SALLY BEAUTY HOLDINGS, INC.
FORM
10-K
(Annual Report)
Filed 11/14/13 for the Period Ending 09/30/13
Address
Telephone
CIK
Symbol
SIC Code
Industry
Sector
Fiscal Year
3001 COLORADO BOULEVARD
DENTON, TX 76210
(940) 898-7500
0001368458
SBH
5990 - Retail Stores, Not Elsewhere Classified
Other Specialty Retailers
Consumer Cyclicals
09/30
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TABLE OF CONTENTS
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2013,
2012 and 2011
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2013
-OR-
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.)
3001 Colorado Boulevard
Denton, Texas
(Address of principal executive offices)
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
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
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 NO 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 NO 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 NO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 NO 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. 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 "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
YES NO 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, 2013 was approximately $4,966,629,000. At November 8, 2013, there were 163,888,813 shares of the
registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's 2014 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Annual Report on Form 10-K where indicated.
Table of Contents
TABLE OF CONTENTS
Page
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
1
16
30
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31
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
ITEM 14.
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 15.
PART IV
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
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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 unless otherwise indicated or the context otherwise requires.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K and in the documents incorporated by reference herein which are not purely historical facts or
which depend upon future events may constitute 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:
•
the highly competitive nature of, and the increasing consolidation of, the beauty products distribution industry;
•
anticipating changes in consumer preferences and buying trends and managing our product lines and inventory;
•
potential fluctuation in our same store sales and quarterly financial performance;
•
our dependence upon manufacturers who may be unwilling or unable to continue to supply products to us;
•
the possibility of material interruptions in the supply of products by our manufacturers or third-party distributors;
•
products sold by us being found to be defective in labeling or content;
•
compliance with laws and regulations or becoming subject to additional or more stringent laws and regulations;
•
the success of our e-commerce businesses;
•
product diversion to mass retailers or other unauthorized resellers;
•
the operational and financial performance of our Armstrong McCall, L.P., which we refer to as Armstrong McCall, franchisebased business;
•
successfully identifying acquisition candidates and successfully completing desirable acquisitions;
•
integrating acquired businesses;
•
opening and operating new stores profitably;
•
the impact of the health of the economy upon our business;
•
the success of our cost control plans;
•
protecting our intellectual property rights, particularly our trademarks;
•
the risk that our products may infringe on the intellectual property rights of others;
•
conducting business outside the United States;
•
disruption in our information technology systems;
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•
severe weather, natural disasters or acts of violence or terrorism;
•
the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the
upgrade of our existing financial reporting system;
•
being a holding company, with no operations of our own, and depending on our subsidiaries for cash;
•
our substantial indebtedness;
•
the possibility that we may incur substantial additional debt, including secured debt, in the future;
•
restrictions and limitations in the agreements and instruments governing our debt;
•
generating the significant amount of cash needed to service all of our debt and refinancing all or a portion of our indebtedness or
obtaining additional financing;
•
changes in interest rates increasing the cost of servicing our debt;
•
the potential impact on us if the financial institutions we deal with become impaired; and
•
the costs and effects of litigation.
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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PART I
ITEM 1. BUSINESS
Introduction
Sally Beauty Holdings, Inc. is an international specialty retailer and distributor of professional beauty supplies with operations primarily in
North America, South America and Europe. We believe the Company is 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. As of September 30,
2013, through Sally Beauty Supply and BSG, we operated a multi-channel platform of 4,487 company-operated stores and supplied
182 franchised stores. Within BSG, we also have one of the largest networks of professional distributor sales consultants in North America, with
approximately 982 professional distributor sales consultants who sell directly to salons and salon professionals. Sally Beauty Supply stores target
retail consumers and salon professionals, while BSG exclusively targets salons and salon professionals. We have store locations in the United
States (including Puerto Rico), Canada, Mexico, Chile, the United Kingdom, Ireland, Belgium, France, Germany, the Netherlands and Spain. We
provide our customers with a wide variety of leading third-party branded and exclusive-label professional beauty supplies, including hair color
products, hair care products, styling appliances, skin and nail care products and other beauty items. Approximately 81%, 82% and 82% of our
consolidated net sales for the fiscal year ended September 30, 2013, 2012 and 2011, respectively, were from customers located in the U.S. For
the year ended September 30, 2013, our consolidated net sales and operating earnings were $3,622.2 million and $520.4 million, respectively.
Sally Beauty Supply began operations with a single store in New Orleans in 1964 and was acquired in 1969 by our former parent company, The
Alberto-Culver Company, which we refer to as Alberto-Culver. BSG became a subsidiary of Sally Beauty in 1995. In November 2006, Sally
Beauty separated from Alberto-Culver and became an independent company listed on the New York Stock Exchange.
Professional Beauty Supply Industry Distribution Channels
The professional beauty supply industry serves end-users through four distribution 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 in salons 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.
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, the Company's website
( www.sallybeauty.com ) and other e-commerce platforms provide access to product offerings and information beyond our retail stores.
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 smaller channel in the U.S. due to the highly fragmented nature of the U.S. salon industry, which makes direct
distribution cost prohibitive for many manufacturers. In addition, we recently began to offer our BSG products
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for sale to salons and salon professionals through the Company's websites ( www.cosmoprofbeauty.com, www.cosmoprofequipment.com and
www.ebobdirect.com ) and other e-commerce platforms.
Mega-Salon Stores
In this channel, large-format salons are supplied directly by manufacturers due to their large scale.
Key Industry and Business Trends
We operate primarily 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 and hair care products. We believe the following key industry and business trends and
characteristics will influence our business and our financial results going forward:
High level of marketplace fragmentation. The U.S. salon channel is highly fragmented with nearly 290,000 salons and barbershops. Given the
fragmented and small-scale nature of the salon industry, we believe that salon operators will continue to depend on full-service/exclusive
distributors and open-line channels for a majority of their beauty supply purchases.
Growth in booth renting and frequent stocking needs. Salon professionals primarily rely on just-in-time inventory due to capital constraints
and a lack of warehouse and shelf space at salons. In addition, booth renters, who comprise a significant percentage of total U.S. salon
professionals, are often responsible for purchasing their own supplies. Historically, booth renters have significantly increased as a percentage of
total salon professionals, and we expect this trend to continue. Given their smaller individual purchases and relative lack of financial resources,
booth renters are likely to be dependent on frequent trips to professional beauty supply stores, like BSG and Sally Beauty Supply. We expect that
these factors will continue to drive demand for conveniently located professional beauty supply stores.
Increasing use of exclusive-label products. We offer an extensive range of exclusive-label professional beauty products, predominantly in our
Sally Beauty Supply segment. As our lines of exclusive-label products have matured and become better known in our retail stores, we have seen
an increase in sales of these products. Generally, our exclusive-label products have higher gross margins for us than the leading third-party
branded products and, accordingly, we believe that the growth in sales of these products will likely enhance our overall gross margins. 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."
Favorable demographic and consumer trends. We expect the aging baby-boomer population to drive future growth in professional beauty
supply sales through an increase in the usage of hair color and hair loss products. Additionally, continuously changing fashion-related trends that
drive new hair styles are expected to result in continued demand for hair styling products. Changes in consumer tastes and fashion trends can
have an impact on our financial performance. Our continued success depends largely 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 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. Please see "Risk
Factors — We may be unable to anticipate changes in consumer preferences and buying trends or manage our product lines and inventory
commensurate with consumer demand."
International growth strategies.
A key element of our growth strategy depends on our ability to capitalize on international growth
opportunities and to grow our current level of non-U.S. operations. For example, from September 30, 2012 to September 30, 2013 our
international company-operated stores increased from 742 stores to 789 stores. In addition, we have completed a number of international
acquisitions over
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the past three years that increased our European and South American footprint. We intend to continue to identify and evaluate non-U.S.
acquisition and/or organic international growth opportunities. Our ability to grow our non-U.S. operations, integrate our new non-U.S.
acquisitions and successfully pursue additional non-U.S. acquisition and/or organic international growth opportunities may be affected by
business, legal, regulatory and economic risks. Please see "Risk Factors — We may not be able to successfully identify acquisition candidates or
successfully complete desirable 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" and "Our ability to conduct business in international marketplaces may be
affected by legal, regulatory and economic risks."
Continuing consolidation. There is continuing consolidation among professional beauty product distributors and professional beauty product
manufacturers. We plan to continue to examine ways in which we can benefit from this trend, including the evaluation of opportunities to shift
business from competitive distributors to the BSG network as well as seeking opportunistic, value-added acquisitions which complement our
long-term growth strategy. We believe that suppliers are increasingly likely to focus on larger distributors and retailers with a broader scale and
retail footprint. We also believe that we are well positioned to capitalize on this trend as well as participate in the ongoing consolidation at the
distributor/retail level. However, changes often occur in our relationships with suppliers that may materially affect the net sales and operating
earnings of our business segments. Consolidation among suppliers could exacerbate the effects of these relationship changes and could increase
pricing pressures. For example, L'Oreal has acquired distributors that compete with BSG in the Midwest, Southeast and West Coast regions of
the U.S. and, as a result, L'Oreal directly competes with BSG in certain geographic areas. If L'Oreal or any of our other suppliers acquired other
distributors or suppliers that conduct significant business with BSG, we could lose related revenue. There can be no assurance that BSG will not
lose further revenue over time (including within its franchise-based business) due to potential losses of additional products as well as from the
increased competition from distribution networks affiliated with any of our suppliers. Please see "Risk Factors — The beauty products
distribution industry is highly competitive and is consolidating" and "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."
Relationships with suppliers. Sally Beauty Supply and BSG, and their respective suppliers are dependent on each other for the distribution of
beauty products. We do not manufacture the brand name or exclusive-label products we sell. We purchase our products from a limited number of
manufacturers. As is typical in distribution businesses (particularly in our industry), these relationships are subject to change from time to time
(including the expansion or loss of distribution rights, including exclusive 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. 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 acquisitions of existing distributors. 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."
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High level of competition. 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, mass merchandisers, on-line retailers, drug
stores and supermarkets, as well as salons retailing hair care items. BSG competes with other domestic and international beauty product
wholesale and retail suppliers and manufacturers selling professional beauty products directly to salons and individual salon professionals. We
also face competition from authorized and unauthorized retailers and internet sites offering professional salon-only products. The increasing
availability of unauthorized professional salon products in large format retail stores such as drug stores, grocery stores and others could also have
a negative impact on our business. Please see "Risk Factors — The beauty products distribution industry is highly competitive and is
consolidating."
Economic conditions. We appeal to a wide demographic consumer profile and offer an extensive selection of professional beauty products
sold directly to retail consumers, and salons and salon professionals. Historically, these factors have provided us with reduced exposure to
downturns in economic conditions in the countries in which we operate. However, a downturn in the economy, especially for an extended period
of time, could adversely impact consumer demand of discretionary items such as beauty products and salon services, particularly affecting our
electrical products category and our full-service sales business. In addition, higher freight costs resulting from increases in the cost of fuel,
especially for an extended period of time, may impact our expenses at levels that we cannot pass through to our customers. These factors could
have a material adverse effect on our business, financial condition and results of operations. Please see "Risk Factors — The health of the
economy in the channels we serve 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."
Controlling expenses. Another important aspect of our business is our ability to control costs by right-sizing the business and maximizing the
efficiency of our business structure. Please see "Risk Factors — We are not certain that our ongoing cost control plans will continue to be
successful."
Opening new stores. Our future growth strategy depends in part on our ability to open and profitably operate new stores in existing and
additional geographic areas. In the U.S. and Canada, the capital requirements to open a Sally Beauty Supply or BSG store, excluding inventory,
average approximately $70,000 and $80,000, respectively, with the capital requirements for stores in other geographic areas costing less or
substantially more depending upon the marketplace. 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, any of which could have a material adverse impact on our business, financial condition or results of operations.
Please see "Risk Factors — If we are unable to profitably open and operate new stores, our business, financial condition and results of operations
may be adversely affected."
Changes to our information technology systems. As our operations grow in both size and scope, we will continuously need to improve and
upgrade our information 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 in advance of any
increase in the volume of our business, with no assurance that the volume of business will increase. For example, we are in the process of
designing and implementing a standardized enterprise resource planning ("ERP") system internationally, which we anticipate will be completed
over the next few years. In addition, we are currently implementing a point-of-sale system upgrade program in several areas (primarily in our
Sally Beauty Supply operations in the U.S.), which we anticipate will provide significant benefits, including enhanced tracking of customer sales
and store inventory activity. These and any other required upgrades to our information systems and information technology (or new technology),
now or in the future, will require that our management and resources be diverted from our core business to assist in completion of these projects.
Many of our systems are proprietary, and as a result our options are limited in seeking third-party assistance with the operation and upgrade of
those systems. There can be no
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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 financial reporting, business, financial condition or results of operations. Please see
"Risk Factors — We may be adversely affected by any disruption in our information technology systems."
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, including its franchise-based business Armstrong McCall, 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, Puerto Rico, the United Kingdom and certain other European countries. BSG operates stores under the CosmoProf
service mark. BSG also franchises Armstrong McCall professional beauty supply outlets in the southern and southwest portions of the U.S. and
in Mexico, and supplies sub-distributors in Europe. Sally Beauty Supply accounted for approximately 62% and BSG accounted for
approximately 38% of the Company's consolidated net sales for each of the years ended September 30, 2013, 2012 and 2011.
Financial information about business segments and geographic area information is incorporated herein by reference to the "Business Segments
and Geographic Area Information," Note 18 of the "Notes to Consolidated Financial Statements" in "Item 8—Financial Statements and
Supplementary Data" contained elsewhere in 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, 2013, Sally Beauty Supply operated 3,403 company-operated retail stores, 2,710 of which are located in the U.S. (with the
remaining 693 company-operated retail stores located in Canada, Mexico, Chile, the United Kingdom, Ireland, Belgium, France, Germany, the
Netherlands and Spain). Sally Beauty Supply also supplied 21 franchised stores located in the United Kingdom and certain other European
countries. Our Sally Beauty Supply stores carry an extensive selection of professional beauty supplies for both retail customers and salon
professionals, with between 6,000 and 10,000 stock keeping units, or SKUs, of beauty products across product categories including hair color,
hair care, skin and nail care, beauty sundries and electrical appliances. 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 professional beauty products, an extensive selection of ethnic products, knowledgeable 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. In the U.S. and Canada, our Sally Beauty Supply stores average approximately 1,700 square feet in
size, are located primarily in strip shopping centers and generally follow a consistent format, allowing customers familiarity
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between Sally Beauty Supply locations. Store formats, including standard size and product selection, for Sally Beauty Supply stores outside the
U.S. and Canada vary by marketplace.
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
displays to highlight new products and key promotional items.
Merchandise
Sally Beauty Supply stores carry an extensive selection of branded and exclusive-label professional beauty supplies. Sally Beauty Supply
manages each category by product and by SKU and uses centrally developed plan-o-guides 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. 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 (implemented primarily in North America) enable it to track and automatically
replenish inventory levels, generally on a weekly basis, allowing it to maintain consistently high levels of in-stock merchandise.
In addition, Sally Beauty Supply offers a comprehensive selection of ethnic products with specific appeal to African-American and Hispanic
customers. Its ethnic product offerings are tailored by store based on market demographics and category performance. We believe the wide
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.
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 (please see " Marketing and Advertising" below).
The following table sets forth the approximate percentage of Sally Beauty Supply's sales by product category:
Fiscal Year Ended
September 30,
2013
2012
2011
22.9% 22.2% 22.5%
22.1% 22.3% 21.3%
15.6% 15.7% 15.2%
13.8% 14.2% 14.5%
9.9% 10.2% 10.6%
7.5%
7.5%
7.9%
8.2%
7.9%
8.0%
100.0% 100.0% 100.0%
Hair color
Hair care
Skin and nail care
Brushes, cutlery and accessories
Electrical appliances
Ethnic products
Other beauty items
Total
Leading Third-Party Branded Products
Sally Beauty Supply offers an extensive selection of hair care products, nail care products, beauty sundries and appliances, featuring leading
third-party brands such as Clairol®, Revlon® and Conair®. In addition, Sally Beauty Supply offers an extensive selection of exclusive-label
merchandise. We believe that carrying an extensive 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
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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 an extensive selection of exclusive-label professional beauty products. We believe exclusive-label products provide
customers with an attractive alternative to higher-priced leading third-party brands. Exclusive-label products accounted for approximately 45%
of Sally Beauty Supply's product sales in the U.S. during the 2013 fiscal year. Generally, the exclusive-label brands have higher gross margins
than the leading third-party branded products, and we believe this area offers continued growth potential. Sally Beauty Supply maintains
exclusive-label products in substantially all its product categories. Sally Beauty Supply actively promotes its exclusive-label brands through instore promotions, print advertising and direct shopping guides. We believe our customers perceive our exclusive-label products to be comparable
in quality and name recognition to leading third-party branded products.
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.
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. For example, we offer between 7,000 and 10,000 SKUs of our Sally Beauty Supply products for sale
through our website ( www.sallybeauty.com ) and believe that the operation of our website enhances our other efforts intended to promote
consumer awareness of Sally Beauty Supply's products. Please see "Risk Factors—Our e-commerce business may be unsuccessful or, if
successful, may divert sales from our stores."
Sally Beauty Supply's customer loyalty and marketing programs, primarily in the U.S. and Canada, allow Sally Beauty Supply to collect pointof-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, are eligible to receive a special, discounted price on almost
every non-sale item. Members are also eligible to receive special Beauty Club e-mail newsletters and exclusive direct mail flyers that contain
additional savings, beauty tips, new product information and coupons. In addition, the "ProCard" is a marketing program for licensed salon
professionals. ProCard members are eligible to receive discounts on all beauty products sold at Sally Beauty Supply stores. We believe these
programs are effective in developing and maintaining customer loyalty. Outside the U.S. and Canada, our customer loyalty and marketing
programs vary by marketplace.
Store Locations
Sally Beauty Supply selects geographic areas and store sites on the basis of demographic information, the 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.
