every provision of this Agreement is intended to be severable, and if any term or provision is determined to be illegal or invalid for any reason whatsoever, such legality or invalidity shall not affect the legality or validity of the remainder of this Agreement. All references to currency or dollar amounts in this Agreement shall be to lawful currency of the United States of America.
11.10 Resolution of Certain Disputes . If the amount of the Closing Net Assets pursuant to Section 4.1 cannot be resolved in accordance with Section 4.1 or if the Allocation Schedule pursuant to Section 12.1 cannot be resolved in accordance with Section 12.1 , the matter shall be submitted to an independent Big Four accounting firm (the Accounting Firm ) for its review and resolution. The decision of the Accounting Firm shall be binding on the Parties and may be specifically enforced by legal proceedings. The Accounting Firm shall be selected jointly by the Shareholders Representative and the Purchaser, or if such Parties are unable to agree, by lot; provided , however , that under no circumstances shall an accounting firm act as the Accounting Firm that has performed any services for any of the Shareholders Representative, the Corporation, the Purchaser or their respective Affiliates within two (2) years immediately preceding the date of the proposed engagement of such accounting firm as the Accounting Firm. The Accounting Firm shall act as an arbitrator to determine, based solely on presentations by the
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Purchaser and the Shareholders Representative, and not by independent review, only those issues still in dispute with respect to the Closing Net Assets or the Allocation Schedule, as applicable. The decision of the Accounting Firm shall be final and binding. The fees and expenses of the Accounting Firm shall be borne equally by the Shareholders and the Purchaser. The Purchaser and the Shareholders Representative and their respective agents and representatives, shall have a reasonable opportunity to review the working papers relating to the preparation of the Closing Balance Sheet and shall have reasonable access to the Auditor.
11.11 Notification . For all purposes of notification by the Shareholders to the Purchaser, the Purchaser can conclusively rely on any notification given by the Shareholders Representative in accordance with Article 10 , as representing all of the Shareholders or any one of them individually and such notice shall be sufficient for purposes of this Agreement. For all purposes of notification by the Purchaser to the Shareholders, the Purchaser can conclusively rely that any notice given by the Purchaser to the Shareholders Representative in accordance with Article 10 , is sufficient notice to all the Shareholders and to each of the foregoing individually and such notice shall be sufficient for purposes of this Agreement.
11.12 Schedules . The inclusion of any matter in any section or paragraph of the Schedules required by Article 5 shall qualify only (a) the corresponding section or paragraph in Article 5 and (b) other sections or paragraphs in Article 5 only to the extent that it is reasonably apparent from a reading of the disclosure and such other sections or paragraphs that such disclosure also relates to such other section or paragraph. The inclusion of any item on any Schedule shall expressly not be deemed to constitute an admission by the Shareholders or the Purchaser or otherwise imply that any such matter is material, has a Material Adverse Effect or creates a measure for, or further defines the meaning of, materiality or Material Adverse Effect and their correlative terms for the purposes of this Agreement. Any capitalized and undefined term used in any section of the Schedules shall have the same meaning assigned to such term herein.
11.13 Shareholders Representative.
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12.1 Allocation Schedule; Allocation Methodology . Within one hundred twenty (120) days after the Closing Date, the Purchaser shall prepare (or cause to be prepared) and deliver to the Shareholders Representative a schedule (together with any revisions thereto, the Allocation Schedule ) allocating the Sellers Consideration (as defined in Treasury Regulation Section 1.1060-1(c)(1)), for the assets of the Corporation among such assets. The Allocation Schedule shall be prepared in accordance with the method of allocation set forth on Exhibit K (the Allocation Methodology ), which is in accordance with Section 1060 of the Code and the Treasury Regulations promulgated thereunder. It is expressly understood that no portion of the Sellers Consideration shall be allocated in the Allocation Schedule to the covenants set forth in Section 7.3 . The Allocation Schedule shall be deemed to be accepted by and shall be conclusive and binding on the Shareholders except to the extent, if any, that the Shareholders shall have delivered within thirty (30) days after the date on which the Allocation Schedule is delivered to the Shareholders, a written notice to the Purchaser stating each and every item to which the Shareholders dispute (it being understood that any amounts not disputed shall be final and binding). If a change proposed by the Shareholders is disputed by the Purchaser, then the Shareholders Representative and the Purchaser shall negotiate in good faith to resolve such dispute. If, after a period of twenty (20) days following the date on which the Shareholders give the Purchaser notice of any such proposed change, any such proposed change still remains disputed, the dispute shall be resolved in accordance with Section 11.10 . The Allocation Schedule shall be promptly revised by the Purchaser (and promptly delivered to the Shareholders) to take into account any purchase price adjustments, including, but not limited to, adjustments arising from the resolution of any disputes arising under Section 4.1 of this Agreement and payments made from the Regular Escrow and Special Escrow described in Section 4.3 , indemnification payments made pursuant to Article 8 and the Section 12.2
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Consideration, which adjustments shall be allocated among the assets of the Corporation in accordance with the method of allocation prescribed by the aforesaid provisions of the Code and Treasury Regulations; provided , however , that it is expressly understood that no purchase price adjustment shall be made with respect to the covenants described in Section 7.3 and that no revision shall be made of the portion of the Allocation Schedule relating to such covenants. Any revisions of the Allocation Schedule shall be subject to the dispute and arbitration provisions set forth in this Section 12.1 and Section 11.10 . The Purchaser and each Shareholder shall file (or cause to be filed) all federal, state and local Tax Returns (including, without limitation, all such Tax Returns of the Corporation) in accordance with the Allocation Schedule (and revisions thereto), and shall take no position contrary thereto or inconsistent therewith (including, without limitation, in any amended Tax Return or claim for refund, any examination or audit by any taxing authority, or any other proceeding), except to the extent otherwise required by Law.
12.2 Section 12.2 Consideration . The Purchaser shall indemnify each Shareholder for (i) any increase in the federal income Tax of such Shareholder for the taxable year in which the Closing Date occurs over the federal income Tax that would have been payable by such Shareholder for such taxable year if, instead of the structure of the transaction as a forward triangular cash merger in accordance with the terms and conditions of this Agreement, the Purchaser had purchased from the Shareholders all of the outstanding stock of the Corporation and there was no election made under Section 338(h)(10) of the Code with respect to such purchase, and (ii) any increase in any state or local income Tax of such Shareholder for the taxable year in which the Closing Date occurs over the state or local income Tax that would have been payable by such Shareholder for such taxable year if, instead of the structure of the transaction as a forward triangular cash merger in accordance with the terms and conditions of this Agreement, the Purchaser had purchased from the Shareholders all of the outstanding stock of the Corporation and there was no election made under Section 338(h)(10) of the Code with respect to such purchase. Any indemnification payment made pursuant to this Section 12.2 shall be treated as an adjustment to the Sellers Consideration; and the amount of any indemnification payable to any Shareholder shall be grossed up to reflect the income Tax ultimately payable by such Shareholder on account of such indemnification payment. All determinations of amounts payable under this Section 12.2 shall be performed by the Auditor, the cost of which shall be paid 50% by the Purchaser and 50% by the Shareholders, as soon as practicable after the finalization of the original and each revisions of the Allocation Schedule to the Shareholders in accordance with Section 12.1 . The determination by the Auditor shall be deemed to be accepted by and shall be conclusive and binding on the Purchaser except to the extent, if any, that the Purchaser shall have delivered within twenty (20) days after the date on which the determination is delivered to the Purchaser, a written notice to the Shareholders Representative stating each and every item to which the Purchaser disputes (it being understood that any amounts not disputed shall be final and binding). If such determination by the Auditor is disputed by the Purchaser, then the Shareholders Representative and the Purchaser shall negotiate in good faith to resolve such dispute. If, after a period of twenty (20) days following the date the Purchaser notifies the Shareholders Representative that the Purchaser disputes the Auditors determination, such dispute remains unresolved, the dispute shall be resolved in accordance with Section 11.10 . The Purchaser shall pay amounts due Shareholders under this Section 12.2 (the Section 12.2 Consideration) within ten (10) days of the finalization of the determination of the Section 12.2 Consideration as agreed by the Purchaser and the Shareholders Representative in
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accordance with the terms set forth in this Section 12.2 or pursuant to Section 11.10 , in each case, as applicable. If, pursuant to any revision to the Allocation Schedule, Shareholder has received an aggregate amount of Section 12.2 Consideration in excess of the required Section 12.2 Consideration, the Shareholders will pay on a per share basis (though such obligation will be on the basis of joint and several liability among the Shareholder Indemnifying Parties) such excess to the Purchaser within ten (10) days of the finalization of such amount in a manner consistent with the same terms governing the determination of the Section 12.2 Consideration. Notwithstanding anything herein to the contrary, the Section 12.2 Consideration paid to the Shareholders shall not exceed $500,000 in the aggregate.
12.3 Responsibility for Preparing and Filing Tax Returns.
12.4 Audits and Other Proceedings.
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12.5 Cooperation on Tax Matters . The Purchaser and the Shareholders shall cooperate fully, and the Purchaser shall cause the Corporation to cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns, and any audit, litigation or other Legal Proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Partys request) the provision of records and information which are reasonably relevant to any such audit, litigation or other Legal Proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Purchaser and the Shareholders agree: (i) to retain (or cause to be retained) all books and records with respect to Tax matters pertinent to the Corporation relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Purchaser or the Shareholders, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority; and (ii) to give the other Parties reasonable written notice prior to transferring, destroying or discarding any such books and records and, if any Party receiving such notice so requests, the Purchaser or the Shareholders, as the case may be, shall allow the requesting Party to take possession of such books and records. The Purchaser, Corporation and Shareholders further agree, upon request, to use their best efforts to obtain (or cause to be obtained) any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed on the Corporation or the Shareholders (including, but not limited to, with respect to the transactions contemplated hereby).
12.6 S Corporation Status . The Shareholders shall not revoke, and the Purchaser shall prohibit the Corporation from revoking, the Corporations election to be taxed as an S corporation within the meaning of Sections 1361 and 1362 of the Code (or any comparable state or local laws) for any period before the Closing Date.
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12.7 Transfer Taxes . Notwithstanding and provision in this Agreement to the contrary, all transfer, documentary, sales, use, stamp, recording, registration and other such similar Taxes, charges and fees (including any penalties and interest) incurred in connection with the consummation of the transactions contemplated by this Agreement (the Transfer Taxes ) shall be paid 50% by the Shareholders and 50% by the Purchaser when due and the Shareholders will file all necessary Transfer Tax Returns and other documentation with respect to all Transfer Taxes, and, if required by applicable law, Purchaser will, and will cause their Affiliates to, join in the execution of any such Transfer Tax Returns and other documentation. The Shareholders and the Purchaser shall cooperate (and the Purchaser shall cause the Corporation to cooperate) with each other in any mutually agreeable, reasonable and lawful arrangement designed to minimize any applicable Transfer Taxes.
[Signatures on the Following Page]
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IN WITNESS WHEREOF, the Parties have executed this Agreement on the day and year first above written.
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BEAUTY SYSTEMS GROUP LLC |
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SCHOENEMAN BEAUTY SUPPLY, INC. |
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2008 GRANTOR RETAINED
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/s/ F. Dale Schoeneman |
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2008 GRANTOR RETAINED
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Exhibit 10.28
ALBERTO-CULVER
COMPANY
EMPLOYEE STOCK OPTION PLAN OF 2003
(as amended through October 21, 2009)
1. Purpose of ACSOP
The Alberto-Culver Company Employee Stock Option Plan of 2003 (hereinafter called the ACSOP) is intended to encourage ownership of the Common Stock of Alberto-Culver Company (the Company) by eligible key employees of the Company and its subsidiaries and to provide incentives for them to make maximum efforts for the success of the business. Options granted under the ACSOP will be non-qualified options (not incentive options as defined in Section 422 of the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder (the Code)).
2. Eligibility
Key employees of the Company and its subsidiaries who perform services which contribute materially to the management, operation and development of the business (Optionees) will be eligible to receive options under the ACSOP.
3. Administration
The Compensation and Leadership Development Committee of the Board of Directors of the Company (the Committee) shall have full power and authority, subject to the express provisions of the ACSOP, to determine the purchase price of the stock covered by each option, the Optionees to whom and the time or times at which options shall be granted, the terms and conditions of the options, including the terms of payment thereof, and the number of shares of stock to be covered by each option. The Committee shall have full power to construe, administer and interpret the ACSOP, and full power to adopt such rules and regulations as the Committee may deem desirable to administer the ACSOP. No member of the Committee shall be liable for any action or determination made in good faith with respect to the ACSOP or any option thereunder. Determinations by the Committee under the ACSOP need not be uniform and may be made by it selectively among Optionees, whether or not such persons are similarly situated. The determination of the Committee as to any disputed question arising under the ACSOP, including questions of construction and interpretation, shall be final, conclusive and binding.
The Committee may, in its discretion, delegate to a committee of member(s) of the Committee its authority with respect to such matters under the ACSOP and options granted under the ACSOP as the Committee may specify.
The Committee shall be comprised solely of members each of whom shall be an outside director within the meaning of Section 162(m) of the Code, and a non-employee director within the meaning of Section 16 (Section 16) of the Securities Exchange Act of 1934 and the rules and regulations thereunder (Exchange Act), provided, however, that if any member of the Committee is not (i) an outside director within the meaning of Section 162(m) of the Code or (ii) a non-employee director within the meaning of Section 16, the Committee shall set up a subcommittee comprised solely of outside directors and non-employee directors for purposes of all matters arising under this ACSOP involving officers within the meaning of Rule 16a-1(f) under Section 16, and covered employees within the meaning of Section 162(m) of the Code for the plan year at issue.
4. Number of Shares of Stock to be Offered
The Committee may authorize from time to time the issuance pursuant to the ACSOP of shares not to exceed 9,000,000 of the Companys Common Stock in the aggregate, subject to adjustment under paragraph 10 hereof. Such shares of Common Stock which may be issued pursuant to options granted under the ACSOP may be authorized and unissued shares or issued and reacquired shares as the Committee from time to time may determine. If any option granted under the ACSOP shall terminate or be surrendered or expire unexercised in whole or in part, the shares of stock so released from such option may be made the subject of additional options granted under the ACSOP. In addition, any shares of Common Stock withheld to pay, in whole or in part, the amount required to be withheld under applicable tax laws in accordance with paragraph 7(d) hereof, may be made the subject of additional options granted under the ACSOP.
5. Option Price
The purchase price under each option granted pursuant to the ACSOP shall be determined by the Committee but shall not be less than the Fair Market Value (as defined below) of the Companys Common Stock on the date the option is granted. For purposes of the ACSOP, Fair Market Value shall mean the average of the high and low transaction prices of a share of Common Stock of the Company as reported in the New York Stock Exchange Composite Transactions on the date as of which such value is being determined or, if there shall be no reported transactions for such date, on the next preceding date for which transactions were reported.
6. Grant of Options
The Committee may not grant to any individual Optionee in any fiscal year an option or options with respect to more than 600,000 shares of Common Stock.
7. Term and Exercise of Options
(a) Each option granted shall provide that it is not exercisable after the expiration of ten (10) years from the date the option is granted, or such shorter period as the Committee determines, and each option shall be subject to the following limitations with respect to its exercise:
(i) Except as otherwise provided in paragraph 11(a) hereof, no option may be exercised until the day preceding the anniversary date of the grant of the option.