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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 (including franchised stores) during the last five fiscal years:
Stores open at beginning of period
Net store openings during period
Stores acquired during period
Stores open at end of period
Fiscal Year Ended September 30,
2013
2012
2011
2010
2009
3,309
3,158
3,032
2,923
2,844
113
129
126
108
60
2
22
—
1
19
3,424
3,309
3,158
3,032
2,923
Beauty Systems Group
We believe BSG is the largest full-service distributor of professional beauty supplies in North America, exclusively targeting salons and salon
professionals. As of September 30, 2013, BSG had 1,084 company-operated stores, supplied 161 franchised stores and had a sales force of
approximately 982 professional distributor sales consultants in all states in the U.S., in portions of Canada, and in Puerto Rico, Mexico and
certain European countries. Through BSG's large store base and sales force, including its franchise-based business Armstrong McCall, BSG is
able to access a significant portion of the highly fragmented U.S. professional beauty sales channel. BSG and Armstrong McCall stores provide a
comprehensive selection of between 5,000 and 10,000 beauty product SKUs that include hair color, hair care, skin and nail care, beauty sundries
and electrical appliances. 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.
Store Design and Operations
BSG stores, including its franchise-based Armstrong McCall stores, are designed to create a professional shopping environment that embraces
the salon professional and highlights its extensive product offering. Company-operated BSG stores, which primarily operate under the
CosmoProf banner, average approximately 2,600 square feet and are primarily located 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®, Joico® and Aquage®. The
selection of these and other brands varies by territory.
Professional Distributor Sales Consultants
BSG currently has a network of approximately 982 professional distributor sales consultants ("DSC" or "DSCs"), which exclusively serve salons
and salon professionals.
In order to provide a knowledgeable sales consultant team, BSG actively recruits individuals with industry knowledge or sales experience, as we
believe that new sales consultants with either broad knowledge about the products or direct sales experience will be more successful. In addition,
BSG provides training to new sales consultants beginning with a two-week training program, followed by a program of continuing 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
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selling professional beauty products, these sales consultants offer in-salon training for professionals and owners in areas such as new styles,
techniques and business practices. An important component of sales consultants' compensation is sales commissions. BSG's commission system
is designed to drive sales, as well as focus consultants on selling products that are best suited to individual salons and salon professionals.
We believe that our emphasis on recruitment, training, and sales-based compensation results in a sales force that distinguishes itself from other
full-service/exclusive-channel distributors and the employment of sales consultants is an effective way to serve salons and salon professionals,
particularly those located far away from a BSG store.
The following table sets forth the approximate percentage of BSG sales attributable by distribution channel:
Company-operated retail stores
Professional distributor sales consultants (full-service)
Franchise stores
Total
Fiscal Year Ended
September 30,
2013
2012
2011
64.7% 64.3% 62.9%
26.0% 26.3% 27.4%
9.3%
9.4%
9.7%
100.0% 100.0% 100.0%
Merchandise
BSG stores carry an extensive selection of third-party branded products, ranging between 5,000 and 10,000 SKUs of beauty products, including
hair color and care, skin and nail care, beauty sundries and 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 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 an extensive selection of branded merchandise is critical to maintaining relationships with our professional customers.
The following table sets forth the approximate percentage of BSG's sales attributable by product category:
Fiscal Year Ended
September 30,
2013
2012
2011
35.8% 36.4% 37.0%
30.0% 29.8% 29.6%
12.0% 12.0% 12.9%
10.2% 10.3%
9.7%
5.3%
4.7%
4.3%
6.7%
6.8%
6.5%
100.0% 100.0% 100.0%
Hair care
Hair color
Promotional items(a)
Skin and nail care
Electrical appliances
Other beauty items
Total
(a)
Promotional items consist of sales from other categories that are sold on a value-priced basis.
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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 shopping guides that highlight promotional products. We
also offer between 13,000 and 15,000 SKUs (primarily in the U.S.) of our BSG products for sale through our websites for beauty professionals
( www.cosmoprofbeauty.com, www.cosmoprofequipment.com and www.ebobdirect.com ) and believe that the operation of our websites enhances
our other efforts intended to promote awareness of BSG's products by salons and salon professionals. Please see "Risk Factors—Our ecommerce business may be unsuccessful or, if successful, may divert sales from our stores." In addition, BSG communicates with its customers
and distributes promotional material via e-mail and social networking websites. 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 also increase brand awareness and potentially
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, we
believe salon professionals are generally less sensitive about store location than our retail customers.
The following table provides a history of BSG's store count (including franchised stores) during the last five fiscal years:
Stores open at beginning of period
Net store openings during period
Stores acquired during period(a)
Stores open at end of period
(a)
Fiscal Year Ended September 30,
2013
2012
2011
2010
2009
1,190
1,151
1,027
991
929
43
39
39
36
16
12
—
85
—
46
1,245
1,190
1,151
1,027
991
Stores acquired in the fiscal year 2013 represent 12 stores owned by Essential Salon Products, Inc. ("Essential
Salon") prior to the Company's acquisition of certain assets of Essential Salon in May 2013. Stores acquired in the
fiscal year 2011 include 82 stores owned by Aerial prior to the Company's acquisition of Aerial in October 2010.
Stores acquired in the fiscal year 2009 include 43 stores owned by Schoeneman prior to the Company's acquisition
of Schoeneman in September 2009.
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
We believe that 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. In the U.S. and Puerto Rico, we offer up to 10,000 and 15,000 SKUs
through Sally Beauty
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Supply and BSG, respectively, (in each case, in our stores or online) to a broad potential customer base that includes retail consumers, salons and
barbershops in the U.S.
Differentiated Customer Value Proposition
We believe that our stores have a competitive advantage over those of our competitors due to our stores' 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 selection of ethnic products, which is
tailored by store based on market demographics and category performance. We believe that the wide selection of these products at our stores
further differentiates Sally Beauty Supply from its competitors. In addition, as discussed above, Sally Beauty Supply also offers a customer
loyalty program called the Beauty Club, whereby members receive special, member discounts on products and are eligible for Beauty Club email newsletters and exclusive direct mail flyers with additional promotional offerings, beauty tips and new product information for a nominal
annual fee. 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. 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.
Attractive Store Economics
We believe that our stores generate attractive returns on invested capital. In the U.S. and Canada, the capital requirements to open a Sally Beauty
Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively. Sally Beauty Supply stores average
approximately 1,700 square feet and BSG stores average approximately 2,600 square feet in size in the U.S. and Canada. 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 of opening, 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 fiscal years Sally Beauty Supply and BSG have opened an aggregate of 536 and 173 net new stores, respectively,
excluding the effect of acquisitions. Outside the U.S. and Canada, our store format, sizes and capital requirements vary by marketplace, but we
believe these stores also generate compelling unit economics.
Experienced Management Team with a Proven Track Record
Our senior management team, led by our President and Chief Executive Officer Gary Winterhalter, possesses a unique combination of
management skills and experience in the beauty supply market. Our team also has a strong track record of successfully identifying and
integrating acquisitions, which continues to be an important part of our overall strategy.
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 marketplaces, both organically and through strategic acquisitions. Key elements of our
growth strategy are to:
Increase Sales Productivity of Our Stores
We intend to grow same store sales by focusing on improving our merchandise mix, introducing new products, growing our exclusive-label
product sales and enhancing our customer loyalty programs. We plan
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to grow the sales of our exclusive-label products in Sally Beauty Supply, which we believe are competitive with leading third-party branded
merchandise, draw traffic to our stores and increase customer loyalty by continuing to develop and promote our selection of exclusive-label
products. We also plan to continue to enhance our customer loyalty programs, which allow us to collect point-of-sale customer data and increase
our understanding of customers' needs. In addition, we plan to tailor our marketing, advertising and promotions to attract new customers and
increase sales with existing customers.
Expand Our Store Base
During the past five fiscal years, Sally Beauty Supply and BSG have opened an aggregate of 536 and 173 net new stores, respectively, excluding
the effect of acquisitions. Because of the limited initial capital outlay, rapid payback, and attractive return on capital, we intend to continue to
expand our store base. In the fiscal year 2013, we opened 113 and 43 Sally Beauty Supply stores and BSG stores, respectively, excluding the
effect of acquisitions. We believe there are growth opportunities for additional stores in North America, Europe, and Central and South America.
We expect new store openings in existing and new areas to be an important aspect of our future growth opportunities, and intend to continue our
annual organic store growth between 3% and 4% of our total stores for the foreseeable future.
Grow Internationally
International sales represent 23% of Sally Beauty Supply's net sales and we believe there is a significant opportunity for future growth in certain
international geographic areas. As of September 30, 2013, we had 789 Sally Beauty Supply and BSG company-operated stores and supplied
49 franchise stores across 10 countries outside the United States: Canada, Mexico, Chile, the United Kingdom, Ireland, Belgium, France,
Germany, the Netherlands and Spain. We believe our platform provides us with the foundation to continue to expand internationally. In
particular, we are currently focused on growing our business in Europe, and Central and South America.
Increase Operating Efficiency and Profitability
We believe there are opportunities to increase the profitability of our operations by growing our exclusive-label brands, improving sourcing,
shifting customer mix, continuing our cost-cutting initiatives and by further expanding our e-commerce channel. We continue to develop and
promote our higher margin exclusive-label products and increase exclusive-label product sales, which increase our gross margins and operating
results. Over the past few years, we have undertaken a full review of our merchandise 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 continue to focus on
changing our customer mix by increasing the percentage of retail customers within our stores at Sally Beauty Supply. At BSG, we have
completed numerous projects, including a re-branding initiative that repositioned the vast majority of our North American company-operated
stores under a common name and store identity, CosmoProf, which we believe has improved brand consistency.
We also offer between 7,000 and 10,000 SKUs of our Sally Beauty Supply products for sale through our website ( www.sallybeauty.com ) and
offer between 13,000 and 15,000 SKUs of our BSG products for sale principally through our websites for beauty professionals
( www.cosmoprofbeauty.com, www.cosmoprofequipment.com and www.ebobdirect.com ). We expect electronic commerce, or e-commerce, will
increasingly result in enhanced operating earnings, as a percentage of net sales, for both business segments as a result of the incremental
operating expenses (including rent and other occupancy expenses, payroll, and shipping and handling expenses) associated with traditional brickand-mortar stores. Please see "Risk Factors — Our e-commerce business may be unsuccessful or, if successful, may divert sales from our stores."
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Pursue Strategic Acquisitions and New Territories for Organic Growth
We have completed more than 40 acquisitions during the last 10 full fiscal 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.
Recent acquisitions have included:
•
In May 2013, we acquired certain assets and business operations of Essential Salon, a professional-only distributor of beauty
products operating in the northeastern region of the United States;
•
In November 2011, we acquired the Floral Group, a distributor of professional beauty products with 19 stores located in the
Netherlands;
•
In October 2011, we acquired certain assets and the business of a former exclusive distributor of John Paul Mitchell Systems
beauty products with sales primarily in Ohio and West Virginia;
•
In October 2010, we acquired Aerial, then an 82-store professional-only distributor of beauty products operating in 11 states in
the mid-western United States;
•
In March 2010, we acquired certain assets and the business of a former exclusive distributor of John Paul Mitchell Systems
beauty products with sales primarily in south Florida and certain islands in the Caribbean; and
•
In December 2009, we acquired Sinelco, a wholesale distributor of professional beauty products located in Belgium with sales
throughout Europe.
We intend to continue to identify and evaluate acquisition targets and organic growth targets both domestically and internationally, with a focus
on expanding our exclusive BSG territories and allowing Sally Beauty Supply to enter new geographic areas principally outside the U.S. Please
see "Risk Factors—We may not be able to successfully identify acquisition candidates or successfully complete desirable acquisitions."
Competition
Although there are a limited number of direct competitors to our business, the beauty industry is highly competitive. In each geographic area in
which we operate, we experience competition from domestic and international businesses often with more resources, including mass
merchandisers, on-line retailers, drug stores, supermarkets and other chains offering similar or substitute beauty products at comparable prices.
Our business also faces competition from department stores, as well as from authorized and unauthorized retailers and internet sites offering
professional beauty products. 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 that 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. Please see "Risk Factors—The beauty products distribution
industry is highly competitive and is consolidating" for additional information about our competition.
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
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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.
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 2013, our five
largest suppliers, The Procter & Gamble Company, or P&G, the Professional Products Division of L'Oreal USA S/D, Inc., or L'Oreal, Conair
Corporation, John Paul Mitchell Systems and Shiseido Cosmetics (America) Limited, accounted for approximately 40% of our consolidated
merchandise purchases. Products are purchased from these and many other 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 business and 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 product lines). Changes in our relationships with suppliers occur often,
and could positively or negatively impact our net sales and operating profits. 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." 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, 2013, we operated mainly through 18 distribution centers, nine of which serviced Sally Beauty Supply and nine of which
serviced BSG.
Our purchasing and distribution system is designed to minimize the delivered cost of merchandise and maximize the level of merchandise instock 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 Factors—We are not certain that our ongoing cost control plans will continue to be successful."
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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 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 Factors—We may be adversely affected by any disruption in our information technology systems."
Employees
The following table sets forth certain information about the Company's employees:
Year Ended
September 30,
2013
2012
2011
7,560
7,370
7,040
5,060
4,890
4,935
13,830
13,265
12,640
26,450
25,525
24,615
Salaried
Hourly
Part-time(a)
Balance at end of period
(a)
Part-time employees enable us to supplement store staffing schedules, particularly in North America.
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 product labeling and safety issues.
As of September 30, 2013, Sally Beauty Supply supplied 21 and BSG supplied 161 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 our operations.
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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 in which
we operate. Together with our subsidiaries, we own over 280 trademark registrations in the U.S., and over 1,150 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.
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 1-800SEC-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 .
ITEM 1A. RISK FACTORS
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. 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,
on-line retailers, 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 e-commerce retailers offering professional salon-only and other products. The
availability of diverted professional salon products in unauthorized 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 branded and exclusive-label 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
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ability to maintain prices or may require us to reduce prices in efforts to retain business or channel 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 with suppliers and greater marketing
resources, resulting in a more effective ability to compete with us. For instance, we may lose customers if those competitors which have broad
geographic reach attract additional salons (individual and chain) that are currently BSG customers, or if professional beauty supply
manufacturers align themselves with our competitors. For example, BSG's largest supplier, L'Oreal, has been able to shift a material amount of
revenue out of the BSG nationwide distribution network and into its own regional distribution networks that compete with us. L'Oreal has also
acquired one manufacturer (that does not currently do business with BSG) and distributors which compete directly with BSG in the southeastern
U.S., the midwestern U.S. and the west coast of the U.S. As a result, L'Oreal directly competes 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 (or another direct competitor) were to acquire or otherwise merge
with another manufacturer which conducts business with BSG, we could lose that revenue as well. Not only does consolidation in distribution
pose risks from competing distributors, but it may also place more leverage in the hands of those manufacturers to negotiate smaller margins on
products sold through our network.
If we are unable to compete effectively in our marketplace or if competitors divert our customers away from our networks, 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 specific beauty products. If we do not timely identify and properly respond to evolving trends and consumer demands in the
marketplace for beauty products and changing consumer demands our sales may decline significantly and we may be required to mark down
unsold inventory to prices which can be significantly lower than normal prices, which would adversely impact our margins and 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 systemsrelated 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.
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Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons.
Our comparable store sales, which we refer to as same 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:
•
changes in our merchandising strategy or mix;
•
the performance of our new stores;
•
our ability to increase sales and meet forecasted levels of profitability at our existing stores;
•
the effectiveness of our inventory management;
•
the timing and concentration of new store openings, including additional human resource requirements and related pre-opening
and other start-up costs;
•
levels of pre-opening expenses associated with new stores;
•
the effect of our integration of acquired businesses and stores over time;
•
the varying cost and profitability of new stores opened in the U.S. and in foreign countries;
•
a portion of a typical new store's sales (or sales we make over the internet channel) coming from customers who previously
shopped at other existing stores;
•
expenditures on our distribution system;
•
the timing and effectiveness of our marketing activities, particularly our ability to drive new retail traffic into our stores and our
Sally Beauty Club and ProCard promotions;
•
seasonal fluctuations due to weather conditions;
•
our internet channels diverting sales from our stores;
•
actions by our existing or new competitors;
•
fluctuations over time in the cost to us of products we sell; and
•
worldwide economic conditions and, in particular, the retail sales environment in the U.S.
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 not continue to increase at the same rates as we have recently experienced and may
even 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 any products we sell, and instead purchase our products from recognized brand manufacturers and private label fillers.
We depend on a limited number of manufacturers for a significant percentage of the products we sell. During the fiscal year 2013, our five
largest suppliers were Procter & Gamble Co., or P&G, the Professional Products Division of L'Oreal USA—S.D., Inc., or L'Oreal, Conair
Corporation, John Paul Mitchell Systems and Shiseido Cosmetics (America) Limited and accounted for approximately 40% of our consolidated
merchandise purchases. In addition, one of those suppliers, L'Oreal, represented approximately 12% of BSG's merchandise purchases during the
fiscal year 2013. BSG recently reached agreement with L'Oreal to extend the right of BSG to distribute Matrix® and certain other L'Oreal
products in BSG East and BSG West, subject to certain conditions, through December 2015.
Since we purchase products from many manufacturers and fillers under at-will contracts and contracts which can be terminated without cause
upon 90 days' notice or less, or which expire without express rights
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of renewal, manufacturers and fillers could discontinue sales to us immediately or upon short notice. Some of our contracts with manufacturers
may be terminated if we fail to meet specified minimum purchase requirements. If minimum purchase requirements are not met, we do not have
contractual assurances of continued supply. In lieu of termination, a manufacturer may also change the terms upon which it sells, for example, by
raising prices or broadening distribution to third parties. Infrequently, a supplier will seek to terminate a distribution relationship through legal
action. 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's 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 lower prices, when their products are purchased from distribution channels they control. If
our access to supplier-provided products were to diminish 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 that may increase our costs and reduce our revenues, adversely affecting our
business, financial condition and results of operations. Therefore, there can be no assurance that the impact of these developments, if they were
to occur, 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 potential unfavorable changes in our relationships with suppliers, 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 products by manufacturers and fillers 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 exclusive-label 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 inability to procure ingredients, 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 manufacturer or filler 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.
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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 products we sell. We may not be able to identify a defect in a product we purchase from a
manufacturer or exclusive-label 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 the composition, manufacture and safety of the products, as well as the compliance of
our product labels with government 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 or
impermissible ingredients, 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 or the credibility of
the manufacturer, 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
manufacturers' insurance policies, it is not certain that any 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 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 and claims for indemnity or reimbursement by us may require us to expend significant
resources and may take years to resolve. If we are forced to expend significant resources and time to resolve such claims or to pay material
amounts 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 federal, state and local laws and regulations in the U.S., as well as applicable laws and regulations in each foreign
marketplace in which we do business. These laws and regulations govern the composition, packaging, labeling and safety of the products we sell,
as well as the methods we use to sell and 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 and fillers of the products sold by us
could result in fines, product recalls and enforcement actions, and 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. 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
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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 disclosure of financial and other information about us, as well as the issuance
and sale of our securities. Another area of intense regulation is that of the relationships we have with our employees, including, for example,
compliance with many different wage and hour and nondiscrimination related regulatory schemes and, in the U.S., compliance with the recently
enacted Affordable Care Act. Violation of any of the laws or regulations governing our business or the assertion of individual or class-wide
claims could have an adverse effect on our business, financial condition and results of operations.
Our e-commerce business may be unsuccessful or, if successful, may divert sales from our stores.
We offer many of our beauty products for sale through our websites in the U.S. (such as www.sallybeauty.com and www.cosmoprofbeauty.com )
and abroad. As a result, we encounter risks and difficulties frequently experienced by 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,
websites and software and other related operational systems. Although we believe that our participation in both e-commerce and physical store
sales is a distinct advantage for us due to synergies and the potential for new customers, supporting product offerings through both of these
channels could create issues that have the potential to adversely affect our results of operations. For example, if our e-commerce business
successfully grows, it may do so in part by attracting existing customers, rather than new customers, who choose to purchase products from us
online rather than from our physical stores, thereby reducing the financial performance of our stores. In addition, offering different products
through each channel could cause conflicts and cause some of our current or potential internet customers to consider competing distributors of
beauty products. In addition, offering products through our internet channels (particularly directly to consumers through our professional
business) could cause some of our current or potential vendors to consider competing internet offerings of their products either on their own or
through competing distributors. As we continue to grow our e-commerce business, the impact of attracting existing rather than new customers,
of conflicts between product offerings online and through our stores, and of opening up our channels to increased internet competition could
have a material adverse impact on our business, financial condition and results of operations, including future growth and same store sales.
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 ultimately to general merchandise retailers, among others. 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. In addition, such 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.
In the BSG arena, product diversion is generally prohibited under our manufacturers' contracts, and we are often under a contractual obligation
to stop selling to salons, salon professionals and other bulk purchasers which engage in product diversion. If we fail to comply with our antidiversion obligations under these manufacturers' contracts, (including any known diversion of products sold through our Armstrong McCall
franchisees), these contracts could be adversely affected or even terminated. In
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addition, our investigation and enforcement of our anti-diversion obligations may result in reduced sales to our customer base, thereby
decreasing our revenues and profitability.
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, the failure of
Armstrong McCall franchisees to renew their franchise agreements, any requirement that Armstrong McCall restructure its franchise agreements
in connection with such renewals, or any failure of Armstrong McCall to meet its obligations under its franchise agreements, could result in
decreased revenues for BSG or create legal issues with our franchisees or with manufacturers.
We may not be able to successfully identify acquisition candidates or successfully complete desirable acquisitions.
In the past several years, we have completed multiple acquisitions and we intend to pursue additional acquisitions in the future. We actively
review acquisition prospects which 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 continue 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 is 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
increase as a result of any acquisitions. Internationally, regulatory requirements, trade barriers and due diligence difficulties, among other
considerations, make acquiring suitable foreign candidates more difficult, time-consuming and expensive. See below "— Our ability to conduct
business in international marketplaces may be affected by legal, regulatory and economic risks ."
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:
•
difficulties in assimilating acquired operations, stores or products, including the loss of key employees from acquired businesses;
•
difficulties and costs associated with integrating and evaluating the distribution or information systems and/or internal control
systems of acquired businesses;
•
difficulties in competing with existing stores or business or diverting sales from existing stores or business;
•
expenses associated with the amortization of identifiable intangible assets;
•
problems retaining key technical, operational and administrative personnel;
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•
diversion of management's attention from our core business, including loss of management focus on marketplace developments;
•
complying with foreign regulatory requirements, including multi-jurisdictional competition rules and restrictions on
trade/imports;
•
enforcement of intellectual property rights in foreign countries;
•
adverse effects on existing business relationships with suppliers and customers, including the potential loss of suppliers of the
acquired businesses;
•
operating inefficiencies and negative impact on profitability;
•
entering geographic areas or channels in which we have limited or no prior experience; and
•
those related to general economic and political conditions, including legal and other barriers to cross-border investment in
general, or by U.S. companies in particular.
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 expected financial improvements in the acquired businesses.
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.
In the U.S. and Canada, the capital requirements to open a Sally Beauty Supply or BSG store, excluding inventory, average approximately
$70,000 and $80,000, respectively, with the capital requirements for stores in other geographic areas costing less or substantially more
depending upon the marketplace. Despite these relatively low 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:
•
the inability to identify and acquire suitable sites or to negotiate acceptable leases for such sites;
•
proximity to existing stores that may reduce the new store's sales or the sales of existing stores;
•
difficulties in adapting our distribution and other operational and management systems to an expanded network of stores;
•
the level of sales made through our internet channels and the potential that sales through our internet channels will divert sales
from our stores;
•
the potential inability to obtain adequate financing to fund expansion because of our high leverage and limitations on our ability
to issue equity under our credit agreements, among other things;
•
increased (and sometimes unanticipated) costs associated with opening stores in international locations;
•
difficulties in obtaining any governmental and third-party consents, permits and licenses;
•
limitations on capital expenditures which may be included in financing documents that we enter into; and
•
difficulties in adapting existing operational and management systems to the requirements of national or regional laws and local
ordinances.
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In addition, as we continue to open new stores, our management, as well as our financial, distribution and information systems, and other
resources will be subject to greater demands. If our personnel and systems are unable to successfully manage this increased burden, our results of
operations may be materially affected.
The health of the economy in the channels we serve 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
internationally. Concerns over inflation, employment, tax laws, energy costs, geopolitical issues, terrorism, the availability and cost of credit, the
mortgage market, sovereign and private banking systems, sovereign deficits and increasing debt burdens and the real estate and other financial
markets in the U.S. and Europe have contributed to increased volatility and diminished expectations for the U.S. and certain foreign economies.
We appeal to a wide demographic consumer profile and offer an extensive 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, as well as adversely impact the frequency of salon services performed by professionals using products purchased from us.
Factors that could affect consumers' willingness to make such discretionary purchases include: general business conditions, levels of
employment, interest rates, tax rates, the availability of consumer credit and consumer confidence in future economic conditions. In the event of
a prolonged economic downturn or acute recession, 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 climate could also adversely affect our vendors.
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 substantially depends on continuing to control or reduce operating expenses. In furtherance of this strategy, we have
engaged in ongoing activities to reduce or control costs, some of which are complicated and require us to expend significant resources to
implement. 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
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 for and obtaining trademark protection 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 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.
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We may have to defend our rights in intellectual property that we use in certain of our products, and we could be found to infringe the
intellectual property rights of others, which could be disruptive and expensive to our business.
The industry in which we operate is characterized by the need for a large number of copyrights, trade secrets and trademarks and by frequent
litigation based on allegations of infringement or other violations of intellectual property rights. A third party may at any time assert that our
products violate such party's intellectual property rights. Successful intellectual property claims against us could result in significant financial
liabilities and/or prevent us from selling certain of our products. In addition, the resolution of infringement claims may require us to redesign our
products, to obtain licenses to use intellectual property belonging to third parties, which may not be attainable on reasonable terms, or to cease
using the intellectual property altogether. Moreover, any intellectual property claim, regardless of its merits, could be expensive and timeconsuming to defend against and could divert the attention of management. As a result, claims based on allegations of infringement or other
violations of intellectual property rights, regardless of outcome, could have a material adverse effect on our business, financial condition and
results of operations.
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, potential difficulties in enforcing
contracts, increasing levels of violence or terrorism, an inability to properly protect assets (including intellectual property), an inability to collect
receivables, 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 (caused by us, by our
service providers or others) or by computer viruses, physical or electronic break-ins and similar disruptions affecting the internet. Such delays,
problems or costs may have a material adverse effect on our business, financial condition and results of operations.
As our operations grow in both size and scope, we continuously need to improve and upgrade our systems and infrastructure while maintaining
their reliability and integrity. 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. For example, we
are in the process of designing and implementing a standardized ERP system internationally over the next few years. In addition, we are
currently implementing new point-of-sale systems in a number of our divisions, which we anticipate will provide significant benefits, including
enhanced tracking of 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 meeting implementation
objectives. Many of our systems are proprietary, and as a result our options are limited in seeking third-party help with the operation and
upgrade of those systems.
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There can be no assurance that the time and resources our management will need to devote to operations and upgrades, any delays due to the
installation of any upgrade (and customer issues therewith), any resulting service outages, or the impact on the reliability of our data from any
upgrade or any legacy system, will not have a material adverse effect on our business, financial condition or results of operations.
The occurrence of natural disasters or acts of violence or terrorism could adversely affect our operations and financial performance.
The occurrence of natural disasters or acts of violence or terrorism could result in physical damage to our properties, the temporary closure of
stores or distribution centers, the temporary lack of an adequate work force, the temporary or long-term disruption in the supply of products (or a
substantial increase in the cost of those products) from 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 violence or terrorism were to impact
our business, we could, among other things, incur significantly higher costs and longer lead times associated with distributing products.
Furthermore, insurance costs associated with our business may rise significantly in the event of a large scale natural disaster or act of violence or
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 a publicly-traded company, we are subject to reporting and other obligations under the Exchange Act and other federal securities regulations,
such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. These obligations place significant demands on our management,
administrative and operational resources, including accounting resources. As a public company, we incur significant legal, accounting and other
expenses. We also have significant compliance costs under SEC and New York Stock Exchange rules and regulations.
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 Section 404. Moreover, effective internal controls are necessary to help prevent financial fraud. Any adverse finding could
result in a negative reaction in the financial marketplace due to 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 are continuously upgrading our systems, including information technology systems, and implementing
additional financial and management controls and disclosure processes, reporting systems and procedures. These and any other modifications to
our financial and management controls and disclosure processes, reporting systems, information technology systems and procedures under the
financial reporting requirements and other rules that apply to us, now and in the future, will require that our management and resources be
diverted from our core business to assist in compliance with the requirements. There can be no assurance that the time and resources our
management will need to devote to the requirements, any delays due to the installation of any upgrade, any resulting service outages, and any
impact on the reliability of our data from an upgrade will not have a material adverse effect on our business, financial condition or results of
operations.
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We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.
We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our
operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends is
highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The ability of our
subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our obligations will depend
on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are
outside of our control. We cannot assure you that the cash flow and earnings of our operating subsidiaries will be adequate for our subsidiaries to
service their debt obligations. If our subsidiaries do not generate sufficient cash flow from operations to satisfy corporate obligations, we may
have to: undertake alternative financing plans (such as refinancing), restructure debt, sell assets, reduce or delay capital investments, or seek to
raise additional capital. We cannot assure you that any such alternative refinancing would be possible, that any assets could be sold, or, if sold, of
the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if
at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Our inability to generate
sufficient cash flow to satisfy our obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on
our business, financial condition and results of operations.
Furthermore, we and our subsidiaries may incur substantial additional indebtedness in the future that may severely restrict or prohibit our
subsidiaries from making distributions, paying dividends or making loans to us.
Risks Relating to Our Substantial Indebtedness
We have substantial debt and may incur substantial additional debt, which could adversely affect our financial health, our ability to obtain
financing in the future and our ability to react to changes in our business.
As of September 30, 2013, certain of our subsidiaries, including Sally Holdings LLC, which we refer to as Sally Holdings, had an aggregate
principal amount of approximately $1,690.7 million of outstanding debt, including capital lease obligations, and a total debt to equity ratio of 5.6:1.00.
Our substantial debt could have important consequences. For example, it could:
•
make it more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such
indebtedness;
•
limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements or
general corporate purposes;
•
require us to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our
indebtedness, thereby reducing the availability of such cash flows to fund working capital, capital expenditures and other general
corporate purposes;
•
restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us, which could limit our ability to conduct
repurchases of our own equity securities or pay dividends to our stockholders, thereby limiting our ability to enhance stockholder
value through such transactions;
•
increase our vulnerability to general adverse economic and industry conditions, including interest rate fluctuations (because a
portion of our borrowings are at variable rates of interest), including borrowings under our senior secured term loan facilities and
our asset-based senior secured loan facility, which we refer to collectively as the senior secured credit facilities;
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•
place us at a competitive disadvantage compared to our competitors with proportionately less debt or comparable debt at more
favorable interest rates and that, as a result, may be better positioned to withstand economic downturns;
•
limit our ability to refinance indebtedness or cause the associated costs of such refinancing to increase; and
•
limit our flexibility to adjust to changing market conditions and ability to withstand competitive pressures, or prevent us from
carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our
business.
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, 2013, our senior credit facility provided us commitments for
additional borrowings of up to approximately $382.3 million under the asset-based senior secured loan (or ABL) facility, subject to 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 asset-based senior secured loan (or ABL) facility (the "ABL facility") as well as
the indentures governing our senior notes due 2019, senior notes due 2022 and senior notes due 2023, which we refer to collectively as "the
Notes" or "the senior notes due 2019-2023", 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 ABL facility contains covenants that, among other things, restrict Sally Holdings and its subsidiaries' ability to:
•
change their line of business;
•
engage in certain mergers, consolidations and transfers of all or substantially all of their assets;
•
make certain dividends, stock repurchases and other distributions;
•
make acquisitions of all of the business or assets of, or stock representing beneficial ownership of, any person;
•
dispose of certain assets;
•
make voluntary prepayments on the Notes or make amendments to the terms thereof;
•
prepay certain other debt or amend specific debt agreements;
•
change the fiscal year of Sally Holdings or its direct parent; and
•
create or incur negative pledges.
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
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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:
•
dispose of assets;
•
incur additional indebtedness (including guarantees of additional indebtedness);
•
pay dividends, repurchase stock or make other distributions;
•
prepay subordinated debt;
•
create liens on assets;
•
make investments (including joint ventures);
•
engage in mergers, consolidations or sales of all or substantially all of Sally Holdings' assets;
•
engage in certain transactions with affiliates; and
•
permit restrictions on Sally Holdings' subsidiaries' ability to pay dividends.
The restrictions in the indentures governing our Notes and the terms of our senior credit facility 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, which are borrowers under these
agreements, will be granted waivers or amendments to these agreements if 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 facility 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 and restrictions could result in a default
under either the senior credit facility 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 ABL facility, could proceed against the collateral securing the debt. In any such case, our
subsidiaries may be unable to borrow under the ABL facility and may not be able to repay the amounts due under 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 depends 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 ABL facility 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.
The impairment of certain financial institutions could adversely affect us.
We have exposure to different financial institutions in their capacities as lenders in our credit facilities, depositories of our corporate cash
balances and counterparties on our foreign currency hedging transactions. All of these transactions expose us to credit risk in the event of default
of the financial institution(s). If these financial institutions become impaired or insolvent, this could have serious consequences to our financial
condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Substantially all of our store and warehouse locations are leased while our corporate headquarters and five 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, 2013:
Location
United States (excluding Puerto
Rico)
Puerto Rico
International:
United Kingdom
Belgium
Canada
Chile
France
Germany
Netherlands
Mexico
Other
Total International
Total Store Count
Sally Beauty
Supply
CompanyOperated
Franchise
Beauty Systems
Group
CompanyOperated
Franchise
2,668
42
—
—
986
2
133
—
238
38
88
38
49
33
22
166
21
693
3,403
4
6
—
—
3
—
—
—
8
21
21
—
—
96
—
—
—
—
—
—
96
1,084
—
—
—
—
—
—
—
28
—
28
161
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The following table provides locations for our significant offices and warehouses and corporate headquarters, as of September 30, 2013:
Location
Company-Owned Properties:
Denton, Texas
Reno, Nevada
Columbus, Ohio
Jacksonville, Florida
Denton, Texas
Marinette, Wisconsin
Leased Properties:
Greenville, Ohio
Fresno, California
Blackburn, Lancashire,
England
Spartanburg, South Carolina
Pottsville, Pennsylvania
Clackamas, Oregon
Thornliebank, Scotland
Ronse, Belgium
Gent, Belgium
Calgary, Alberta, Canada
Mississauga, Ontario, Canada
Lincoln, Nebraska
Guadalupe, Nuevo Leon,
Mexico
(1)
(2)
Type of Facility
Sq. Feet
Business Segment
Corporate Headquarters
Warehouse
Warehouse
Warehouse
Office, Warehouse
Office, Warehouse
N/A
253,000
246,000
237,000
114,000
99,000
(1)(2)
(1)
(1)
(1)
(1)
(2)
Office, Warehouse
Warehouse
246,000
200,000
(2)
(2)
Warehouse
Warehouse
Office, Warehouse
Warehouse
Office, Warehouse
Office, Warehouse
Office, Warehouse
Warehouse
Office, Warehouse
Warehouse
190,000
190,000
140,000
104,000
94,000
91,000
83,000
62,000
60,000
54,000
(1)
(2)
(2)
(2)
(1)
(1)
(1)
(2)
(2)
(2)
Warehouse
40,000
(1)(2)
Sally Beauty Supply
BSG
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, 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 these matters. 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 foreign
country or jurisdiction 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market for the Registrant's Common Equity
(a)
Market Information
Our common stock is listed on the New York Stock Exchange, Inc., or the NYSE, under the symbol "SBH." The following table sets forth the
high and low sales prices of our common stock during the fiscal years ended September 30, 2013 and 2012.