(ii) Except as otherwise provided in paragraph 11(a) hereof, on the day preceding the anniversary date of the grant of the option in each of the four calendar years immediately following the year of the grant of the option, the right to purchase twenty-five percent (25%) of the total number of shares of stock specified in the option shall accrue to the Optionee. Subject to paragraph 8 hereof, each such right to purchase such twenty-five percent (25%) may be exercised, in whole or in part, at any time after such right accrues and prior to the expiration of the term of the option.
(b) Notwithstanding the foregoing or paragraph 8 hereof, the Committee may in its discretion (i) specifically provide at the date of grant for another time or times of exerciseability; (ii) at any time prior to the expiration or termination of any option previously granted, accelerate the exercisability of any option subject to such terms and conditions as the Committee deems necessary or appropriate to effectuate the purpose of the ACSOP; or (iii) at any time prior to the expiration or termination of any option previously granted, extend the term of any option (including such options held by officers or
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directors) for such additional period as the Committee, in its discretion, shall determine; provided that effective January 1, 2005, the term of an option shall not be extended beyond the later of the fifteenth day of the third month following the date on which the option would otherwise have expired, or the last day of the calendar year in which the option would otherwise have expired (or such other date as may be permitted by final regulations issued under Section 409A of the Code). In no event, however, shall the aggregate option period with respect to any option, including the original term of the option and any extensions thereof, exceed ten years.
(c) An option may be exercised (subject to the receipt of payment) by giving written notice to the Company specifying the number of shares to be purchased. The full purchase price for such shares may be paid (i) in cash, (ii) by check, (iii) by such other method approved by the Committee and permitted by law, or (iv) by a combination of these methods of payment. Payment must be received by the Company before any exercise is consummated.
(d) At any time when an Optionee is required to pay to the Company an amount required to be withheld under applicable tax laws in connection with the exercise of an option (calculated by taking the minimum statutory withholding rates for federal, state and local tax purposes including payroll taxes, applicable to the income generated by the Optionee by such exercise), the Optionee may satisfy this obligation (i) in cash, (ii) by check, (iii) by delivery of previously owned shares of Common Stock, (iv) by making an election to have the Company withhold shares of Common Stock, or (v) by a combination of these methods of payment, in each case having a value equal to the amount required to be withheld. The Optionee must specify the method of satisfying this obligation on or before the date of exercise. The value of the shares to be withheld or delivered shall be based on the Fair Market Value of the Common Stock on the date of exercise.
8. Continuity of Employment
(a) Each option shall be subject to the following in addition to the restrictions set forth in paragraphs 6 and 7 hereof:
(i) Unless otherwise determined by the Committee at or after the date of grant, if an Optionee dies without having fully exercised his or her option, the executors or administrators of his or her estate or legatees or distributees shall have the right during the one (1) year period following his or her death (but not after the expiration of the term of such option) to exercise such option in whole or in part but only to the extent that the Optionee could have exercised it at the date of his or her death.
(ii) Unless otherwise determined by the Committee at or after the date of grant, if an Optionees termination of employment is due to disability, the Optionees option shall terminate one (1) year after his or her termination of employment (but not after the expiration of the term of such option) and may be exercised only to the extent that such Optionee could have exercised it at the date of his or her termination of employment. For purposes of the ACSOP, disability shall have the meaning provided in the Companys applicable long-term disability plan and such disability continues for more than three months or, in the absence of such a definition, when an Optionee becomes totally disabled as determined by a physician mutually acceptable to the Optionee and the Committee before attaining his or her 65 th birthday and if such total disability continues for more than three months. Disability does not include any condition which is intentionally self-inflicted or caused by illegal acts of the Optionee.
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(iii) Unless otherwise determined by the Committee at or after the date of grant and subject to the third sentence of this paragraph 8(a)(iii), if an Optionees termination of employment is due to retirement, all options (or portions thereof) which are (a) vested at the time of retirement may be exercised for a period of two (2) years following retirement (but not after the expiration of the term of the option) and (b) unvested at the time of retirement may be exercised for a period of five (5) years from the date of grant (but not after the expiration of the term of the option). Unless otherwise determined by the Committee at or after the date of grant and subject to the third sentence of this paragraph 8(a)(iii), following retirement, options (or portions thereof) which are unvested at the time of retirement will continue to vest under such options vesting schedule for a period of five (5) years following retirement. Only for options granted in January, 2003, if an Optionees termination of employment is due to retirement (as defined in the ACSOP prior to January 1, 2004), such option shall terminate one (1) year after his or her termination of employment (but not after the expiration of the term of such option) and may be exercised only to the extent that such Optionee could have exercised such option at the date of his or her termination of employment. For purposes of the ACSOP, retirement shall be reached when an Optionees employment terminates and at the time of such termination the sum of such Optionees age and years of service as an employee of the Company or any of its subsidiaries equals or exceeds 75 years (Rule of 75).
(iv) Unless otherwise determined by the Committee at or after the date of grant, if an Optionees termination of employment is for any reason other than death, retirement or physical disability, the Optionees option shall terminate upon said termination of employment; provided, however, that if such termination of employment occurs following a Change in Control (as such term is defined in paragraph 11(b) hereof), the Optionees option shall terminate three (3) months after his or her termination of employment (but not after the expiration of the term of such option) unless otherwise determined by the Committee.
(b) Nothing contained in the ACSOP or any option granted pursuant to the ACSOP shall confer upon any Optionee any right to be continued in the employment of the Company or any subsidiary or shall prevent the Company or any subsidiary from terminating an Optionees employment at any time, with or without cause. The determination by the Committee of whether an authorized leave of absence constitutes a termination of employment shall be final, conclusive and binding.
9. Non-Transferability of Options
An option granted under the ACSOP shall not be assignable or transferable by an Optionee otherwise than by will or the laws of descent and distribution, and an option shall be exercisable during the lifetime of the Optionee only by him or her. Unless otherwise determined by the Committee at or after the date of grant and subject to the following sentence, an option transferred by will or the laws of descent and distribution may only be exercised by the legatee or distributee during the one year period following the Optionees death and may only be exercised to the extent it was exercisable by the Optionee prior to his or her death. Unless otherwise determined by the Committee at or after the date of grant, in the event that at the time of the Optionees death the Optionee met the Rule of 75, an option transferred by will or the laws of descent and distribution may only be exercised by the legatee or distributee during the period of time that the Optionee could have exercised such options at the time of his or her death and such options shall continue to vest as if the Optionee had not died.
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10. Adjustment upon Change in Stock
Each option, the number and kind of shares subject to future options and the number of shares subject to options that may be granted to an Optionee in any fiscal year under the ACSOP shall be adjusted, as may be determined to be equitable in the sole and absolute discretion of the Committee, in the event there is any change in the outstanding Common Stock, or any event that could cause a change in the outstanding Common Stock, including, without limitation, by reason of a stock dividend, recapitalization, reclassification, issuance of Common Stock, issuance of rights to purchase Common Stock, extraordinary cash dividend, issuance of securities convertible into or exchangeable for Common Stock, merger, consolidation, stock split, reverse stock split, spin-off, combination, exchange or conversion of shares, or any other similar type of event. The Committees determination of any adjustment pursuant to this paragraph10 shall be final, conclusive and binding.
11. Change in Control
(a) (1) Unless otherwise determined by the Committee at or after the date of grant and notwithstanding any provision of the ACSOP, in the event of a Change in Control, all outstanding options shall immediately be exercisable in full and shall be subject to the provisions of paragraph 11(a)(2) or 11(a)(3), to the extent that either such paragraph is applicable.