Quarter Ended
Fiscal Year 2013:
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
Fiscal Year 2012:
September 30, 2012
June 30, 2012
March 31, 2012
December 31, 2011
(b)
High
Low
$
$
$
$
31.86
31.62
29.94
26.57
$
$
$
$
25.25
28.27
23.57
22.49
$
$
$
$
28.29
28.35
25.63
21.85
$
$
$
$
23.95
24.65
19.63
15.93
Holders
As of November 8, 2013, there were 1,084 stockholders of record of our common stock.
(c)
Dividends
We have not declared or paid dividends at any time during the 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, to repay outstanding debt or fund additional share
repurchases. 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 the agreements and instruments governing our
debt) 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 and instruments significantly restrict the ability of our subsidiaries to make certain Restricted Payments 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 Factors—Risks Relating to Our Substantial Indebtedness" and Note 13 of
the "Notes to Consolidated Financial Statements" in "Item 8—Financial Statements and Supplementary Data."
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(d)
Not Applicable
(e)
Performance Graph
The following illustrates the comparative total return among Sally Beauty, the Dow Jones U.S. Specialty Retailers Index and the S&P 500 Index
assuming that $100 was invested on September 30, 2008 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 non-managed index and provides a comprehensive view of issuers which
are primarily in the retail sector in the United States. Sally Beauty's common stock is included in this index.
9/08
Sally
Beauty
Holdings,
Inc.
100.00
S&P 500 100.00
Dow
Jones
US
Specialty
Retailers
TSM
100.00
3/09
9/09
3/10
9/10
3/11
9/11
3/12
9/12
3/13
9/13
66.05
69.46
82.67 103.72 130.23 162.91 193.02 288.37 291.74 341.63 304.19
93.09 104.03 102.55 120.31 103.72 130.58 135.05 148.81 161.17
86.54 108.34 125.55 135.77 152.91 140.46 177.20 168.66 193.20 236.13
This data assumes that $100 was invested on September 30, 2008 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.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about the Company's repurchases of shares of its common stock during the three months ended
September 30, 2013:
Fiscal Period
July 1 through
July 31,
2013
August 1
through
August 31,
2013
September 1
through
September 30,
2013
Total this
quarter
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
177,500 $
Total Number of Shares
Purchased as Part of
Publicly
Announced Plans
or Programs(1)(2)
29.77
177,500 $
Approximate Dollar
Value of Shares that
May Yet Be
Purchased
Under the Plans or
Programs
553,911,891
3,138,882
27.10
3,138,882
468,842,386
463,447
26.22
463,447
456,689,172
3,779,829 $
27.12
3,779,829 $
456,689,172
(1)
On August 27, 2012, the Company announced that its Board of Directors approved a share repurchase program authorizing
it to repurchase up to $300.0 million of its common stock beginning on October 1, 2012 (the "2012 Share Repurchase
Program"). The Company repurchased 10.4 million shares of its common stock under the 2012 Share Repurchase Program
at an aggregate cost of $266.4 million, prior to the Company's termination of the 2012 Share Repurchase Program in
March 2013.
(2)
On March 5, 2013, the Company announced that its Board of Directors approved a new share repurchase program
authorizing it to repurchase up to $700.0 million of its common stock over a period of eight quarters commencing on that
date (the "2013 Share Repurchase Program"). The 2013 Share Repurchase Program expires on or about March 5, 2015.
During the period from March 5, 2013 through September 30, 2013, the Company repurchased 8.5 million shares of its
common stock under the 2013 Share Repurchase Program at an aggregate cost of $243.3 million.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Sally Beauty for the each of the years in the five-year period ended September 30, 2013
(dollars in thousands, except per share data):
Fiscal Year Ended September 30,
2012
2011
2010
2013
Results of operations
information:
Net sales
Cost of products sold and
distribution expenses
Gross profit
Selling, general and
administrative expenses(a)
Depreciation and amortization
Operating earnings
Interest expense(b)
Earnings before provision for
income taxes
Provision for income taxes
Net earnings
Earnings per share
Basic
Diluted
Weighted average shares, basic
Weighted average shares,
diluted
Operating data:
Number of stores (at end of
period):
Sally Beauty Supply
Beauty Systems Group
Consolidated
Professional distributor sales
consultants (at end of period)
Same store sales growth
(decline)(c):
Sally Beauty Supply
Beauty Systems Group
Consolidated
Financial condition
information (at end of
period):
Working capital
Cash, cash equivalents and
short-term investments
Property, plant and equipment,
net
Total assets
Long-term debt, excluding
current maturities(b)
Stockholders' deficit
$ 3,622,216
2009
$ 3,523,644 $ 3,269,131 $ 2,916,090 $ 2,636,600
1,826,953
1,795,263
1,780,385
1,743,259
1,674,526
1,594,605
1,511,716
1,404,374
1,393,283
1,243,317
1,202,709
72,192
520,362
107,695
1,179,206
64,698
499,355
138,412
1,086,414
59,722
448,469
112,530
1,012,321
51,123
340,930
112,982
899,415
47,066
296,836
132,022
412,667
151,516
$ 261,151
360,943
335,939
227,948
164,814
127,879
122,214
84,120
65,697
$ 233,064 $ 213,725 $ 143,828 $ 99,117
$
$
$
$
1.52
1.48
171,682
1.27 $
1.17 $
0.79 $
0.55
1.24 $
1.14 $
0.78 $
0.54
183,420
183,020
181,985
181,691
176,159
188,610
188,093
184,088
183,306
3,424
1,245
4,669
3,309
1,190
4,499
3,158
1,151
4,309
3,032
1,027
4,059
2,923
991
3,914
982
1,044
1,116
1,051
1,022
(0.6)%
4.2%
0.8%
$ 473,164
6.5%
6.1%
6.4%
6.3%
5.5%
6.1%
4.1%
6.2%
4.6%
2.1%
1.0%
1.8%
$ 686,519 $ 419,142 $ 387,123 $ 341,733
47,115
240,220
63,481
59,494
54,447
229,540
1,950,086
202,661
2,065,800
182,489
1,728,600
168,119
1,589,412
151,252
1,490,732
1,612,685
(303,479)
1,615,322
1,410,111
1,559,591
1,653,013
(115,085) $ (218,982) $ (461,272) $ (615,451)
(a)
Selling, general and administrative expenses for the fiscal years 2013, 2012, 2011, 2010 and 2009 include share-based
compensation expenses of $19.2 million, $16.9 million, $15.6 million, $12.8 million and $8.6 million, respectively. In the
fiscal year 2012, selling, general and administrative expenses reflect a $10.2 million charge resulting from a loss
contingency and, in the fiscal year 2011, selling, general and administrative expenses reflect a net favorable impact of
$21.3 million, including a $27.0 million credit from a litigation settlement and certain non-recurring charges of
$5.7 million.
(b)
Our long-term debt primarily relates to debt incurred in 2006 when we became an independent company (debt which has
largely been refinanced during the past two fiscal years) and interest expense relates mainly to such indebtedness. In the
fiscal year 2012, interest expense reflects non-recurring charges of $37.8 million related to
35
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our redemption of outstanding senior notes and our repayment in full of a term loan in connection with such refinancing.
Please see Note 13 of the "Notes to Consolidated Financial Statements" in "Item 8—Financial Statements and
Supplementary Data" for additional information about the Company's debt.
(c)
For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for
14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior fiscal
year. Our same store sales are calculated in constant dollars and include internet-based sales and the effect of store
expansions, if applicable, but do not generally include the sales from stores relocated until 14 months after the relocation.
The sales from stores acquired are excluded from our same store sales calculation until 14 months after the acquisition.
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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 as of September 30, 2013 and 2012, and the results of operations
and cash flows for the three fiscal years in the period ended September 30, 2013, of Sally Beauty. This section should be read in conjunction
with the audited consolidated financial statements of Sally Beauty and the related notes included elsewhere in this Annual Report. This
Management's Discussion and Analysis of Financial Condition and Results of Operations section may contain 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, 2013:
•
Our consolidated net sales from company-operated stores that have been open for 14 months or longer, which we refer to as same
store sales, increased 0.8% for the fiscal year ended September 30, 2013, compared to the fiscal year ended September 30, 2012;
•
Our consolidated net sales for the fiscal year ended September 30, 2013 increased by $98.6 million, or 2.8%, to $3,622.2 million
compared to the fiscal year ended September 30, 2012. For the fiscal year ended September 30, 2013, changes in foreign currency
exchange rates did not have a material impact on our consolidated net sales;
•
Our consolidated gross profit for the fiscal year ended September 30, 2013 increased by $52.0 million, or 3.0%, to
$1,795.3 million compared to the fiscal year ended September 30, 2012. As a percentage of net sales, gross profit increased to
49.6% for the fiscal year ended September 30, 2013, compared to 49.5% for the fiscal year ended September 30, 2012;
•
Our consolidated operating earnings for the fiscal year ended September 30, 2013 increased by $21.0 million, or 4.2%, to
$520.4 million compared to the fiscal year ended September 30, 2012. As a percentage of net sales, operating earnings increased
to 14.4% for the fiscal year ended September 30, 2013, compared to 14.2% for the fiscal year ended September 30, 2012;
•
Our consolidated net earnings increased by $28.1 million, or 12.1%, to $261.2 million compared to the fiscal year ended
September 30, 2012. As a percentage of net sales, net earnings increased by 60 basis points to 7.2% for the fiscal year ended
September 30, 2013, compared to 6.6% for the fiscal year ended September 30, 2012;
•
Sally Beauty Supply and BSG opened or acquired 119 and 53 net new stores, respectively, during the fiscal year ended
September 30, 2013, excluding franchised stores;
•
Cash provided by operations increased by $12.9 million, or 4.3%, to $310.5 million for the fiscal year ended September 30, 2013,
compared to $297.6 million for the fiscal year ended September 30, 2012;
•
In March 2013, our Board of Directors approved a new share repurchase program authorizing us to repurchase up to
$700.0 million of our common stock. During the fiscal year ended September 30, 2013, we repurchased and retired approximately
18.9 million shares of our common stock under share repurchase programs approved by our Board of Directors, including the
repurchase program approved in March 2013, at an aggregate cost of $509.7 million; and
•
In May 2013, we acquired certain assets and business operations of Essential Salon Products, Inc. ("Essential Salon"), a
professional-only distributor of beauty products operating in the northeastern region of the United States, for approximately
$15.7 million, subject to certain adjustments.
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Overview
Description of Business
As of September 30, 2013, we operate primarily through two business units, Sally Beauty Supply and Beauty Systems Group, or BSG. Through
Sally Beauty Supply and BSG, we had a multi-channel platform of 4,487 company-operated stores and supplied 182 franchised stores, primarily
in North America and selected South American and European countries, as of September 30, 2013. We believe the Company is the largest
distributor of professional beauty supplies in the U.S. based on store count. Within BSG, we also have one of the largest networks of
professional distributor sales consultants in North America. We provide our customers with a wide variety of leading third-party branded and
exclusive-label professional beauty supplies, including hair color products, 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, 2013, our consolidated net sales and operating earnings were $3,622.2 million and
$520.4 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, 2013, Sally Beauty Supply operated 3,403 company-operated retail stores, 2,710 of which are located in the U.S., with the
remaining 693 company-operated stores located in Canada, Mexico, Chile, the United Kingdom, Ireland, Belgium, France, Germany, the
Netherlands and Spain. Sally Beauty Supply also supplied 21 franchised stores located in the United Kingdom and certain other European
countries. In the U.S. and Canada, our Sally Beauty Supply stores average approximately 1,700 square feet in size and are located primarily in
strip shopping centers. Our Sally Beauty Supply stores carry an extensive selection of professional beauty supplies for both retail customers and
salon professionals, with between 6,000 and 10,000 SKUs of beauty products across product categories including hair color, hair care, skin and
nail care, beauty sundries and electrical appliances. 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. Store formats, including average size and product selection, for Sally
Beauty Supply outside the U.S. and Canada vary by marketplace. For the year ended September 30, 2013, Sally Beauty Supply's net sales and
segment operating profit were $2,230.0 million and $437.0 million, respectively, representing 62% and 69% of our consolidated net sales and
consolidated operating profit before unallocated corporate expenses and share-based compensation expenses, respectively.
We believe BSG is the largest full-service distributor of professional beauty supplies in North America, exclusively targeting salons and salon
professionals. As of September 30, 2013, BSG had 1,084 company-operated stores, supplied 161 franchised stores and had a sales force of
approximately 982 professional distributor sales consultants selling exclusively to salons and salon professionals in all states in the U.S., in
portions of Canada, and in Puerto Rico, Mexico and certain European countries. Company-operated BSG stores, which primarily operate under
the CosmoProf banner, average approximately 2,600 square feet in size and are primarily located in secondary strip shopping centers. BSG
stores provide a comprehensive selection of between 5,000 and 10,000 beauty product SKUs that include hair color and care, skin and nail care,
beauty sundries and electrical appliances. 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. BSG stores carry leading third-party brands such as Paul Mitchell®, Wella®, Sebastian®, Goldwell®,
Joico® and Aquage®, intended for use in salons and for resale by the salons 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, 2013, BSG's net sales and segment operating profit were $1,392.2 million and $200.5 million, respectively,
representing 38% and 31% of our consolidated net sales and consolidated operating profit before unallocated corporate expenses and share-based
compensation expenses, respectively.
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Key Industry and Business Trends
We operate primarily 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 and hair care products. We believe the following key industry and business trends and
characteristics will influence our business and our financial results going forward:
•
High level of marketplace fragmentation. The U.S. salon channel is highly fragmented with nearly 290,000 salons and
barbershops. Given the fragmented and small-scale nature of the salon industry, we believe that salon operators will continue to
depend on full-service/exclusive distributors and open-line channels for a majority of their beauty supply purchases.
•
Growth in booth renting and frequent stocking needs. Salon professionals primarily rely on just-in-time inventory due to capital
constraints and a lack of warehouse and shelf space at salons. In addition, booth renters, who comprise a significant percentage of
total U.S. salon professionals, are often responsible for purchasing their own supplies. Historically, booth renters have
significantly increased as a percentage of total salon professionals, and we expect this trend to continue. Given their smaller
individual purchases and relative lack of financial resources, booth renters are likely to be dependent on frequent trips to
professional beauty supply stores, like BSG and Sally Beauty Supply. We expect that these factors will continue to drive demand
for conveniently located professional beauty supply stores.
•
Increasing use of exclusive-label products. We offer a broad range of exclusive-label professional beauty products, primarily in
our Sally Beauty Supply segment. As our lines of exclusive-label products have matured and become better known in our retail
stores, we have seen an increase in sales of these products. Generally, our exclusive-label products have higher gross margins for
us than the leading third-party branded products and, accordingly, we believe that the growth in sales of these products will likely
enhance our overall gross margins. 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."
•
Favorable demographic and consumer trends. We expect the aging baby-boomer population to drive future growth in
professional beauty supply sales through an increase in the usage of hair color and hair loss products. Additionally, continuously
changing fashion-related trends that drive new hair styles are expected to result in continued demand for hair styling products.
Changes in consumer tastes and fashion trends can have an impact on our financial performance. Our continued success depends
largely 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 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. Please see "Risk Factors — We may
be unable to anticipate changes in consumer preferences and buying trends or manage our product lines and inventory
commensurate with consumer demand."
•
International growth strategies. A key element of our growth strategy depends on our ability to capitalize on international
growth opportunities and to grow our current level of non-U.S. operations. For example, during the fiscal year ended
September 30, 2013 our international company-operated stores increased from 742 stores to 789 stores. In addition, we have
completed a number of international acquisitions over the past three years that increased our European and South American
footprint. We intend to continue to identify and evaluate non-U.S. acquisition and/or organic international growth opportunities.
Our ability to grow our non-U.S. operations, integrate our new non-U.S. acquisitions and successfully pursue additional non-U.S.
acquisition and/or organic international growth opportunities may be affected by business, legal, regulatory and economic risks.
Please see "Risk Factors — We may not be able to successfully identify acquisition
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candidates or successfully complete desirable 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" and "Our ability to conduct business in
international marketplaces may be affected by legal, regulatory and economic risks."
•
Continuing consolidation. There is continuing consolidation among professional beauty product distributors and professional
beauty product manufacturers. We plan to continue to examine ways in which we can benefit from this trend, including the
evaluation of opportunities to shift business from competitive distributors to the BSG network as well as seeking opportunistic,
value-added acquisitions which complement our long-term growth strategy. We believe that suppliers are increasingly likely to
focus on larger distributors and retailers with a broader scale and retail footprint. We also believe that we are well positioned to
capitalize on this trend as well as participate in the ongoing consolidation at the distributor/retail level. However, changes often
occur in our relationships with suppliers that may materially affect the net sales and operating earnings of our business segments.
Consolidation among suppliers could exacerbate the effects of these relationship changes and could increase pricing pressures.
For example, L'Oreal has acquired distributors that compete with BSG in the Midwest, Southeast and West Coast regions of the
U.S. and, as a result, L'Oreal directly competes with BSG in certain geographic areas. If L'Oreal or any of our other suppliers
acquired other distributors or suppliers that conduct significant business with BSG, we could lose related revenue. There can be
no assurance that BSG will not lose further revenue over time (including within its franchise-based business) due to potential
losses of additional products as well as from the increased competition from distribution networks affiliated with any of our
suppliers. Please see "Risk Factors — The beauty products distribution industry is highly competitive and is consolidating" and
"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."
•
Relationships with suppliers. Sally Beauty Supply and BSG, and their respective suppliers are dependent on each other for the
distribution of beauty products. We do not manufacture the brand name or exclusive-label products we sell. We purchase our
products from a limited number of manufacturers. As is typical in distribution businesses (particularly in our industry), these
relationships are subject to change from time to time (including the expansion or loss of distribution rights, including exclusive
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. 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 acquisitions of existing distributors.
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."