(2) Notwithstanding any provision of the ACSOP, in the event of a Change in Control in connection with which the holders of shares of the Companys Common Stock receive shares of common stock that are registered under Section 12 of the Exchange Act, all outstanding options shall immediately be exercisable in full and there shall be substituted for each share of the Companys Common Stock available under the ACSOP, whether or not then subject to an outstanding option, the number and class of shares into which each outstanding share of the Companys Common Stock shall be converted pursuant to such Change in Control. In the event of any such substitution, the purchase price per share of each option shall be appropriately adjusted by the Committee or the committee to which authority has been delegated pursuant to paragraph 3 hereof, such adjustments to be made without an increase in the aggregate purchase price.
(3) Notwithstanding any provision in the ACSOP, in the event of a Change in Control in connection with which the holders of the Companys Common Stock receive consideration other than shares of common stock that are registered under Section 12 of the Exchange Act, each outstanding option shall be surrendered to the Company by the holder thereof, and each such option shall immediately be cancelled by the Company, and the holder shall receive, within ten (10) days of the occurrence of such Change in Control, a cash payment from the Company in an amount equal to the number of shares of the Companys Common Stock then subject to such option, multiplied by the excess, if any, of (i) the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of the Companys Common Stock on the date of occurrence of the Change in Control over (ii) the purchase price per share of the Companys Common Stock subject to the option. The Company may, but is not required to, cooperate with any person who is subject to Section 16 of the Exchange Act to assure that any cash payment in accordance with the foregoing to such person is made in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder providing for an exemption from Section 16(b) of the Exchange Act.
(b) Change in Control means:
(1) The occurrence of any one or more of the following events:
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(A) The acquisition by any individual, entity or group (a Person), including any person within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act of both (x) 20% or more of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities) and (y) combined voting power of Outstanding Company Voting Securities in excess of the combined voting power of the Outstanding Company Voting Securities held by the Exempt Persons (as such term is defined in paragraph 11(c)); provided, however , that a Change in Control shall not result from an acquisition of Company Voting Securities:
(i) directly from the Company, except as otherwise provided in paragraph 11(b)(2)(A);
(ii) by the Company, except as otherwise provided in paragraph 11(b)(2)(B);
(iii) by an Exempt Person;
(iv) by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or
(v) by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i) and (ii) of paragraph 11(b)(1)(C) shall be satisfied.
(B) The cessation for any reason of the members of the Incumbent Board (as such term is defined in paragraph 11(d)) to constitute at least a majority of the Board of Directors of the Company (hereinafter called the Board).
(C) Consummation of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation:
(i) more than 60% of the combined voting power of the then outstanding securities of the corporation resulting from such reorganization, merger or consolidation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners of the combined voting power of all of the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation; and
(ii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation.
(D) Consummation of the sale or other disposition of all or substantially all of the assets of the Company other than (x) pursuant to a tax-free spin-off of a subsidiary or
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other business unit of the Company or (y) to a corporation with respect to which, immediately after such sale or other disposition:
(i) more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the combined voting power of all of the Outstanding Company Voting Securities immediately prior to such sale or other disposition; and
(ii) at least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition.
(E) Approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company.
(2) Notwithstanding the provisions of paragraph 11(b)(1):
(A) no acquisition of Company Voting Securities shall be subject to the exception from the definition of Change in Control contained in clause (i) of paragraph 11(b)(1)(A) if such acquisition results from the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company; and
(B) for purposes of clause (ii) of paragraph 11(b)(1)(A), if any Person (other than the Company, an Exempt Person or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall, by reason of an acquisition of Company Voting Securities by the Company, become the beneficial owner of (x) 20% or more of the combined voting power of the Outstanding Company Voting Securities and (y) combined voting power of Outstanding Company Voting Securities in excess of the combined voting power of the Outstanding Company Voting Securities held by the Exempt Persons, and such Person shall, after such acquisition of Company Voting Securities by the Company, become the beneficial owner of any additional Outstanding Company Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control.
(c) Exempt Person (and collectively, the Exempt Persons) means:
(1) Leonard H. Lavin or Bernice E. Lavin;
(2) any descendant of Leonard H. Lavin and Bernice E. Lavin or the spouse of any such descendant;
(3) the estate of any of the persons described in paragraph 11(c)(1) or (2);
(4) any trust or similar arrangement for the benefit of any person described in paragraph 11(c)(1) or (2); or
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(5) the Lavin Family Foundation or any other charitable organization established by any person described in paragraph 11(c)(1) or (2).
(d) Incumbent Board means those individuals who, as of October 24, 2002, constitute the Board, provided that:
(1) any individual who becomes a director of the Company subsequent to such date whose election, or nomination for election by the Companys stockholders, was approved either by the vote of at least a majority of the directors then comprising the Incumbent Board or by the vote of at least a majority of the combined voting power of the Outstanding Company Voting Securities held by the Exempt Persons shall be deemed to have been a member of the Incumbent Board; and
(2) no individual who was initially elected as a director of the Company as a result of an actual or threatened solicitation by a Person other than the Board or the Exempt Persons for the purpose of opposing a solicitation by any other Person with respect to the election or removal of directors, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board or the Exempt Persons shall be deemed to have been a member of the Incumbent Board.
12. Amendment and Discontinuance
The Committee or the Board, without further approval of the stockholders, may, at any time and from time to time, suspend or discontinue the ACSOP in whole or in part or amend the ACSOP in such respects as the Committee or the Board may deem proper and in the best interests of the Company or as may be advisable, provided, however, that no suspension or amendment shall be made which would:
(i) Adversely affect or impair any option previously granted under the ACSOP without the consent of the Optionee, or
(ii) Except as specified in paragraph 10, increase the total number of shares for which options may be granted under the ACSOP or decrease the minimum price at which options may be granted under the ACSOP.
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Exhibit 10.29
SALLY
BEAUTY HOLDINGS
2007 OMNIBUS INCENTIVE PLAN
RESTRICTED
STOCK UNIT AGREEMENT
FOR INDEPENDENT DIRECTORS
(Time Vesting)
THIS RESTRICTED STOCK UNIT AGREEMENT (this Agreement ) is made effective as of ( Effective Date ), by and between Sally Beauty Holdings, Inc. (the Company ) and ( Director ).
1. GRANT OF RESTRICTED STOCK UNITS . Pursuant to the Sally Beauty Holdings 2007 Omnibus Incentive Plan (the Plan ) Director is hereby awarded restricted stock units covering shares of the Common Stock of the Company (the RS Units ). On any day, the value of an RS Unit shall equal the Fair Market Value of one share of Common Stock of the Company. All of the RS Units shall be subject to the prohibition on the transfer of the RS Units and the obligations to forfeit the RS Units to the Company as set forth in Section 4 of this Agreement.
2. EFFECT OF THE PLAN . The RS Units awarded to Director are subject to all of the terms and conditions of the Plan, which terms and conditions are incorporated herein for all purposes, and of this Agreement together with all rules and determinations from time to time issued by the Committee and by the Board pursuant to the Plan. The Company hereby reserves the right to amend, modify, restate, supplement or terminate the Plan without the consent of Director, so long as such amendment, modification, restatement or supplement shall not materially reduce the rights and benefits available to Director hereunder, and this Award shall be subject, without further action by the Company or Director, to such amendment, modification, restatement or supplement unless provided otherwise therein. Capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Plan.
3. VESTING OF RS UNITS . Except as otherwise provided in Section 4 of this Agreement, all of the RS Units shall vest pursuant to the provisions of paragraph (c) of Section 4 of this Agreement, on September 30 , 2010 (the Vesting Date ).
4. RESTRICTIONS . Director hereby accepts the Award of the RS Units and agrees with respect thereto as follows:
(a) No Transfer . Unless otherwise determined by the Committee and provided in this Agreement or the Plan, the RS Units shall not be sold, assigned, pledged, exchanged, hypothecated or otherwise transferred except by will or the laws of descent and distribution. Any attempted assignment of an RS Unit in violation of this Agreement shall be null and void. The Company shall not be required to honor the transfer of any RS Units that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or the Plan.
(b) Forfeiture of RS Units . If Director terminates service with the Company and its Subsidiaries prior to the Vesting Date for any reason other than Directors death, Disability, or involuntary termination without Cause, then Director (or Directors estate, as applicable) shall, for no consideration, forfeit all RS Units; provided, however, that the Committee or its designee may, in the Committees or the designees sole and absolute discretion, as applicable, provide for the acceleration of the vesting of the RS Units, eliminate or make less restrictive any restrictions contained in this Agreement, waive any restriction or other provision of the Plan or this Agreement or otherwise amend or modify this Agreement in any manner that is either (i) not adverse to Director, or (ii) consented to by Director.
(c) Vesting of RS Units . If Director provides continuous, eligible service to the Company and its Subsidiaries, as determined by the Committee or its designee, in the Committees or the designees sole and absolute discretion, as applicable, from the Effective Date until the Vesting Date, Director shall vest in one hundred percent (100%) of the RS Units on the Vesting Date.
(d) Death, Disability, or Involuntary Termination Without Cause . If, as a result of Directors death, Disability, or involuntary termination without Cause, Director terminates service with the Company and its Subsidiaries prior to the Vesting Date, then, provided Director has provided continuous, eligible service to the Company from the Effective Date until Directors death, Disability, or involuntary termination without Cause, Director shall vest in and have a non-forfeitable right to a pro-rata portion of the RS Units determined by multiplying the total number of RS Units awarded under this Agreement by a fraction the numerator of which is the number of whole months Director served as a member of the board of directors of the Company after the Effective Date, and the denominator of which is 12.
(e) Rights . RS Units represent an unsecured promise of the Company to issue shares of Common Stock of the Company as provided in this Agreement. Other than the rights provided in this Agreement, Director shall have no rights of a stockholder of the Company with respect to the RS Units awarded under this Agreement until such RS Units have vested and the related shares of Common Stock have been issued pursuant to the terms of this Agreement.
(f) Issuance of Common Stock . The Company will issue to Director the shares of Common Stock underlying the vested RS Units on the date which is six months after the effective date of Directors separation from service with the Company (as defined in Section 409A of the Code and applicable Treasury regulations thereunder, without giving effect to any elective provisions that may be available under such definition), or within five business days thereafter. Evidence of the issuance of the shares of Common Stock pursuant to this Agreement may be accomplished in such manner as the Company or its authorized representatives shall deem appropriate including, without limitation, electronic registration, book-entry registration or issuance of a certificate or certificates in the name of Director or in the name of such other party or parties as the Company and its authorized representatives shall deem appropriate.
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In the event the shares of Common Stock issued pursuant to this Agreement remain subject to any additional restrictions, the Company and its authorized representatives shall ensure that Director is prohibited from entering into any transaction that would violate any such restrictions, until such restrictions lapse.
5. COMMUNITY INTEREST OF SPOUSE . The community interest, if any, of any spouse of Director in any of the RS Units shall be subject to all of the terms, conditions and restrictions of this Agreement and the Plan, and shall be forfeited and surrendered to the Company upon the occurrence of any of the events requiring Directors interest in such RS Units to be so forfeited and surrendered pursuant to this Agreement.
6. BINDING EFFECT . This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Director.
7. TAX MATTERS .
Director acknowledges that the tax consequences associated with the Award are complex and that the Company has urged Director to review with Directors own tax advisors the federal, state, and local tax consequences of this Award. Director is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Director understands that Director (and not the Company) shall be responsible for Directors own tax liability that may arise as a result of this Agreement.
IN WITNESS WHEREOF , the Company has caused this Agreement to be duly executed by an authorized officer and Director has executed this Agreement, all as of the date first above written.
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SALLY BEAUTY HOLDINGS, INC. |
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DIRECTOR ACKNOWLEDGES AND AGREES THAT THE RS UNITS SUBJECT TO THIS AWARD SHALL VEST AND THE RESTRICTIONS RESULTING IN THE FORFEITURE OF THE RS UNIT SHALL LAPSE, IF AT ALL, ONLY DURING THE PERIOD OF DIRECTORS SERVICE TO THE COMPANY OR AS OTHERWISE PROVIDED IN THIS AGREEMENT (NOT THROUGH THE ACT OF BEING GRANTED THE RS UNITS). DIRECTOR FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT OR THE PLAN SHALL CONFER UPON DIRECTOR ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF DIRECTORS SERVICE TO THE COMPANY. Director acknowledges receipt of a copy of the Plan, represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Restricted Stock Unit Award subject to all of the terms and provisions hereof and thereof, including the mandatory dispute resolution provisions. Director has reviewed this Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of this Agreement and the Plan.
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DIRECTOR |
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Exhibit 10.30
SALLY BEAUTY HOLDINGS
2007 OMNIBUS INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
FOR EMPLOYEES
THIS RESTRICTED STOCK AGREEMENT (this Agreement ) is made as of October 21, 2009 by and between Sally Beauty Holdings, Inc. (the Company ) and ( Employee ).
This certificate and the shares of stock represented hereby are subject to the terms and conditions, including forfeiture provisions and restrictions against transfer (the Restrictions), contained in the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan and an agreement between the registered owner and Sally Beauty Holdings, Inc. Any attempt to dispose of these shares in contravention of the Restrictions, including by way of sale, assignment, transfer, pledge, hypothecation or otherwise, shall be null and void without effect.
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Upon the lapse of the Forfeiture Restrictions pursuant to this Section 3, the Company or, at the Companys instruction, its authorized representative shall release those Restricted Shares with respect to which the Forfeiture Restrictions have lapsed. The lapse of the Forfeiture Restrictions and the release of the Restricted Shares shall be evidenced in such a manner as the Company and its authorized representatives deem appropriate under the circumstances.
At the Companys request, Employee shall execute and deliver, as necessary, a stock power, in blank, with respect to the Restricted Shares, and the Company may, as necessary, exercise such stock power in the event of the forfeiture of any Restricted Shares pursuant to this
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Agreement, or as may otherwise be required in order for the Company to withhold the Restricted Shares necessary to satisfy any applicable federal, state and local income and employment tax withholding obligations pursuant to Section 6 of this Agreement.
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IN WITNESS WHEREOF , the Company has caused this Agreement to be duly executed by an authorized officer and Employee has executed this Agreement, all as of the date first above written.
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SALLY BEAUTY HOLDINGS, INC. |
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EMPLOYEE ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THIS RESTRICTED STOCK AWARD SHALL REMAIN SUBJECT TO THE FORFEITURE RESTRICTIONS PROVIDED FOR IN THIS AGREEMENT AND THE FORFEITURE RESTRICTIONS SHALL LAPSE, IF AT ALL, ONLY DURING THE PERIOD OF EMPLOYEES SERVICE TO THE COMPANY OR AS OTHERWISE PROVIDED IN THIS AGREEMENT (NOT THROUGH THE ACT OF BEING GRANTED THE RESTRICTED STOCK AWARD). EMPLOYEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT OR THE PLAN SHALL CONFER UPON EMPLOYEE ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF EMPLOYEES SERVICE TO THE COMPANY. Employee acknowledges receipt of a copy of the Plan, represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Restricted Stock Award subject to all of the terms and provisions hereof and thereof. Employee has reviewed this Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Agreement, and fully understands all provisions of this Agreement and the Plan.