•
High level of competition. Sally Beauty Supply competes with other domestic and international beauty product wholesale and
retail outlets, including local and regional open-line beauty supply
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stores, professional-only beauty supply stores, mass merchandisers, on-line retailers, drug stores and supermarkets, as well as
salons retailing hair care items. BSG competes with other domestic and international beauty product wholesale and retail
suppliers and manufacturers selling professional beauty products directly to salons and individual salon professionals. We also
face competition from authorized and unauthorized retailers and internet sites offering professional salon-only products. The
increasing availability of unauthorized professional salon products in large format retail stores such as drug stores, grocery stores
and others could also have a negative impact on our business. Please see "Risk Factors — The beauty products distribution
industry is highly competitive and is consolidating."
•
Economic conditions. We appeal to a wide demographic consumer profile and offer an extensive selection of professional beauty
products sold directly to retail consumers, and salons and salon professionals. Historically, these factors have provided us with
reduced exposure to downturns in economic conditions in the countries in which we operate. However, a downturn in the
economy, especially for an extended period of time, could adversely impact consumer demand of discretionary items such as
beauty products and salon services, particularly affecting our electrical products category and our full-service sales business. In
addition, higher freight costs resulting from increases in the cost of fuel, especially for an extended period of time, may impact
our expenses at levels that we cannot pass through to our customers. These factors could have a material adverse effect on our
business, financial condition and results of operations. Please see "Risk Factors — The health of the economy in the channels we
serve 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."
•
Controlling expenses. Another important aspect of our business is our ability to control costs by right-sizing the business and
maximizing the efficiency of our business structure. Please see "Risk Factors — We are not certain that our ongoing cost control
plans will continue to be successful."
•
Opening new stores. Our future growth strategy depends in part on our ability to open and profitably operate new stores in
existing and additional geographic areas. In the U.S. and Canada, the capital requirements to open a Sally Beauty Supply or BSG
store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for stores in
other geographic areas costing less or substantially more depending upon the marketplace. 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, any of which could have a material adverse impact
on our business, financial condition or results of operations. Please see "Risk Factors — If we are unable to profitably open and
operate new stores, our business, financial condition and results of operations may be adversely affected."
•
Changes to our information technology systems. As our operations grow in both size and scope, we will continuously need to
improve and upgrade our information 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 in advance of any increase in the volume of our business, with no assurance that the volume of business will
increase. For example, we are in the process of designing and implementing a standardized enterprise resource planning ("ERP")
system internationally, which we anticipate will be completed over the next few years. In addition, we are currently implementing
a point-of-sale system upgrade program in several areas (primarily in our Sally Beauty Supply operations in the U.S.), which we
anticipate will provide significant benefits, including enhanced tracking of customer sales and store inventory activity. These and
any other required upgrades to our information systems and information technology (or new technology), now or in the future,
will require that our management and resources be diverted from our core business to assist in completion of these projects. Many
of our systems are proprietary, and as a result our options are limited in seeking third-party assistance with the operation and
upgrade of those systems. There can
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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 financial reporting, business, financial
condition or results of operations. Please see "Risk Factors — We may be adversely affected by any disruption in our information
technology systems."
Significant Recent Acquisitions
Essential Salon —On May 31, 2013, the Company acquired certain assets and business operations of Essential Salon, a professional-only
distributor of beauty products operating in the northeastern region of the United States, for approximately $15.7 million, subject to certain
adjustments. The results of operations of the Essential Salon are included in the Company's consolidated financial statements subsequent to the
acquisition date. The assets acquired and liabilities assumed, including intangible assets subject to amortization of $9.1 million, were recorded
based on their preliminary estimated fair values at the acquisition date. In addition, goodwill of $3.5 million (which is expected to be deductible
for tax purposes) was recorded as a result of this acquisition. The final valuation of the assets acquired and liabilities assumed will be completed
within twelve months from the acquisition date. We funded this acquisition with cash from operations.
The Floral Group —In the fiscal year 2012, the Company acquired Floral Group, then a 19-store distributor of professional beauty products
based in Eindhoven, the Netherlands, for approximately €22.8 million (approximately $31.2 million). The assets acquired and liabilities
assumed, including intangible assets subject to amortization of $11.8 million, were recorded at their respective fair values at the acquisition date
and goodwill of $15.0 million (which is not expected to be deductible for tax purposes) was recorded as a result of this acquisition. The results of
operations of the Floral Group are included in the Company's consolidated financial statements subsequent to the acquisition date. The
acquisition was funded with cash from operations and with borrowings under our asset-based senior secured loan (or ABL) facility (the "ABL
facility") in the amount of approximately $17.0 million.
Aerial Company —In the fiscal year 2011, the Company acquired Aerial Company, Inc. ("Aerial"), an 82-store professional-only distributor of
beauty products operating in 11 states in the midwestern region of the United States, for approximately $81.8 million. The results of operations
of Aerial are included in our consolidated financial statements subsequent to the acquisition date. The assets acquired and liabilities assumed,
including intangible assets subject to amortization of $34.7 million, were recorded at their respective fair values at the acquisition date and
goodwill of $25.3 million (which is expected to be deductible for tax purposes) was recorded as a result of this acquisition. The acquisition of
Aerial was funded with borrowings in the amount of $78.0 million under the ABL facility (which were later paid in full) and with cash from
operations.
In addition to these three acquisitions, we completed several other individually immaterial acquisitions during the fiscal years 2013, 2012 and
2011 at the aggregate cost of approximately $6.8 million, $12.8 million and $5.0 million, respectively. In connection with these acquisitions in
fiscal 2013, we recorded additional intangible assets subject to amortization of $4.0 million and, in connection with these acquisitions in fiscal
2012 and 2011, we recorded additional goodwill in the amount of $9.4 million and $4.3 million, respectively, the majority of which is expected
to be deductible for tax purposes. Generally, we funded these acquisitions with cash from operations or borrowings under the ABL facility. The
valuation of the assets acquired and liabilities assumed in connection with these acquisitions was based on their fair values at the acquisition
date.
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Share Repurchase Programs
In August 2012, we announced that our Board of Directors approved a share repurchase program authorizing us to repurchase up to
$300.0 million of our common stock (the "2012 Share Repurchase Program"). In addition, on March 5, 2013, we announced that our Board of
Directors approved a new share repurchase program authorizing us to repurchase up to $700.0 million of our common stock over the eight
quarters commencing on such date (the "2013 Share Repurchase Program"). In connection with the authorization of the 2013 Share Repurchase
Program, the 2012 Share Repurchase Program was terminated.
Prior to such termination, the Company had repurchased approximately 10.4 million shares at a cost of $266.4 million under the 2012 Share
Repurchase Program. In addition, during the period from March 5, 2013 through September 30, 2013, the Company repurchased approximately
8.5 million shares at a cost of $243.3 million under the 2013 Share Repurchase Program.
During the fiscal year ended September 30, 2013, we repurchased and retired approximately 18.9 million shares of our common stock (under the
2012 Share Repurchase Program and the 2013 Share Repurchase Program) at a cost of $509.7 million. We reduced common stock and additional
paid-in capital, in the aggregate, by these amounts. We funded these share repurchases with the cash proceeds from our September 2012 debt
issuance, cash from operations and borrowings under the ABL facility. Please see "Item 5. Unregistered Sales of Equity Securities and Use of
Proceeds—(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers" in Part II, Other Information, for additional information
about the Company's share repurchase programs.
During the fiscal year ended September 30, 2012, we repurchased and retired approximately 7.6 million shares of our common stock from two
venture capital investment funds associated with Clayton, Dubilier & Rice, LLC (the "CD&R Investors") at a cost of $200.0 million.
Other Significant Items
Derivative Instruments
As a multinational corporation, we are subject to certain market risks including changes in market interest rates and foreign currency
fluctuations. We may consider a variety of practices in the ordinary course of business to manage these market risks, including, when deemed
appropriate, the use of derivative instruments such as interest rate swaps and foreign currency options, collars and forwards (hereafter, "foreign
exchange contracts"). Currently, we do not purchase or hold any derivative instruments for speculative or trading purposes.
Foreign Currency Derivative Instruments
We are exposed to potential gains or losses from foreign currency fluctuations affecting net investments in subsidiaries (including intercompany
notes not permanently invested) and earnings denominated in foreign currencies, as well as exposure resulting from the sale of products and
services among the parent company and subsidiaries with a functional currency different from the parent. Our primary exposures are to changes
in exchange rates for the U.S. dollar versus the Euro, the British pound sterling, the Canadian dollar, the Chilean peso, and the Mexican peso. In
addition, from time to time we may have exposure to changes in the exchange rates for the British pound sterling versus the Euro in connection
with the sale of products and services among certain European subsidiaries of the Company. Our various foreign currency exposures at times
offset each other, sometimes providing a natural hedge against foreign currency risk. In connection with the remaining foreign currency risk, the
Company from time to time uses foreign exchange contracts to effectively fix the foreign currency exchange rate applicable to specific
anticipated foreign currency-denominated cash flows, thus limiting the potential fluctuations in such cash flows resulting from foreign currency
market movements.
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The Company uses foreign exchange contracts including, at September 30, 2013, foreign currency options with an aggregate notional amount of
$12.0 million to manage the exposure to the U.S. dollar resulting from certain of our Sinelco Group subsidiaries' purchases of merchandise from
third-party suppliers. Sinelco's functional currency is the Euro. These foreign currency options enable Sinelco to buy U.S. dollars at a contractual
exchange rate of 1.32, are with a single counterparty and expire ratably through September 2014.
The Company also uses foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates in connection with
certain intercompany balances not permanently invested. As such, at September 30, 2013, we hold: (a) a foreign currency forward which enables
us to sell approximately €13.9 million ($18.9 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.3526, (b) a
foreign currency forward which enables us to sell approximately $5.5 million Canadian dollars ($5.3 million, at the September 30, 2013
exchange rate) at the contractual exchange rate of 1.03115, (c) a foreign currency forward which enables us to buy approximately $8.0 million
Canadian dollars ($7.8 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.0329, (d) a foreign currency
forward which enables us to sell approximately 8.6 million Mexican pesos ($0.7 million, at the September 30, 2013 exchange rate) at the
contractual exchange rate of 13.1806 and (e) a foreign currency forward which enables us to sell approximately £4.2 million ($6.8 million, at the
September 30, 2013 exchange rate) at the contractual exchange rate of 1.6129. All the foreign currency forwards discussed in this paragraph are
with a single counterparty (not the same party as the counterparty on the options discussed in the preceding paragraph) and expire on or before
December 31, 2013.
In addition, the Company uses foreign exchange contracts including, at September 30, 2013, foreign currency forwards with an aggregate
notional amount of €3.6 million ($4.9 million, at the September 30, 2013 exchange rate) to mitigate the exposure to the British pound sterling
resulting from the sale of products and services among certain European subsidiaries of the Company. The foreign currency forwards discussed
in this paragraph enable the Company to buy British pound sterling in exchange for Euro currency at the weighted average contractual exchange
rate of 0.8425, are with a single counterparty (the same counterparty as that on the foreign currency forwards discussed in the immediately
preceding paragraph) and expire ratably through September 2014.
The Company's foreign exchange contracts are not designated as hedges and do not currently meet the requirements for hedge accounting.
Accordingly, the changes in the fair value (i.e., marked-to-market adjustments) of these derivative instruments (which are adjusted quarterly) are
recorded in selling, general and administrative expenses in our consolidated statements of earnings. During the fiscal year ended September 30,
2013, selling, general and administrative expenses included $2.8 million in net losses from all of the Company's foreign exchange contracts,
including marked-to-market adjustments. Please see "Item 7A—Quantitative and Qualitative Disclosures about Market Risk—Foreign currency
exchange rate risk" and Note 14 of the "Notes to Consolidated Financial Statements" in Item 8—"Financial Statements and Supplementary Data"
contained elsewhere in this Annual Report.
Interest Rate Swap Agreements
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. At
September 30, 2013, the Company held no interest rate derivative instruments.
In May 2008, we entered into certain interest rate swap agreements with an aggregate notional amount of $300 million in connection with our
variable interest rate obligation under the senior term loan B facility (until our May 2012 repayment of such loan). These agreements enabled us
to convert a portion of our variable interest rate obligations to fixed rate obligations and were designated and qualified as effective
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cash flow hedges. Accordingly, changes in the fair value of these derivative instruments were recorded quarterly, net of income tax, in
accumulated other comprehensive (loss) income ("OCI") until the swap agreements expired, in May 2012. As such for the fiscal years 2012 and
2011, other comprehensive income included deferred gains on these swaps of $3.9 million and $5.6 million, respectively, after tax.
Share-Based Compensation Awards
For the fiscal years 2013, 2012 and 2011, total share-based compensation cost charged against earnings was $19.2 million, $16.9 million and
$15.6 million, respectively, and resulted in an increase in additional paid-in capital by the same amounts. Share-based compensation expenses
for the fiscal years 2013, 2012 and 2011 included $5.9 million, $5.3 million and $5.0 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 Sally Beauty
Holdings, Inc. 2010 Omnibus Incentive Plan (the "2010 Plan") and certain predecessor plans, such as the Sally Beauty Holdings 2007 Omnibus
Incentive Plan. For the fiscal years 2013, 2012 and 2011, 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 $7.1 million, $6.2 million and $6.0 million,
respectively, and resulted in the recognition of deferred tax assets by generally the same amounts. Our consolidated statements of cash flows
reflect, for the fiscal years 2013, 2012 and 2011, excess tax benefits of $15.4 million, $14.4 million and $3.7 million, respectively, from
employee exercises of stock options as financing cash flows. As of September 30, 2013, we had $15.1 million of unrecognized compensation
expense related to unvested stock option awards that is expected to be charged to expense over the weighted average period of 2.3 years, and
$2.5 million of unrecognized compensation expense related to unvested restricted stock awards that is expected to be charged to expense over
the weighted average period of 3.1 years.
Non-recurring Items
Based upon an unfavorable verdict rendered in November 2012 in certain actions brought against the Company in March 2011, we recorded
$10.2 million in legal settlement costs as of September 30, 2012, which we believed to be our best estimate of the potential loss. During the
fiscal year ended September 30, 2013, the parties continued to engage in negotiations aimed at resolving the matter and, in November 2012,
entered into a settlement agreement whereby the Company agreed to pay the plaintiff the one-time cash sum of $8.5 million and agreed to certain
other terms of settlement in exchange for a full release of claims.
In December 2011, the Company redeemed the $430.0 million aggregate principal amount outstanding of its 9.25% senior notes due 2014 and
the $275.0 million aggregate principal amount outstanding of its 10.50% senior subordinated notes due 2016, pursuant to the terms of the
indentures governing the senior notes and the senior subordinated notes. In addition, in May 2012, the Company paid in full its borrowings under
the senior term loan B (approximately $596.9 million). Accordingly, during the fiscal year ended September 30, 2012, the Company recorded
charges to earnings in the aggregate amount of approximately $37.8 million (including approximately $24.4 million in call premiums paid and
approximately $13.4 million in unamortized deferred financing costs expensed) in connection with its redemption of the senior notes and the
senior subordinated notes and its repayment of the senior term loan B. These amounts are included in interest expense in the Company's
consolidated statements of earnings for the fiscal year ended September 30, 2012. Please see "Liquidity and Capital Resources" below for more
information about the Company's debt.
In the fiscal year ended September 30, 2012, we recognized tax benefits (approximately $10.3 million) resulting from a limited restructuring, for
U.S. income tax purposes, completed in that fiscal year. As a result, the effective income tax rate for the fiscal year 2012 (35.4%) was lower than
our average historical effective tax rate of approximately 37.0%.
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For the fiscal year ended September 30, 2011, consolidated operating earnings reflect a net favorable impact of $21.3 million, including a
$27.0 million credit from a litigation settlement and certain non-recurring charges of $5.7 million, including exit costs related to the closure of a
BSG warehouse.
Results of Operations
The following table shows the condensed results of operations of our business for the fiscal years ended September 30, 2013, 2012 and 2011 (in
millions):
Net sales
Cost of products sold and distribution
expenses
Gross profit
Total other operating costs and expenses
Operating earnings
Interest expense
Earnings before provision for income taxes
Provision for income taxes
Net earnings
Fiscal Year Ended
September 30,
2013
2012
2011
$ 3,622.2 $ 3,523.6 $ 3,269.1
1,826.9
1,780.4
1,674.5
1,795.3
1,743.2
1,594.6
1,274.9
1,243.8
1,146.1
520.4
499.4
448.5
107.7
138.4
112.6
412.7
361.0
335.9
151.5
127.9
122.2
$ 261.2 $ 233.1 $ 213.7
The following table shows the condensed results of operations of our business for the fiscal years ended September 30, 2013, 2012 and 2011,
expressed as a percentage of net sales for the respective periods:
Fiscal Year Ended
September 30,
2013
2012
2011
100.0% 100.0% 100.0%
50.4% 50.5% 51.2%
49.6% 49.5% 48.8%
35.2% 35.3% 35.1%
14.4% 14.2% 13.7%
3.0%
4.0%
3.4%
11.4% 10.2% 10.3%
4.2%
3.6%
3.8%
7.2%
6.6%
6.5%
Net sales
Cost of products sold and distribution expenses
Gross profit
Total other operating costs and expenses
Operating earnings
Interest expense
Earnings before provision for income taxes
Provision for income taxes
Net earnings
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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):
Fiscal Year Ended September 30,
2013
2012
2011
Net sales:
Sally Beauty Supply
BSG
Consolidated
$ 2,230,028
1,392,188
$ 3,622,216
Gross profit
Gross profit margin
Selling, general and administrative expenses
Depreciation and amortization
$ 1,795,263 $ 1,743,259 $ 1,594,605
49.6%
49.5%
48.8%
$ 1,202,709 $ 1,179,206 $ 1,086,414
$
72,192 $
64,698 $
59,722
Earnings before provision for income taxes:
Segment operating profit:
Sally Beauty Supply(a)
BSG(a)
Segment operating profit
Unallocated expenses(a)(b)
Share-based compensation expense
Operating earnings
Interest expense(c)
Earnings before provision for income taxes
$
437,018 $ 429,520 $ 380,963
200,492
182,699
164,660
637,510
612,219
545,623
(97,947)
(96,012)
(81,594)
(19,201)
(16,852)
(15,560)
520,362
499,355
448,469
(107,695)
(138,412)
(112,530)
$ 412,667 $ 360,943 $ 335,939
Segment operating profit margin:
Sally Beauty Supply
BSG
Consolidated operating profit margin
Number of stores at end-of-period (including
franchises):
Sally Beauty Supply
BSG
Consolidated
19.6%
14.4%
14.4%
3,424
1,245
4,669
Same store sales growth (decline)(d)
Sally Beauty Supply
BSG
Consolidated
(a)
(b)
(c)
(d)
$ 2,198,468 $ 2,012,407
1,325,176
1,256,724
$ 3,523,644 $ 3,269,131
(0.6)%
4.2%
0.8%
19.5%
13.8%
14.2%
3,309
1,190
4,499
6.5%
6.1%
6.4%
18.9%
13.1%
13.7%
3,158
1,151
4,309
6.3%
5.5%
6.1%
For the fiscal year 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge resulting from a loss
contingency. For the fiscal year 2011, consolidated operating earnings reflect a net favorable impact of $21.3 million,
including a $27.0 million credit from a litigation settlement and certain non-recurring charges of $5.7 million. This net
benefit of $21.3 million is reflected in the BSG segment and in unallocated expenses in the amount of $19.0 million and
$2.3 million, respectively.