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5
Exhibit 10.31
SALLY BEAUTY HOLDINGS 2007 OMNIBUS INCENTIVE PLAN
STOCK OPTION AGREEMENT
FOR EMPLOYEES
Optionee: |
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Total Shares Subject to Option: |
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Option Exercise Price Per Share: |
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Date of Grant: |
October 21, 2009 |
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Vesting Commencement Date: |
October 21, 2009 |
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Expiration Date: |
October 21, 2019 |
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Type of Stock Option: |
Non-Statutory Stock Option |
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If an installment covers a fractional Share, such installment will be rounded to the next highest Share, except the final installment, which will be for the balance of the total Shares; provided, that, absent the occurrence of an Adjustment Event as described in Section 4.4 of the Plan, the Optionee shall in no event be entitled under the Option to purchase a number of shares of Common Stock greater than the Total Shares Subject to Option indicated above. Unless otherwise provided in the Plan or this Option Agreement, the Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the Expiration Date. Unless otherwise provided below, upon the effective date of an Optionees termination of service the unvested portion of the Optionees Option under this Option Agreement shall be forfeited.
If the Optionees service with the Company or any Subsidiary is terminated as a result of the Optionees Retirement and the Optionee does not agree to be bound by the restrictions of Section 5.5 of the Plan, then the Option shall be exercisable only to the extent that the Optionee could exercise it on the date of his or her Retirement. If the Optionees service with the Company or any Subsidiary is terminated as a result of the Optionees Retirement and the Optionee agrees to be bound by the restrictive covenants of Section 5.5 of the Plan for the three-year period following Optionees Retirement then Optionee will continue to vest in the portion of the Option that was not vested and exercisable as of the date of the Optionees Retirement for the three-year period following Optionees Retirement as if the Optionees service had not terminated, unless Optionee violates the any of the restrictive covenants of Section 5.5 of the Plan during such three-year period. If, in the sole discretion of the Committee, the Optionee violates one of the restrictive covenants of Section 5.5 of the Plan during the three-year period following Optionees Retirement, then all Options, whether or not vested, shall be immediately forfeited and cancelled as of the date of such violation. If the Optionees service with the Company or any Subsidiary is terminated as a result of the Optionees death or Disability then the Optionee shall, in addition to the portion of the Option in which the Optionee was vested as of the effective date of any such termination of service, vest in that portion of the Option that becomes vested and exercisable on the next vesting date following the effective date of the Optionees termination of service as a result of the Optionees death or Disability. If the Optionee voluntarily terminates service for any other reason the Option shall be exercisable only to the extent the Optionee was vested on the effective date of such termination of service. Unless, as described in Section 9.2 of the Plan, an Alternative Award replaces this Option, this Option shall become fully vested and exercisable upon the occurrence during the term of this Option Agreement of a Change in Control. If the Optionees service is terminated for Cause (or if, following the date of termination of the Optionees service for any reason, the Compensation Committee determines that circumstances exist that the Optionees service could have been terminated for Cause) then all Options shall be immediately forfeited and cancelled as of the date of such termination.
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SALLY BEAUTY HOLDINGS, INC. |
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THE OPTIONEE ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED OTHERWISE HEREIN, THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE OPTIONEES CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS OPTION AGREEMENT OR THE PLAN SHALL CONFER UPON THE OPTIONEE ANY RIGHT WITH RESPECT TO FUTURE GRANTS OR CONTINUATION OF THE OPTIONEES CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE OPTIONEES RIGHT OR THE RIGHT OF THE OPTIONEES EMPLOYER TO TERMINATE OPTIONEES CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE OPTIONEE ACKNOWLEDGES THAT UNLESS THE OPTIONEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE OPTIONEES STATUS IS AT-WILL.
The Optionee acknowledges receipt of a copy of the Plan, represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions hereof and thereof. The Optionee has reviewed this Option Agreement, the Plan, and the Exercise Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement, and fully understands all provisions of this Option Agreement, the Plan and the Exercise Notice. The Optionee further agrees to provide the Company with such information as the Company considers necessary for the administration of this Option Agreement.
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OPTIONEE: |
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7
EXHIBIT A
SALLY BEAUTY HOLDINGS 2007 OMNIBUS INCENTIVE PLAN
STOCK OPTION EXERCISE NOTICE
This Stock Option Exercise Notice ( Exercise Notice ) is made this day of , 20 between Sally Beauty Holdings, Inc. (the Company ), and the optionee named below (the Optionee ) pursuant to the Sally Beauty Holdings 2007 Omnibus Incentive Plan (the Plan ). Unless otherwise defined herein, the capitalized terms used in this Exercise Notice shall have the meaning ascribed to them in the Plan and in the Stock Option Agreement ( Option Agreement ) to which this Exercise Notice relates.
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The Optionee hereby delivers to the Company the Aggregate Purchase Price set forth above ( Aggregate Purchase Price ) in cash as indicated below or to the extent provided for in the Option Agreement and approved by the Committee by accepting this Exercise Notice, as follows (as applicable, check and complete):
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in cash in the amount of $ , receipt of which is acknowledged by the Company; |
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through a same-day-sale commitment, delivered herewith, from the Optionee and the NASD Dealer named therein in the amount of $ ; |
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through a margin commitment, delivered herewith, from the Optionee and the NASD Dealer named therein in the amount of $ ; |
The Company and the Optionee (the Parties) hereby agree as follows:
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SALLY BEAUTY HOLDINGS, INC. |
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3
Exhibit 10.32
ALBERTO-CULVER COMPANY EMPLOYEE STOCK OPTION PLAN OF 2003
STOCK OPTION AGREEMENT
FOR EMPLOYEES
Optionee: |
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Total Shares Subject to Option: |
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Option Exercise Price Per Share: |
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Date of Grant: |
October 21, 2009 |
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Vesting Commencement Date: |
October 21, 2009 |
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Expiration Date: |
October 21, 2019 |
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Type of Stock Option: |
Non-Statutory Stock Option |
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If an installment covers a fractional Share, such installment will be rounded to the next highest Share, except the final installment, which will be for the balance of the total Shares; provided, that, absent the occurrence of any change in the outstanding Common Stock or any event that could cause a change in the outstanding Common Stock as described in Section 10 of the Plan, the Optionee shall in no event be entitled under the Option to purchase a number of shares of Common Stock greater than the Total Shares Subject to Option indicated above. Unless otherwise provided in the Plan or this Option Agreement, the Option shall expire on the Expiration Date set forth above and must be exercised, if at all, on or before the Expiration Date. Unless otherwise provided below, upon the effective date of an Optionees termination of service the unvested portion of the Optionees Option under this Option Agreement shall be forfeited.
If the Optionees service with the Company or any subsidiary is terminated as a result of the Optionees retirement (as defined in the Plan) and the Optionee does not agree to be bound by the restrictions of Section 5.5 of the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the 2007 Plan), then the Option shall be exercisable only to the extent that the Optionee could exercise it on the date of his or her retirement. If the Optionees service with the Company or any subsidiary is terminated as a result of the Optionees retirement and the Optionee agrees to be bound by the restrictive covenants of Section 5.5 of the 2007 Plan for the three-year period following Optionees retirement then Optionee will continue to vest in the portion of the Option that was not vested and exercisable as of the date of the Optionees retirement for the three-year period following Optionees retirement as if the Optionees service had not terminated, unless Optionee violates the any of the restrictive covenants of Section 5.5 of the 2007 Plan during such three-year period. If, in the sole discretion of the Committee, the Optionee violates one of the restrictive covenants of Section 5.5 of the 2007 Plan during the three-year period following Optionees retirement, then all Options, whether or not vested, shall be immediately forfeited and cancelled as of the date of such violation. If the Optionees service with the Company or any subsidiary is terminated as a result of the Optionees death or disability (as defined in the Plan) then the Optionee shall, in addition to the portion of the Option in which the Optionee was vested as of the effective date of any such termination of service, vest in that portion of the Option that becomes vested and exercisable on the next vesting date following the effective date of the Optionees termination of service as a result of the Optionees death or disability. If the Optionee voluntarily terminates service for any other reason the Option shall be exercisable only to the extent the Optionee was vested on the effective date of such termination of service. Unless, as described in Section 9.2 of the 2007 Plan, an Alternative Award (as defined in the 2007 Plan) replaces this Option, this Option shall become fully vested and exercisable upon the occurrence during the term of this Option Agreement of a Change in Control. If the Optionees service is terminated for Cause (or if, following the date of termination of the Optionees service for any reason, the Compensation Committee determines that circumstances exist that the Optionees service could have been terminated for Cause) then all Options shall be immediately forfeited and cancelled as of the date of such termination.