Unallocated expenses consist of corporate and shared costs.
For the fiscal year 2012, interest expense reflects non-recurring charges of $37.8 million in connection with the
Company's redemption of outstanding notes and repayment of a term loan.
For the purpose of calculating our same store sales metrics, we compare the current period sales for stores open for
14 months or longer as of the last day of a month with the sales for these stores for the comparable period in the prior
fiscal year. Our same store sales are calculated in constant dollars and include internet-based sales and the effect of
store expansions, if applicable, but do not generally include the sales from stores relocated until 14 months after the
relocation. The sales from stores acquired are excluded from our same store sales calculation until 14 months after the
acquisition.
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Description of Net Sales and Expenses
Net Sales.
Our net sales consist primarily of the following:
1.
Sally Beauty Supply. Sally Beauty Supply generates net sales primarily by selling products through its stores to both retail
customers and salon professionals. Sally Beauty Supply sells products for hair color and care, skin and nail care, beauty sundries
and electrical appliances. Because approximately 45% of our Sally Beauty Supply product sales come from exclusive-label
brands, most of these same products are generally not available in most other retail stores or in our BSG business segment.
Various factors influence Sally Beauty Supply's net sales including overall consumer traffic, local competition, inclement
weather, product assortment and availability, price, hours of operation, and marketing and promotional activity. Sally Beauty
Supply's product assortment and sales are generally not seasonal in nature.
2.
Beauty Systems Group. BSG generates net sales by selling products to salons and salon professionals through companyoperated and franchised stores as well as through its network of professional distributor sales consultants. BSG sells products for
hair color and care, skin and nail care, beauty sundries and electrical appliances. These products are not sold directly to the
general public and are generally not the same products as those sold in our Sally Beauty Supply stores. Various factors influence
BSG's net sales, including product features and availability, competition, relationships with suppliers, new product introductions
and price. BSG's product assortment and sales are generally not seasonal in nature.
Cost of Products Sold and Distribution Expenses. Cost of products sold and distribution expenses consist of the cost to purchase merchandise
from suppliers, less vendor rebates and allowances, and certain overhead expenses including purchasing costs, freight from distribution centers
to stores and merchandise handling costs at 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, employee benefits, utilities, property maintenance, advertising costs, rent, insurance, freight and
distribution expenses for delivery to customers, administrative costs and costs associated with our corporate support center.
Interest Expense.
Interest expense includes the amortization of deferred debt issuance costs and is stated net of interest income.
The Fiscal Year Ended September 30, 2013 compared to the Fiscal Year Ended September 30, 2012
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,
2013
2012
Increase
Net sales:
Sally Beauty Supply
BSG
Consolidated net sales
Gross profit:
Sally Beauty Supply
BSG
Consolidated gross profit
Gross profit margin:
Sally Beauty Supply
BSG
Consolidated gross profit margin
$ 2,230,028 $ 2,198,468 $
1,392,188
1,325,176
$ 3,622,216 $ 3,523,644 $
31,560
67,012
98,572
1.4%
5.1%
2.8%
$ 1,223,378 $ 1,199,342 $
571,885
543,917
$ 1,795,263 $ 1,743,259 $
24,036
27,968
52,004
2.0%
5.1%
3.0%
54.9%
41.1%
49.6%
48
54.6%
41.0%
49.5%
0.3%
0.1%
0.1%
Table of Contents
Net Sales
Consolidated Net Sales
Consolidated net sales increased by $98.6 million, or 2.8%, for the fiscal year ended September 30, 2013, compared to the fiscal year ended
September 30, 2012, primarily as a result of increases in unit volume, including increases in sales at existing stores and the incremental sales
from the 172 company-operated stores opened or acquired during the last twelve months. Company-operated Sally Beauty Supply and BSG
stores that have been open for 14 months or longer contributed an increase in consolidated net sales of approximately $105.7 million, or 3.0%,
and certain other sales channels (including sales through our BSG franchise-based businesses and distributor sales consultants, and sales from
our Sally Beauty Supply non-store sales channels), in the aggregate, contributed an increase in consolidated sales of approximately
$37.6 million, or 1.1%, compared to fiscal year ended September 30, 2012. On the other hand, incremental sales from businesses acquired in the
preceding 12 months were $28.9 million, or 0.8%, lower for the fiscal year ended September 30, 2013, compared to the fiscal year ended
September 30, 2012, mainly due to fewer acquisitions. Incremental sales from stores that have been open for less than 14 months were
$15.8 million, or 0.5%, lower for the fiscal year ended September 30, 2013, compared to the fiscal year ended September 30, 2012, in part due to
fewer store openings and/or the timing of store openings. For the fiscal year ended September 30, 2013, changes in foreign currency exchange
rates did not have a material impact on our consolidated net sales.
For the fiscal year ended September 30, 2013, consolidated net sales reflect lower or negative same store sales growth rates, particularly in the
Sally Beauty Supply segment's U.S. business, compared to very strong performance for the same stores in the fiscal year ended September 30,
2012. The consolidated same store sales growth rates for the fiscal year ended September 30, 2013 were adversely impacted by lower nonBeauty Club Card traffic in the U.S., as well as a difficult comparison against strong growth in certain Sally Beauty Supply product categories in
the fiscal year ended September 30, 2012.
Sally Beauty Supply. Net sales for Sally Beauty Supply increased by $31.6 million, or 1.4%, for the fiscal year ended September 30, 2013,
compared to the fiscal year ended September 30, 2012, primarily as a result of increases in unit volume, including the incremental sales from 119
company-operated stores opened or acquired during the last twelve months. In the Sally Beauty Supply segment, company-operated stores that
have been open for 14 months or longer contributed an increase of approximately $47.9 million, or 2.2%, and certain other sales channels
(including sales from our non-store sales channels, which include sales through independent distributors in Europe (previously reported in sales
from businesses acquired) and sales at trade shows), in the aggregate, contributed an increase of approximately $16.0 million, or 0.7%. Other the
other hand, incremental sales from businesses acquired in the preceding 12 months were $22.5 million, or 1.0%, lower for the fiscal year ended
September 30, 2013, compared to the fiscal year ended September 30, 2012, mainly due to fewer acquisitions. Incremental sales from stores that
have been open for less than 14 months were $9.9 million, or 0.5%, lower for the fiscal year ended September 30, 2013, compared to the fiscal
year ended September 30, 2012, in part due to fewer store openings and/or the timing of store openings. For the fiscal year ended September 30,
2013, changes in foreign currency exchange rates did not have a material impact on our Sally Beauty Supply segment net sales.
For the fiscal year ended September 30, 2013, the Sally Beauty Supply segment's net sales reflect a negative 0.6% same store sales growth rate
due to soft traffic in the U.S., compared to strong performance for the same stores in the fiscal year ended September 30, 2012. This decrease
was partially offset by strong sales growth in the Sally Beauty Supply segment's international businesses. The Sally Beauty Supply segment's
same store sales growth rate for the fiscal year ended September 30, 2013 was adversely impacted by lower non-Beauty Club Card traffic in the
U.S., as well as a difficult comparison against strong growth in certain Sally Beauty Supply product categories (such as nail care and certain hair
product lines) in fiscal year ended September 30, 2012, as discussed previously.
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Beauty Systems Group. Net sales for BSG increased by $67.0 million, or 5.1%, for the fiscal year ended September 30, 2013, compared to the
fiscal year ended September 30, 2012, primarily as a result of increases in unit volume, including increases in sales at existing stores and the
incremental sales from 53 company-operated stores opened or acquired during the last twelve months. In the BSG segment, company-operated
stores that have been open for 14 months or longer contributed an increase in segment net sales of approximately $57.7 million, or 4.4%, and
sales through our distributor sales consultants contributed an increase of approximately $16.9 million, or 1.3%. On the other hand, certain other
sales channels (including sales from businesses acquired in the preceding 12 months, sales from stores that have been open for less than
14 months and sales through our franchise-based businesses), in the aggregate, experienced a decrease in sales of approximately $7.6 million, or
0.6%, compared to the fiscal year ended September 30, 2012, in part due to fewer acquisitions and/or the timing of acquisitions and store
openings. For the fiscal year ended September 30, 2013, changes in foreign currency exchange rates did not have a material impact on our BSG
segment net sales.
For the fiscal year ended September 30, 2013, the BSG segment's net sales reflect a lower same store sales growth rate, compared to very strong
performance for the same stores in the fiscal year ended September 30, 2012.
Gross Profit
Consolidated gross profit increased by $52.0 million, or 3.0%, for the fiscal year ended September 30, 2013, compared to the fiscal year ended
September 30, 2012, principally due to higher sales volume and improved gross profit margins in both business segments, as more fully
described below. Consolidated gross profit as a percentage of net sales, or consolidated gross profit margin, increased to 49.6% for the fiscal
year ended September 30, 2013, compared to 49.5% for the fiscal year ended September 30, 2012. For the fiscal year ended September 30, 2013,
changes in foreign currency exchange rates did not have a material impact on our consolidated gross profit.
Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $24.0 million, or 2.0%, for the fiscal year ended September 30, 2013,
compared to the fiscal year ended September 30, 2012, principally as a result of higher sales volume and improved gross profit margins. Sally
Beauty Supply's gross profit as a percentage of net sales increased to 54.9% for the fiscal year ended September 30, 2013, compared to 54.6%
for the fiscal year ended September 30, 2012. This increase was the result of a shift in product and customer mix (including a year-over-year
increase in sales of exclusive-label and other higher-margin products) and continued benefits from product cost reduction initiatives, partially
offset by an increase in distribution expenses in the fiscal year 2013, particularly in some of the segment's international operations.
Beauty Systems Group. BSG's gross profit increased by $28.0 million, or 5.1%, for the fiscal year ended September 30, 2013, compared to the
fiscal year ended September 30, 2012, principally as a result of higher sales volume and improved gross profit margins. BSG's gross profit as a
percentage of net sales increased to 41.1% for the fiscal year ended September 30, 2013, compared to 41.0% for the fiscal year ended
September 30, 2012. This increase was principally as a result of a favorable change in the sales mix across the business, continued benefits from
product cost reduction initiatives and a shift in channel mix (including a year-over-year increase in company-operated store sales as a percentage
of total sales).
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses increased by $23.5 million, or 2.0%, to $1,202.7 million for the fiscal year ended
September 30, 2013, compared to the fiscal year ended September 30, 2012. This increase was attributable to incremental expenses (including
employee compensation, rent and other occupancy-related expenses) resulting from stores opened, to a lesser extent, and from businesses
acquired in the preceding 12 months (approximately 172 company-operated stores added since the fiscal year 2012, a 4.0% increase), as well as
higher advertising expenses in the Sally Beauty
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Supply segment of $3.9 million, higher expenses related primarily to on-going upgrades to our information technology systems (including
certain expenses associated with the Sally Beauty Supply point-of-sale system conversion and the international ERP system implementation) of
approximately $2.6 million, and higher share-based compensation expense of $2.3 million, as described below. For the fiscal year ended
September 30, 2012, selling, general and administrative expenses reflect a $10.2 million charge resulting from a loss contingency settled in
November 2012 without a comparable amount in the current fiscal year. Selling, general and administrative expenses, as a percentage of net
sales, decreased to 33.2% for the fiscal year ended September 30, 2013 compared to 33.5% for the fiscal year ended September 30, 2012. This
decrease was due to a lower growth rate in selling, general and administrative expenses compared to the growth rate in net sales described above,
principally the result of our current efforts to further control expenses in light of the softer sales growth experienced in our Sally Beauty Supply
segment in the fiscal year ended September 30, 2013, partially offset by the expense increases mentioned earlier in this paragraph.
Depreciation and Amortization
Consolidated depreciation and amortization was $72.2 million for the fiscal year ended September 30, 2013, compared to $64.7 million for the
fiscal year ended September 30, 2012. This increase reflects the incremental depreciation and amortization expenses associated with capital
expenditures (mainly in connection with store openings in both operating segments and ongoing information technology upgrades in the Sally
Beauty Supply segment) made in the preceding 12 months and, to a lesser extent, with businesses acquired in that period, partially offset by the
impact of assets that became fully depreciated in the preceding 12 months.
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,
2013
2012
Increase
Operating Earnings:
Segment operating profit:
Sally Beauty Supply
BSG
Segment operating profit
Unallocated expenses
Share-based compensation expense
Operating earnings
$ 437,018 $ 429,520 $ 7,498
200,492
182,699
17,793
637,510
612,219
25,291
(97,947)
(96,012)
1,935
(19,201)
(16,852)
2,349
$ 520,362 $ 499,355 $ 21,007
1.7%
9.7%
4.1%
2.0%
13.9%
4.2%
Consolidated operating earnings increased by $21.0 million, or 4.2%, to $520.4 million for the fiscal year ended September 30, 2013, compared
to the fiscal year ended September 30, 2012. The increase in consolidated operating earnings was due primarily to an increase in the operating
profits of both segments, partially offset by higher unallocated expenses and share-based compensation expense, as more fully discussed below.
Operating earnings, as a percentage of net sales, increased to 14.4% for the fiscal year ended September 30, 2013, compared to 14.2% for the
fiscal year ended September 30, 2012. This increase reflects the increase in consolidated gross profit margin described above, as well as a
reduction in consolidated operating expenses as a percentage of consolidated net sales.
Sally Beauty Supply. Sally Beauty Supply's segment operating earnings increased by $7.5 million, or 1.7%, to $437.0 million for the fiscal
year ended September 30, 2013, compared to the fiscal year ended
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September 30, 2012. The increase in Sally Beauty Supply's segment operating earnings was primarily a result of increased sales volume and
improved gross profit margin. This increase was partially offset by the incremental costs related to approximately 119 additional companyoperated stores (stores opened or acquired during the past twelve months) operating during the fiscal year ended September 30, 2013, as well as
higher advertising costs of $3.9 million and incremental depreciation expense (approximately $6.3 million) associated with capital expenditures
(mainly in connection with store openings and with ongoing information technology upgrades) made in the preceding 12 months. For the fiscal
year ended September 30, 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge resulting from a loss contingency settled
in November 2012 without a comparable expense in the current fiscal year. Segment operating earnings, as a percentage of net sales, increased to
19.6% for the fiscal year ended September 30, 2013, compared to 19.5% for the fiscal year ended September 30, 2012. This increase reflects the
increase in the segment's gross profit margin described above, partially offset by an increase in the segment's operating expenses as a percentage
of the segment's net sales. The increase in the segment's operating expenses as a percentage of the segment's net sales, was principally as a result
of softer segment sales growth as discussed above.
Beauty Systems Group. BSG's segment operating earnings increased by $17.8 million, or 9.7%, to $200.5 million for the fiscal year ended
September 30, 2013, compared to the fiscal year ended September 30, 2012, primarily as a result of increased sales volume and improved gross
profit margin. Segment operating earnings, as a percentage of net sales, increased to 14.4% for the fiscal year ended September 30, 2013,
compared to 13.8% for the fiscal year ended September 30, 2012. This increase reflects the increase in the segment's gross profit margin
described above, as well as a reduction in the segment's operating expenses as a percentage of the segment's net sales.
Unallocated expenses. Unallocated expenses, which represent corporate costs (such as payroll, employee benefits and travel expenses for
corporate staff, certain professional fees, certain new business development expenses and corporate governance expenses) that have not been
charged to our operating segments, increased by $1.9 million, or 2.0%, to $97.9 million for the fiscal year ended September 30, 2013, compared
to the fiscal year ended September 30, 2012. This increase was primarily due to corporate expenses, including depreciation and other expenses
related to on-going upgrades to our information technology systems ($4.8 million) and to certain new business development activities, partially
offset by lower employee compensation-related expenses of approximately $3.6 million.
Share-based Compensation Expense. Total compensation costs charged against income for share-based compensation arrangements increased
by $2.3 million, to $19.2 million for the fiscal year ended September 30, 2013, compared to the fiscal year ended September 30, 2012. This
increase was due to the incremental expenses related to, as well as the higher fair value at the grant date of, share-based awards during the fiscal
year ended September 30, 2013, compared to share-based awards during the fiscal year ended September 30, 2012, partially offset by the impact
of share-based awards that became fully vested during the fiscal year ended September 30, 2013.
Interest Expense
Interest expense decreased by $30.7 million, to $107.7 million for the fiscal year ended September 30, 2013, compared to the fiscal year ended
September 30, 2012. Interest expense is net of interest income of $0.2 million for each of the fiscal years ended September 30, 2013 and 2012.
The decrease in interest expense was primarily attributable to losses on extinguishment of debt in the aggregate amount of $37.8 million in
connection with our redemption of outstanding notes and our repayment in full of the borrowings under the senior term loan B in the fiscal year
ended September 30, 2012. This amount includes a call premium of approximately $24.4 million and unamortized deferred financing costs of
approximately $13.4 million expensed in connection with such redemption and loan repayment. This decrease was partially offset by the effect
of higher principal balances on our debt outstanding during the
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fiscal year ended September 30, 2013 (including the senior notes due 2019 and senior notes due 2022), compared to our debt outstanding during
the fiscal year ended September 30, 2012. Please see Note 14 of the Notes to Consolidated Financial Statements in Item 8 — "Financial
Statements and Supplementary Data" contained elsewhere in this Annual Report for additional information about the Company's interest rate
swaps and "Liquidity and Capital Resources" below for additional information about our credit facilities.