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SALLY BEAUTY HOLDINGS, INC. |
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Title: |
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THE OPTIONEE ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED OTHERWISE HEREIN, THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE OPTIONEES CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS OPTION AGREEMENT OR THE PLAN SHALL CONFER UPON THE OPTIONEE ANY RIGHT WITH RESPECT TO FUTURE GRANTS OR CONTINUATION OF THE OPTIONEES CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE OPTIONEES RIGHT OR THE RIGHT OF THE OPTIONEES EMPLOYER TO TERMINATE OPTIONEES CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE OPTIONEE ACKNOWLEDGES THAT UNLESS THE OPTIONEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE OPTIONEES STATUS IS AT-WILL.
The Optionee acknowledges receipt of a copy of the Plan, represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions hereof and thereof. The Optionee has reviewed this Option Agreement, the Plan, and the Exercise Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement, and fully understands all provisions of this Option Agreement, the Plan and the Exercise Notice. The Optionee further agrees to provide the Company with such information as the Company considers necessary for the administration of this Option Agreement.
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OPTIONEE: |
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7
EXHIBIT A
ALBERTO-CULVER COMPANY EMPLOYEE STOCK OPTION PLAN OF 2003
STOCK OPTION EXERCISE NOTICE
This Stock Option Exercise Notice ( Exercise Notice ) is made this day of , 20 between Sally Beauty Holdings, Inc. (the Company ), and the optionee named below (the Optionee ) pursuant to the Alberto-Culver Company Employee Stock Option Plan of 2003 (the Plan ). Unless otherwise defined herein, the capitalized terms used in this Exercise Notice shall have the meaning ascribed to them in the Plan and in the Stock Option Agreement ( Option Agreement ) to which this Exercise Notice relates.
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Option Exercise Price Per Share: |
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Date of Grant: |
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The Optionee hereby delivers to the Company the Aggregate Purchase Price set forth above ( Aggregate Purchase Price ) in cash as indicated below or to the extent provided for in the Option Agreement and approved by the Committee by accepting this Exercise Notice, as follows (as applicable, check and complete):
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in cash in the amount of $ , receipt of which is acknowledged by the Company; |
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through a same-day-sale commitment, delivered herewith, from the Optionee and the NASD Dealer named therein in the amount of $ ; |
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through a margin commitment, delivered herewith, from the Optionee and the NASD Dealer named therein in the amount of $ ; |
The Company and the Optionee (the Parties) hereby agree as follows:
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OPTIONEE: |
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SALLY BEAUTY HOLDINGS, INC. |
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3
Exhibit 10.33
PRIVILEGED & CONFIDENTIAL
AMENDED AND RESTATED DIRECTOR INDEMNIFICATION AGREEMENT
Indemnification Agreement, dated as of October 22, 2009, between Sally Beauty Holdings Inc., a Delaware corporation (the Company ) and ( Indemnitee ).
WHEREAS, qualified persons are reluctant to serve corporations as directors, officers or otherwise unless they are provided with broad indemnification and insurance against claims arising out of their service to and activities on behalf of the corporations; and
WHEREAS, the Company has determined that attracting and retaining such persons is in the best interests of the Companys stockholders and that it is reasonable, prudent and necessary for the Company to indemnify such persons to the fullest extent permitted by applicable law and to provide reasonable assurance regarding insurance.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
Change in Control means, and shall be deemed to have occurred if, on or after the date of this Agreement, ( i ) any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than ( A ) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries acting in such capacity, or ( B ) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Companys then outstanding Voting Securities, ( ii ) during any period of two consecutive years commencing from and after the date hereof, individuals who at the beginning of such period constitute the board of directors of the Company and any new director whose election by the board of directors of the Company or nomination for election by the Companys stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, ( iii ) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total
voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, ( iv ) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of its assets, or ( v ) the Company shall file or have filed against it, and such filing shall not be dismissed, any bankruptcy, insolvency or dissolution proceedings, or a trustee, administrator or creditors committee shall be appointed to manage or supervise the affairs of the Company.
Corporate Status means the status of a person who is or was a director (or a member of any committee of a board of directors), officer, employee or agent (including without limitation a manager of a limited liability company) of the Company or any of its subsidiaries, or of any predecessor thereof, or is or was serving at the request of the Company as a director (or a member of any committee of a board of directors), officer, employee or agent (including without limitation a manager of a limited liability company) of another corporation, limited liability company, partnership, joint venture, trust or other enterprise, or of any predecessor thereof, including service with respect to an employee benefit plan.
Determination means a determination that either ( x ) there is a reasonable basis for the conclusion that indemnification of Indemnitee is proper in the circumstances because Indemnitee met a particular standard of conduct (a Favorable Determination ) or ( y ) there is no reasonable basis for the conclusion that indemnification of Indemnitee is proper in the circumstances because Indemnitee met a particular standard of conduct (an Adverse Determination ). An Adverse Determination shall include the decision that a Determination was required in connection with indemnification and the decision as to the applicable standard of conduct.
DGCL means the General Corporation Law of the State of Delaware, as amended from time to time.
Expenses means all attorneys fees and expenses, retainers, court, arbitration and mediation costs, transcript costs, fees of experts, bonds, witness fees, costs of collecting and producing documents, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, appealing or otherwise participating in a Proceeding.
Independent Legal Counsel means an attorney or firm of attorneys competent to render an opinion under the applicable law, selected in accordance with the provisions of Section 5(e), who has not otherwise performed any services for the Company or any of its subsidiaries or for Indemnitee within the last three years (other than with respect to
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matters concerning the rights of Indemnitee under this Agreement or under indemnity agreements similar to this Agreement).
Proceeding means a threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including without limitation a claim, demand, discovery request, formal or informal investigation, inquiry, administrative hearing, arbitration or other form of alternative dispute resolution, including an appeal from any of the foregoing.
Voting Securities means any securities of the Company that vote generally in the election of directors.
Indemnitee agrees to serve as a director or officer of the Company or one or more of its subsidiaries and in such other capacities as Indemnitee may serve at the request of the Company from time to time, and, by its execution of this Agreement, the Company confirms its request that Indemnitee serve as a director or officer of the Company and in such other capacities. Indemnitee shall be entitled to resign or otherwise terminate such service with immediate effect at any time, and neither such resignation or termination nor the length of such service shall affect Indemnitees rights under this Agreement. This Agreement shall not constitute an employment agreement, supersede any employment agreement to which Indemnitee is a party or create any right of Indemnitee to continued employment or appointment.
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The Company shall pay all Expenses incurred by Indemnitee in connection with any Proceeding in any way connected with, resulting from or relating to Indemnitees Corporate Status, other than a Proceeding initiated by Indemnitee for which the Company would not be obligated to indemnify Indemnitee pursuant to Section 3(e)(i), in advance of the final disposition of such Proceeding and without regard to whether Indemnitee will ultimately be entitled to be indemnified for such Expenses and without regard to whether an Adverse Determination has been made, except as contemplated by the last sentence of Section 5(f). Indemnitee shall repay such amounts advanced if and to the extent that it shall ultimately be determined in a decision by a court of competent jurisdiction from which no appeal can be taken that Indemnitee is not entitled to be indemnified by the Company for such Expenses. Such repayment obligation shall be unsecured and shall not bear interest.
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The Company shall pay all Expenses incurred by Indemnitee in connection with a Determination.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
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Annex I Indemnitee-Related Entities
Clayton, Dubilier & Rice, Inc.
Clayton, Dubilier & Rice Fund VII, L.P.
CD&R Parallel Fund VII, L.P.
Notices to the above parties may be delivered to:
Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18
th
floor
New York, New York 10152
Attention: Theresa Gore
Fax: 212-407-5252
With a copy to:
Paul S. Bird
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
Fax: 212-909-6836
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Exhibit 21.1
SALLY BEAUTY
HOLDINGS, INC.
LIST OF SUBSIDIARIES
As of September 30, 2009
Sally Investment Holdings LLC (Delaware)
Sally Holdings LLC (Delaware)
Beauty Systems Group LLC (Delaware) (1)
Armstrong McCall Holdings, Inc. (Texas)
Arnolds, Inc. (Arkansas)
Armstrong McCall Holdings, L.L.C. (Delaware)
Armstrong McCall Management, L.C. (Texas)
Armstrong McCall L.P. (Texas)
Innovations-Successful Salon Services (California) (2)
Schoeneman Beauty Supply, Inc. (Delaware)
Procare Laboratories, Inc. (Delaware)
Neka Salon Supply, Inc. (New Hampshire)
Salon Success International, LLC (Florida) (3)
Sally Beauty Supply LLC (Delaware)
Diorama Services Company, LLC (Delaware)
Sally Capital Inc. (Delaware)
Sally Beauty Distribution LLC (Delaware)
Sally Beauty International Finance LLC (Delaware)
Beauty Holding LLC (Delaware)
Beyond the Zone, Inc. (Delaware)
Silk Elements, Inc. (Delaware)
High Intensity Products, Inc. (Delaware)
Nail Life, Inc. (Delaware)
Sexy U Products, Inc. (Delaware)
For Perms Only, Inc. (Delaware)
Energy of Beauty, Inc. (Delaware)
Miracle Lane, Inc. (Delaware)
Tanwise, Inc. (Delaware)
Satin Strands, Inc. (Delaware)
Brentwood Beauty Laboratories International, Inc. (Texas)
Ion Professional Products, Inc. (Delaware)
New Image Professional Products, Inc. (Delaware)
Esthetician Services Inc. (Delaware)
Femme Couture International, Inc. (Delaware)
Venetian Blends, Inc. (Delaware)
Modern Panache, Inc. (Delaware)
Land of Dreams, Inc. (Delaware)
Coloresse, Inc. (Delaware)
Design Lengths, Inc. (Delaware)
Power IQ, Inc. (Delaware)
Soren Enterprises, Inc. (Delaware)
Sally Beauty Distribution of Ohio, Inc. (Delaware)
Sally Beauty International, Inc. (Delaware)
Sally Beauty Supply BV (Netherlands)
Pro-Duo Deutschland GmbH (Germany)
Sally Beauty Canada Holdings LLC (Delaware)
Sally Beauty Supply Japan, Inc. (Japan)
SBCBSG Company de Mexico, s. de R.I. de C.V. (Mexico)
SBIFCO Company de Mexico, S.A. de C.V. (Mexico)
Sally Beauty International Holdings, C.V. (Netherlands)
Sally International Holdings LLC (Delaware)
Sally Beauty Holdings LP (Bermuda)
Sally Beauty Worldwide Holdings BV ((Netherlands)
SBH Finance B.V. (Netherlands)
Sally Beauty de Puerto Rico, Inc. (Puerto Rico)
Sally Beauty Global Holdings BV (Netherlands)
Sally Beauty (Canada) Corporation (Nova Scotia)
Beauty Systems Group (Canada), Inc. (New Brunswick)(1)
Salon Success BV (Netherlands)
Sally Salon Services (Ireland) Ltd (Ireland)
Earnridge Limited (Ireland)
Sumdveldt Limited (Ireland)
Pro-Duo Spain SL (Spain)
Salon del Exito, S.L. (Spain)
Sally UK Holdings Limited (England)
Sally Salon Services Ltd (England)
Jack Kaye Hair and Beauty Supplies Ltd. (England)
Shear Beauty Limited (England)
Fashion Services Limited (Northern Ireland)
Teknique Haircare Limited (Scotland)
MHR Limited (England)
Chapelton 21 Ltd (Scotland)
Three Six Five Group Ltd. (England)
Sally Chile Holding SpA (Chile)
Salon Services (Hair and Beauty Supplies) Ltd (Scotland) (4)
Beauty Express Ltd (Scotland)
Salon Services Franchising Ltd (Scotland)
Sassi Hair and Beauty Ltd (Scotland)
Salon Services (England) Ltd (Scotland)
Salon Services (Ireland) Ltd (Scotland)
Salon Success Limited (England) (5)
Ogee Limited (England)
Pro-Duo NV (Belgium)
Pro-Duo France SAS (France)
Vigox BVBA (Belgium)
Montane Importaciones, S.L. (Spain)
Pro-Duo Nederland BV (Netherlands)
Wacos NV (Belgium)
Ainat Lilibeth, S.L. (Spain)
Habru SPRL (Belgium)
(1) Doing business as CosmoProf
(2) Doing business as CosmoProf, Matrix of Los Angeles, CosmoProf Professional Salon Services, Cosmovision Innovative Salon Concepts, Infinity Salon Services, Matrix Distribution of Hawaii and WDG Hawaii
(3) Education division doing business as Premier Education
(4) Doing business as Sally Salon Services
Education division doing business as 3 × 6 × 5
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Sally Beauty Holdings, Inc.:
We consent to the incorporation by reference in the registration statements on Form S-8 (Registration Nos. 333-142583 and 333-138830) of Sally Beauty Holdings, Inc. of our reports dated November 18, 2009, with respect to the consolidated balance sheets of Sally Beauty Holdings, Inc. (prior to November 16, 2006, Sally Holdings, Inc.) and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of earnings, cash flows and stockholders (deficit) equity for each of the years in the three-year period ended September 30, 2009, and the effectiveness of internal control over financial reporting as of September 30, 2009, which reports appear in the September 30, 2009 Annual Report on Form 10-K of Sally Beauty Holdings, Inc.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
November 18, 2009
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gary G. Winterhalter, certify that:
(1) I have reviewed this Annual Report on Form 10-K of Sally Beauty Holdings, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 19, 2009 | ||||
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By: |
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/s/ GARY G. WINTERHALTER Gary G. Winterhalter Chief Executive Officer |
CERTIFICATION
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark J. Flaherty, certify that:
(1) I have reviewed this Annual Report on Form 10-K of Sally Beauty Holdings, Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 19, 2009 | ||||
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/s/ MARK J. FLAHERTY Mark J. Flaherty Senior Vice President and Chief Financial Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sally Beauty Holdings, Inc. (the "Company") on Form 10-K for the fiscal year ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary G. Winterhalter, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
By: |
/s/ GARY G. WINTERHALTER
Gary G. Winterhalter Chief Executive Officer |
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Date: November 19, 2009 |
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sally Beauty Holdings, Inc. (the "Company") on Form 10-K for the fiscal year ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark J. Flaherty, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
By: |
/s/ MARK J. FLAHERTY
Mark J. Flaherty Senior Vice President and Chief Financial Officer |
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Date: November 19, 2009 |
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