Provision for Income Taxes
The provision for income taxes was $151.5 million and $127.9 million and the annual effective tax rate was 36.7% and 35.4% for the fiscal years
ended September 30, 2013 and 2012, respectively. The lower fiscal year 2012 annual effective tax rate, compared to our average historical
effective tax rate of approximately 37.0%, was primarily due to tax benefits (approximately $10.3 million) resulting from a limited restructuring,
for U.S. income tax purposes, completed in the fiscal year 2012.
Net Earnings
As a result of the foregoing, consolidated net earnings increased by $28.1 million, or 12.1%, to $261.2 million for the fiscal year ended
September 30, 2013, compared to $233.1 million for the fiscal year ended September 30, 2012. Net earnings, as a percentage of net sales, were
7.2% for the fiscal year ended September 30, 2013, compared to 6.6% for the fiscal year ended September 30, 2012.
The Fiscal Year Ended September 30, 2012 compared to the Fiscal Year Ended September 30, 2011
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,
2012
2011
Increase
Net sales:
Sally Beauty Supply
BSG
Consolidated net sales
Gross profit:
Sally Beauty Supply
BSG
Consolidated gross profit
Gross profit margin:
Sally Beauty Supply
BSG
Consolidated gross profit margin
$ 2,198,468 $ 2,012,407 $ 186,061
1,325,176
1,256,724
68,452
$ 3,523,644 $ 3,269,131 $ 254,513
9.2%
5.4%
7.8%
$ 1,199,342 $ 1,087,698 $ 111,644
543,917
506,907
37,010
$ 1,743,259 $ 1,594,605 $ 148,654
10.3%
7.3%
9.3%
54.6%
41.0%
49.5%
54.0%
40.3%
48.8%
0.6%
0.7%
0.7%
Net Sales
Consolidated net sales increased by $254.5 million, or 7.8%, for the fiscal year ended September 30, 2012, compared to the fiscal year ended
September 30, 2011, primarily as a result of increases in unit volume, including increases in sales at existing stores and the incremental sales
from 187 company-operated stores opened or acquired during the last twelve months. Company-operated Sally Beauty Supply and BSG stores
that have been open for at least 14 months contributed an increase of approximately $286.4 million, or 8.8%, and sales through our BSG
distributor sales consultants contributed an increase of approximately $41.3 million, or 1.3%. In addition, our Sally Beauty Supply non-store
sales channels contributed an
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increase of approximately $10.3 million, or 0.3%. For the fiscal year ended September 30, 2012, incremental sales from businesses acquired in
the preceding 12 months contributed approximately $83.1 million, or 2.5%, less to the annual sales increase than for the fiscal year ended
September 30, 2011. Other sales channels (including sales through our BSG franchise-based businesses and from stores that have been open for
less than 14 months), in the aggregate, experienced a minor decline in sales compared to the fiscal year ended September 30, 2011. Consolidated
net sales for the fiscal year ended September 30, 2012, are inclusive of an approximately $26.3 million negative impact from changes in foreign
currency exchange rates.
Sally Beauty Supply. Net sales for Sally Beauty Supply increased by $186.1 million, or 9.2%, for the fiscal year ended September 30, 2012,
compared to the fiscal year ended September 30, 2011, primarily as a result of increases in unit volume, including increases in sales at existing
stores and the incremental sales from 151 company-operated stores opened or acquired during the last twelve months. In the Sally Beauty Supply
segment, company-operated stores that have been open for at least 14 months contributed an increase of approximately $160.5 million, or 8.0%,
and our non-store sales channels (which, after December 2010, include the catalog and internet sales of our Sinelco Group subsidiaries)
contributed an increase of approximately $10.3 million, or 0.5%. For the fiscal year ended September 30, 2012, incremental sales from
businesses acquired in the preceding 12 months contributed approximately $16.0 million, or 0.8%, more to the annual sales increase than for the
fiscal year ended September 30, 2011. Other sales channels (including sales from stores that have been open for less than 14 months)
experienced a minor decline in sales compared to the fiscal year ended September 30, 2011. Net sales for Sally Beauty Supply for the fiscal year
ended September 30, 2012, are inclusive of an approximately $22.6 million negative impact from changes in foreign currency exchange rates,
including the impact of a weaker Euro in 2012.
Beauty Systems Group. Net sales for BSG increased by $68.5 million, or 5.4%, for the fiscal year ended September 30, 2012, compared to the
fiscal year ended September 30, 2011, primarily as a result of increases in unit volume, including increases in sales at existing stores and the
incremental sales from 36 company-operated stores opened or acquired during the last twelve months. Company-operated stores that have been
open for at least 14 months contributed an increase of approximately $125.9 million, or 10.0%, and sales through our distributor sales
consultants contributed an increase of approximately $41.3 million, or 3.3%. For the fiscal year ended September 30, 2012, incremental sales
from businesses acquired in the preceding 12 months contributed approximately $99.1 million, or 7.9%, less to the annual sales increase than for
to the fiscal year ended September 30, 2011. Other sales channels (including sales through our Armstrong McCall franchise-based business and
sales from stores that have been open for less than 14 months), in the aggregate, experienced a minor increase in sales compared to the fiscal
year ended September 30, 2011. Net sales for BSG for the fiscal year ended September 30, 2012, are inclusive of an approximately $3.7 million
negative impact from changes in foreign currency exchange rates.
Gross Profit
Consolidated gross profit increased by $148.7 million, or 9.3%, for the fiscal year ended September 30, 2012, compared to the fiscal year ended
September 30, 2011, principally due to higher sales volume and improved gross profit margins in both business segments as more fully
described below. Consolidated gross profit as a percentage of net sales, or consolidated gross profit margin, increased to 49.5% for the fiscal
year ended September 30, 2012, compared to 48.8% for the fiscal year ended September 30, 2011.
Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $111.6 million, or 10.3%, for the fiscal year ended September 30, 2012,
compared to the fiscal year ended September 30, 2011, principally as a result of higher sales volume and improved gross profit margins. Sally
Beauty Supply's gross profit as a percentage of net sales increased to 54.6% for the fiscal year ended September 30, 2012, compared to 54.0%
for the fiscal year ended September 30, 2011. This increase was the result of a shift in product and
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customer mix (including a year-over-year increase in sales of exclusive-label and other higher-margin products) and continued benefits from
low-cost sourcing initiatives, partially offset by an increase in distribution expenses in the fiscal year 2012, particularly in some of the segment's
international operations. This increase also reflects a $10.3 million negative impact from changes in foreign currency exchange rates, including
the impact of a weaker Euro in 2012.
Beauty Systems Group. BSG's gross profit increased by $37.0 million, or 7.3%, for the fiscal year ended September 30, 2012, compared to the
fiscal year ended September 30, 2011, principally as a result of higher sales volume and improved gross profit margins. BSG's gross profit as a
percentage of net sales increased to 41.0% for the fiscal year ended September 30, 2012, compared to 40.3% for the fiscal year ended
September 30, 2011. This increase was principally the result of a favorable change in the sales mix across the business, product cost reduction
initiatives and synergies from businesses acquired during the last 24 months.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses increased by $92.8 million, or 8.5%, to $1,179.2 million for the fiscal year ended
September 30, 2012, compared to the fiscal year ended September 30, 2011. This increase was primarily attributable to incremental expenses
(including employee compensation, rent and other occupancy-related expenses) resulting from stores opened and from businesses acquired in the
preceding 12 months (approximately 187 company-operated stores were added since the fiscal year 2011, a 4.5% increase), as well as higher
advertising expenses in the Sally Beauty Supply segment of $7.3 million. In addition, for the fiscal year 2012, selling, general and administrative
expenses reflect a $10.2 million charge resulting from a loss contingency. For the fiscal year ended September 30, 2011, selling, general and
administrative expenses reflect certain non-recurring charges ($5.7 million), including costs related to the closure of a BSG warehouse, and a
credit resulting from a litigation settlement ($27.0 million). Selling, general and administrative expenses, as a percentage of net sales, was 33.5%
for the fiscal year ended September 30, 2012, compared to 33.2% for the fiscal year ended September 30, 2011 primarily due to the charge from
the loss contingency in 2012 and the credit from the litigation settlement in the fiscal year 2011, partially offset by a lower growth rate in selling,
general and administrative expenses (excluding the impact of the loss contingency in 2012 and the litigation settlement in 2011 mentioned
above) compared to the growth rate in net sales described above.
Depreciation and Amortization
Consolidated depreciation and amortization increased to $64.7 million for the fiscal year ended September 30, 2012, compared to $59.7 million
for the fiscal year ended September 30, 2011. This increase reflects the incremental depreciation and amortization expenses associated with
businesses acquired in the last 12 months and with capital expenditures made in the fiscal year 2012 (mainly in connection with store openings
in both operating segments and with ongoing information technology upgrades), partially offset by the impact of assets that became fully
depreciated in the preceding 12 months.
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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,
2012
2011
Increase
Operating Earnings:
Segment operating profit:
Sally Beauty Supply
BSG
Segment operating profit
Unallocated expenses
Share-based compensation expense
Operating earnings
$ 429,520 $ 380,963 $
182,699
164,660
612,219
545,623
(96,012)
(81,594)
(16,852)
(15,560)
$ 499,355 $ 448,469 $
48,557
18,039
66,596
14,418
1,292
50,886
12.7%
11.0%
12.2%
17.7%
8.3%
11.3%
Consolidated operating earnings increased by $50.9 million, or 11.3%, to $499.4 million for the fiscal year ended September 30, 2012, compared
to the fiscal year ended September 30, 2011. The increase in consolidated operating earnings was due primarily to an increase in the operating
profits of both segments, partially offset by higher unallocated corporate expenses and share-based compensation expense, as more fully
discussed below. In addition, for the fiscal year ended September 30, 2012, consolidated operating earnings reflect a $10.2 million charge
resulting from a loss contingency. For the fiscal year ended September 30, 2011, consolidated operating earnings reflect a net favorable impact
of $21.3 million, including a credit resulting from a litigation settlement ($27.0 million) and certain non-recurring charges ($5.7 million),
including costs related to the closure of a BSG warehouse. The credit resulting from the litigation settlement ($27.0 million) is reflected in the
BSG segment's results and in unallocated expenses in the amount of $24.7 million and $2.3 million, respectively. Operating earnings, as a
percentage of net sales, increased to 14.2% for the fiscal year ended September 30, 2012, compared to 13.7% for the fiscal year ended
September 30, 2011. This increase reflects the increase in consolidated gross profit margin described above, as well as a reduction in
consolidated operating expenses (excluding the impact of the loss contingency in 2012 and the benefit from the litigation settlement in 2011
mentioned above) as a percentage of consolidated gross profit. This increase was partially offset by the credit from the litigation settlement in the
fiscal year 2011, without a comparable benefit in the fiscal year 2012.
Sally Beauty Supply. Sally Beauty Supply's segment operating earnings increased by $48.6 million, or 12.7%, to $429.5 million for the fiscal
year ended September 30, 2012, compared to the fiscal year ended September 30, 2011. The increase in Sally Beauty Supply's operating
earnings was primarily a result of increased sales volume and improved gross profit margins, partially offset by higher advertising costs of
approximately $7.3 million, higher freight and distribution expenses of $4.0 million and the incremental costs related to approximately 151 net
additional company-operated stores (stores opened or acquired during the past 12 months) operating during the fiscal year ended September 30,
2012. In addition, for the fiscal year ended September 30, 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge resulting
from a loss contingency. Segment operating earnings, as a percentage of net sales, increased to 19.5% for the fiscal year ended September 30,
2012, compared to 18.9% for the fiscal year ended September 30, 2011. This increase reflects the increase in the segment's gross profit margin
described above, as well as a reduction in the segment's operating expenses (excluding the charge resulting from the loss contingency) as a
percentage of the segment's gross profit.
Beauty Systems Group. BSG's segment operating earnings increased by $18.0 million, or 11.0%, to $182.7 million for the fiscal year ended
September 30, 2012, compared to the fiscal year ended September 30, 2011. The increase in BSG's operating earnings was primarily a result of
increased sales
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volume and improved gross profit margins, partially offset by the incremental costs related to approximately 36 net additional company-operated
stores (stores opened or acquired during the past 12 months) operating during the fiscal year ended September 30, 2012. In addition, for the
fiscal year ended September 30, 2011, BSG's operating earnings reflect a credit resulting from a litigation settlement ($24.7 million), partially
offset by certain non-recurring charges ($5.7 million) that include costs related to the closure of a warehouse. Segment operating earnings, as a
percentage of net sales, increased to 13.8% for the fiscal year ended September 30, 2012, compared to 13.1% for the fiscal year ended
September 30, 2011. This increase reflects the increase in the segment's gross profit margin described above, as well as a reduction in the
segment's operating expenses (excluding the impact of the credit from the litigation settlement in 2011) as a percentage of the segment's gross
profit. This increase was partially offset by the credit from the litigation settlement in the fiscal year 2011, without a comparable benefit in the
fiscal year 2012.
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, increased by
$14.4 million, or 17.7%, to $96.0 million for the fiscal year ended September 30, 2012, compared to the fiscal year ended September 30, 2011.
This increase was due to higher employee compensation and compensation-related expenses ($5.2 million), professional fees ($1.9 million),
insurance expense ($1.3 million) and other corporate expenses related primarily to on-going upgrades to our information technology systems
($3.7 million). In addition, during the fiscal year ended September 30, 2011, $2.3 million of the benefit from a litigation settlement offset
corporate expenses incurred in connection with the litigation, without a comparable benefit in the fiscal year 2012.
Share-based Compensation Expense. Total compensation cost charged against income for share-based compensation arrangements increased
by $1.3 million, to $16.9 million for the fiscal year ended September 30, 2012, compared to the fiscal year ended September 30, 2011. This
increase was due to the incremental expenses related to, as well as the higher fair value at the grant date of, share-based awards during the fiscal
year ended September 30, 2012, compared to share-based awards during the fiscal year ended September 30, 2011, partially offset by the impact
of share-based awards that became fully vested during the fiscal year ended September 30, 2012.
Interest Expense
Interest expense increased by $25.9 million, to $138.4 million for the fiscal year ended September 30, 2012, compared to the fiscal year ended
September 30, 2011. Interest expense is net of interest income of $0.2 million and $0.3 million for the fiscal year ended September 30, 2012 and
2011, respectively. The increase in interest expense was primarily attributable to losses on extinguishment of debt in the aggregate amount of
approximately $37.8 million in connection with our December 2011 redemption of our 9.25% senior notes due 2014 and 10.50% senior
subordinated notes due 2016, as well as our May 2012 repayment in full of the borrowings under the senior term loan B. This amount includes a
call premium of approximately $24.4 million paid and unamortized deferred financing costs of approximately $13.4 million expensed in
connection with such redemption and loan repayment.
This increase was partially offset by the impact of lower expense associated with our new senior notes compared to the expense associated with
the senior notes and senior subordinated notes redeemed in December 2011, as well as a lower average outstanding principal balance on our
senior term loan B facility until such facility was repaid in May 2012, compared to the average outstanding principal balance in such facility
during the fiscal year ended September 30, 2011 (please see Note 14 of the Notes to Consolidated Financial Statements in Item 8 — "Financial
Statements and Supplementary Data" contained elsewhere in this Annual Report for additional information about the Company's interest rate
swaps and "Liquidity and Capital Resources" below for additional information about our credit facilities).
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Provision for Income Taxes
Provision for income taxes was $127.9 million and $122.2 million and the annual effective tax rate was 35.4% and 36.4% for the fiscal years
ended September 30, 2012 and 2011, respectively. The lower fiscal year 2012 annual effective tax rate, compared to our average historical
effective tax rate of approximately 37.0%, was primarily due to tax benefits (approximately $10.3 million) resulting from a limited restructuring,
for U.S. income tax purposes, completed in the fiscal year 2012. The lower fiscal year 2011 annual effective tax rate, compared to our average
historical effective tax rate, was primarily due to tax benefits resulting from certain intercompany transactions that resulted in the release of
valuation allowances during the fiscal year 2011.
Net Earnings
As a result of the foregoing, consolidated net earnings increased by $19.3 million, or 9.0%, to $233.1 million for the fiscal year ended
September 30, 2012, compared to $213.7 million for the fiscal year ended September 30, 2011. Net earnings, as a percentage of net sales, were
6.6% for the fiscal year ended September 30, 2012, compared to 6.5% for the fiscal year ended September 30, 2011.
Financial Condition
September 30, 2013 Compared to September 30, 2012
Working capital (current assets less current liabilities) decreased by $213.4 million to $473.2 million at September 30, 2013, compared to
$686.5 million at September 30, 2012. The ratio of current assets to current liabilities was 1.87 to 1.00 at September 30, 2013, compared to 2.44
to 1.00 at September 30, 2012. The decrease in working capital reflects a decrease in current assets of $148.1 million and an increase in current
liabilities of $65.3 million. The decrease in current assets as of September 30, 2013, includes a decrease of $193.1 million in cash and cash
equivalents primarily due to cash used to repurchase shares of our common stock under the Company's share repurchase programs (please see
"Liquidity and Capital Resources, Historical Cash Flows " below) and a decrease in income taxes receivable of $18.8 million, partially offset by
an increase of $73.0 million in inventory as discussed below. The increase in current liabilities includes an increase in current maturities of longterm debt of $76.1 million and an increase of $11.2 million in accounts payable, partially offset by a decrease of $15.5 million in accrued
liabilities and a decrease of $6.6 million in income taxes payable, as discussed below.
Cash and cash equivalents decreased by $193.1 million to $47.1 million at September 30, 2013, compared to $240.2 million at September 30,
2012 primarily due to cash used to repurchase shares of our common stock under the Company's share repurchase programs and by cash used by
investing activities; partially offset by cash provided by operating activities during the fiscal year ended September 30, 2013 (please see
"Liquidity and Capital Resources" below) and by borrowings under the ABL facility. Income taxes receivable decreased by $18.8 million to
$4.9 million at September 30, 2013, compared to $23.7 million at September 30, 2012 due to the Company's application of certain income taxes
receivable amounts against its current income tax liability, consistent with applicable tax laws. Inventory increased by $73.0 million to
$808.3 million at September 30, 2013, compared to $735.4 million at September 30, 2012 primarily due to the effect of stores opened or
acquired and product lines added in the preceding twelve months, and the effect of foreign currency translation adjustments.
Accounts payable increased by $11.2 million to $273.5 million at September 30, 2013, compared to $262.2 million at September 30, 2012
primarily due to the timing of payments to suppliers mainly in connection with recent purchases of merchandise inventory and capital
expenditures. Accrued liabilities decreased by $15.5 million to $184.8 million at September 30, 2013, compared to $200.3 million at
September 30, 2012, primarily due to lower accrued compensation-related expenses of $9.1 million and to the November 2012 settlement of a
loss contingency obligation of $10.2 million recorded in the fourth quarter of the fiscal year 2012. Income taxes payable decreased by
$6.6 million to $6.4 million at
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September 30, 2013, compared to $13.0 million at September 30, 2012, primarily due to the realization of certain income taxes receivable of
$18.8 million, as discussed in the preceding paragraph, partially offset by the incremental income tax liability related to earnings generated in the
fiscal year ended September 30, 2013.
Net property and equipment increased by $26.9 million to $229.5 million at September 30, 2013, compared to $202.7 million at September 30,
2012, primarily due to capital expenditures of $84.9 million and the property and equipment of businesses acquired, partially offset by the fiscal
year 2013 depreciation expense of $59.4 million and the effect of foreign currency translation adjustments.
Goodwill increased by $5.9 million to $538.3 million at September 30, 2013, compared to $532.3 million at September 30, 2012, primarily due
to goodwill recorded in connection with businesses acquired during the fiscal year 2013, including the May 2013 acquisition of certain assets
and business operations of Essential Salon.
Intangible assets, excluding goodwill, increased by $1.7 million to $130.1 million at September 30, 2013, compared to $128.4 million at
September 30, 2012, primarily due to intangible assets recorded in connection with businesses acquired during the fiscal year 2013, including the
May 2013 acquisition of certain assets and business operations of Essential Salon, partially offset by amortization expense of $12.8 million
recognized in the fiscal year 2013.
Long-term debt, including current portion, increased by $73.5 million to $1,690.7 million at September 30, 2013, compared to $1,617.2 million
at September 30, 2012. This increase was primarily due to borrowings under the ABL facility of $76.0 million, which were used primarily to
fund recent share repurchases and for general working capital purposes. Please see "Liquidity and Capital Resources" below.
Deferred income tax liabilities, net, increased by $10.0 million to $73.9 million at September 30, 2013, compared to $63.9 million at
September 30, 2012 primarily due to the timing of differences between depreciation and amortization included for tax purposes versus
depreciation and amortization included in our consolidated statements of earnings.
Total stockholders' deficit increased by $188.4 million to $303.5 million at September 30, 2013 compared to $115.1 million at September 30,
2012. This increase was primarily as a result of a decrease in additional paid-in capital of $449.0 million and an increase in treasury stock of
$1.2 million, as described below, partially offset by net earnings of $261.2 million and a decrease in accumulated other comprehensive loss, net
of tax, consisting of foreign currency translation adjustments of $0.8 million. The $449.0 million decrease in additional paid-in capital reflects
our repurchase and subsequent retirement of 18.8 million shares of our common stock for approximately $508.3 million, partially offset by
share-based compensation expense and the impact of exercises of stock options, in the aggregate, of $59.3 million. In addition, in the fiscal year
ended September 30, 2013, we purchased 46,700 shares of our common stock for approximately $1.2 million, which are included in treasury
stock in our consolidated balance sheets. Please see "Liquidity and Capital Resources" below.
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
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 our outstanding indebtedness and from
funding the costs of operations, working capital, capital expenditures and share repurchases. As a holding company, we depend on our
subsidiaries, including Sally
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Holdings LLC (which we refer to as "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 relevant laws, and covenants and financial ratios related to their existing or future indebtedness, including covenants restricting
Sally Holdings' ability to pay dividends to us. 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 Factors—Risks Relating to Our
Business," and "—Risks Relating to Our Substantial Indebtedness."
We may from time to time repurchase or otherwise retire or refinance our debt (through our subsidiaries or otherwise) and take other steps to
reduce or refinance our debt. These actions may include open market repurchases of our notes or other retirements of outstanding debt. The
amount of debt that may be repurchased, or refinanced or otherwise retired, if any, will be determined in 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.
At September 30, 2013, cash and cash equivalents were $47.1 million. 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, share repurchases and potential acquisitions and to finance anticipated capital expenditures over the
next twelve months.
However, 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 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" in Item 1A of this Annual
Report.
We utilize our ABL facility for the issuance of letters of credit, for certain working capital and liquidity needs and to manage normal fluctuations
in our operational cash flow. In that regard, we may from time to time draw funds under the ABL facility for general corporate purposes
including funding of capital expenditures, acquisitions, interest payments due on our indebtedness and share repurchases. The funds drawn on an
individual occasion during the fiscal year ended September 30, 2013 have varied in amounts up to $35.5 million, total amounts outstanding have
ranged from zero up to $110.0 million and the average daily balance outstanding was $32.8 million. During the fiscal year ended September 30,
2013, the weighted average interest rate on our borrowings under the ABL facility was 2.9%. The amounts drawn are generally paid down with
cash provided by our operating activities.
As of September 30, 2013, borrowings outstanding under the ABL facility were $76.0 million (which were subsequently repaid) and Sally
Holdings had $382.3 million available for borrowings under the 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. Please see "Long-Term Debt Covenant" below.
During the fiscal year 2013, we completed several acquisitions at an aggregate cost of $22.5 million, including the May 2013 acquisition of
certain assets and business operations of Essential Salon, a professional-only distributor of beauty products operating in the northeastern region
of the U.S., for
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approximately $15.7 million, subject to certain adjustments. We funded these acquisitions with cash from operations and borrowings under the
ABL facility.
Share Repurchase Programs
In August 2012, we announced that our Board of Directors approved the 2012 Share Repurchase Program. In addition, on March 5, 2013, we
announced that our Board of Directors approved a new share repurchase program authorizing us to repurchase up to $700.0 million of our
common stock over the next eight quarters (the "2013 Share Repurchase Program"). In connection with the authorization of the 2013 Share
Repurchase Program, the 2012 Share Repurchase Program was terminated.
Prior to termination of the 2012 Share Repurchase Program, the Company had repurchased and retired approximately 10.4 million shares at a
cost of $266.4 million under the 2012 Share Repurchase Program. In addition, during the period from March 5, 2013 through September 30,
2013, the Company repurchased and retired approximately 8.5 million shares at a cost of $243.3 million under the 2013 Share Repurchase
Program. As such, during the fiscal year 2013, we repurchased an aggregate of 18.9 million shares at a cost of $509.7 million under the 2012
Share Repurchase Program and the 2013 Share Repurchase Program. We funded these share repurchases with the cash proceeds from our
September 2012 debt issuance, cash from operations and borrowings under the ABL facility.
The 2013 Share Repurchase Program expires on or about March 5, 2015. Future repurchases of shares of our common stock are expected to be
funded with existing cash balances, funds expected to be generated by operations, funds available under the ABL facility and the cash proceeds
from our $200.0 million debt issuance in October 2013.
In May 2012, we entered into an agreement pursuant to which we repurchased (and subsequently retired) 7.6 million shares of our common
stock from the CDR Investors, in a private transaction, at $26.485 per share. We funded this $200.0 million share repurchase primarily with
borrowings in the amount of $160.0 million under our ABL facility and with cash from operations.
Historical Cash Flows
For the fiscal years 2013, 2012 and 2011, our primary source of cash has been funds provided by operating activities and, when necessary,
borrowings under our ABL facility. The primary uses of cash during the past three years were for acquisitions, capital expenditures, repayments
of long-term debt and share repurchases.
The following table shows our sources and uses of funds for the fiscal years ended September 30, 2013, 2012 and 2011 (in thousands):
2013
Fiscal Year Ended September 30,
2012
Change
2012
2011
Change
Net cash
provided
by
operating
activities
$ 310,454 $ 297,582 $ 12,872 $ 297,582 $ 291,841 $ 5,741
Net cash
used by
investing
activities
(106,977)
(112,513)
5,536
(112,513)
(146,735)
34,222
Net cash
used by
financing
activities
(396,775)
(8,682)
(388,093)
(8,682)
(140,049) 131,367
Effect of
foreign
currency
exchange
rate
changes
on cash
and cash
equivalents
193
352
(159)
352
(1,070)
1,422
Net
(decrease)
increase
in cash
and cash
equivalents $ (193,105) $ 176,739 $ (369,844) $ 176,739 $
3,987 $ 172,752
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Net Cash Provided by Operating Activities
Net cash provided by operating activities during the fiscal year ended September 30, 2013 increased by $12.9 million to $310.5 million
compared to $297.6 million during the fiscal year ended September 30, 2012. The increase was primarily due to an improvement of
approximately $21.0 million in operating earnings, compared to the fiscal year ended September 30, 2012.
Net cash provided by operating activities during the fiscal year ended September 30, 2012 increased by $5.7 million to $297.6 million compared
to $291.8 million during the fiscal year ended September 30, 2011. The increase was primarily due to an improvement of approximately
$50.9 million in operating earnings, partially offset by net changes in accounts payable and accrued liabilities of $34.6 million and an increase in
excess tax benefits from share-based compensation of $10.7 million for the fiscal year ended September 30, 2012, compared to the fiscal year
ended September 30, 2011.
Net Cash Used by Investing Activities
Net cash used by investing activities during the fiscal year ended September 30, 2013 decreased by $5.5 million to $107.0 million compared to
$112.5 million during the fiscal year ended September 30, 2012. This change was primarily due to a decrease of $21.3 million in cash used for
acquisitions, net of cash acquired, partially offset by an increase of $15.8 million in capital expenditures, primarily related to store openings, the
opening of a distribution facility in the Sally Beauty Supply segment and ongoing information technology upgrades.
Net cash used by investing activities during the fiscal year ended September 30, 2012 decreased by $34.2 million to $112.5 million compared to
$146.7 million during the fiscal year ended September 30, 2011. This change was primarily due to a decrease of $43.6 million in cash used for
acquisitions, net of cash acquired, partially offset by an increase of $9.1 million in capital expenditures, primarily in connection with design and
implementation of a standardized enterprise resource planning ("ERP") system in some of our international operations.
Net Cash Used by Financing Activities
Net cash used by financing activities increased by $388.1 million to $396.8 million during the fiscal year ended September 30, 2013, compared
to $8.7 million during the fiscal year ended September 30, 2012. This increase was primarily due to an increase in cash used to repurchase shares
of our common stock of $309.7 million, as well as a decrease in net borrowing under our credit facilities of $106.2 million, partially offset by a
decrease in debt issuance costs paid of $29.3 million. During the fiscal year ended September 30, 2013, we repurchased approximately
18.9 million shares of our common stock (under the 2012 Share Repurchase Program and the 2013 Share Repurchase Program) at a cost of
$509.7 million. During the fiscal year ended September 30, 2012, we repurchased approximately 7.6 million shares of our common stock from
the CD&R Investors at a cost of $200.0 million.
Net cash used by financing activities during the fiscal year ended September 30, 2012 decreased by $131.4 million to $8.7 million compared to
$140.0 million during the fiscal year ended September 30, 2011. This change was primarily due to net proceeds of $750.0 million from the
issuance of our senior notes due 2019 and $859.3 million from the issuance of our senior notes due 2022 (please see " Long-Term Debt " below),
and by increases in proceeds from exercises of stock options awarded under our share-based compensation plans of $17.1 million and in excess
tax benefits from share-based compensation of $10.7 million. These amounts were partially offset by: (a) cash used to redeem our 9.25% senior
notes due 2014 and our 10.50% senior subordinated notes due 2016 in the aggregate amount of $729.4 million (including a call premium paid to
redeem such notes of $24.4 million), (b) incremental optional repayments of our senior term loan B facility (including the May 2012 repayment
in full of such loan facility) in the aggregate amount of $549.9 million, (c) cash used for our May 2012 repurchase of approximately 7.6 million
shares of our common stock from the CDR Investors for $200.0 million, and
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(d) an increase in debt issuance costs paid of $25.9 million during the fiscal year ended September 30, 2012, compared to the fiscal year ended
September 30, 2011.
Long-Term Debt
Outstanding Long-Term Debt
In November 2006, the Company, through its subsidiaries (Sally Investment Holdings LLC and Sally Holdings) incurred $1,850.0 million of
indebtedness in connection with the Company's separation from its former parent, Alberto-Culver.
In the fiscal year ended September 30, 2011, Sally Holdings entered into a new $400 million, five-year asset-based senior secured loan facility
(the "ABL facility") and terminated its prior $400 million ABL credit facility. The availability of funds under the ABL facility, as amended on
June 8, 2012, is subject to a customary borrowing base comprised of: (i) a specified percentage of our eligible credit card and trade accounts
receivable (as defined therein) and (ii) a specified percentage of our eligible inventory (as defined therein), and reduced by (iii) certain
customary reserves and adjustments and by certain outstanding letters of credit. The ABL facility includes a $25.0 million Canadian sub-facility
for our Canadian operations.
On July 26, 2013, the Company, Sally Holdings and other parties to the ABL facility entered into a second amendment to the ABL facility
which, among other things, increased the maximum availability under the ABL Facility to $500.0 million (subject to borrowing base
limitations), reduced pricing, relaxed the restrictions regarding the making of Restricted Payments, extended the maturity to July 26, 2018 and
improved certain other covenant terms. At September 30, 2013, the Company had $382.3 million available for borrowing under the ABL
facility, including the Canadian sub-facility. In addition, the terms of the ABL facility contain a commitment fee of 0.25% on the unused portion
of the facility.
In the fiscal year ended September 30, 2012, the Company issued $750.0 million aggregate principal amount of its 6.875% Senior Notes due
2019 (the "senior notes due 2019") and $850.0 million aggregate principal amount of its 5.75% Senior Notes due 2022 (the "senior notes due
2022"), including notes in the aggregate principal amount of $150.0 million which were issued at par plus a premium. Such premium is being
amortized over the term of the notes using the effective interest method. The net proceeds from such debt issuances were used to retire
outstanding indebtedness in the aggregate principal amount of approximately $1,391.9 million and for general corporate purposes.
In connection with the issuances of the senior notes due 2022, during the fiscal year ended September 30, 2012 the Company incurred and
capitalized financing costs of approximately $16.0 million. This amount is included in other assets on our consolidated balance sheets and is
being amortized over the term of the senior notes due 2022 using the effective interest method.
On October 24, 2013, Sally Holdings and Sally Capital Inc. (collectively, the "Issuers"), both indirect wholly-owned subsidiaries of the
Company, the Company and certain domestic subsidiaries of the Company entered into an underwriting agreement pursuant to which the Issuers
sold $200.0 million aggregate principal amount of the Issuers' 5.5% Senior Notes due 2023 (the "senior notes due 2023"). The senior notes due
2023 bear interest at an annual rate of 5.5%, were issued at par, are registered securities pursuant to a registration statement filed with the SEC in
May 2012, and are guaranteed by the Company and certain domestic subsidiaries of the Company. Interest on the senior notes due 2023 is
payable semi-annually. The Company used the net proceeds from this debt issuance, approximately $196.3 million, to repay borrowings
outstanding under the ABL facility of $88.5 million and intends to use the remaining amount for general corporate purposes.
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Details of long-term debt (excluding capitalized leases) as of September 30, 2013 are as follows (dollars in thousands):
Amount
76,000
ABL facility(a)
$
Senior notes due 2019
Senior notes due 2022(b)
Other(c)
Total
750,000
858,381
1,310
$ 1,685,691
Maturity Dates
Interest Rates
July 2018 (i) Prime plus (0.50% to 0.75%) or;
(ii) LIBOR(a) plus (1.50% to 1.75%)
Nov. 2019 6.875%
June 2022 5.750%(b)
2014-2015 4.93% to 5.79%
(a)
At September 30, 2013, borrowings outstanding under the ABL facility bear interest at the weighted average rate of 2.0%.
When used in this Annual Report, LIBOR means the London Interbank Offered Rate.
(b)
Includes unamortized premium of $8.4 million related to notes issued in September 2012 with an aggregate principal
amount of $150.0 million. The 5.75% interest rate relates to notes in the aggregate principal amount of $850.0 million.
(c)
Represents pre-acquisition debt of Pro-Duo NV and Sinelco Group BVBA.
Long-Term Debt Covenants
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:
• Incurrence of additional indebtedness
• Granting of liens on assets
• Repurchases and redemptions of capital stock and the payment of
• Making of investments, including joint ventures
dividends
• Making of certain debt prepayments
• Making of acquisitions
• Mergers or consolidations
• Disposition of assets
Borrowings under the ABL facility are secured by substantially all of our assets, those of Sally Investment, those of our domestic subsidiaries,
those of our Canadian subsidiaries (in the case of borrowings under the Canadian sub-facility) and a pledge of certain intercompany notes. The
senior notes due 2019 and the senior notes due 2022 (together, the "senior notes due 2019-2022") are unsecured obligations of the Issuers and
are jointly and severally guaranteed by the Company and Sally Investment, and by each material domestic subsidiary of the Company. Interest
on the senior notes due 2019-2022 is payable semi-annually.
The ABL facility and the indentures governing the senior notes due 2019-2022 contain other covenants regarding restrictions on assets
dispositions, granting of liens and security interests, prepayment of certain indebtedness and other matters and customary events of default,
including customary cross-default and/or cross-acceleration provisions. As of September 30, 2013, all the net assets of our consolidated
subsidiaries were unrestricted from transfer under our credit arrangements.
The senior notes due 2019 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on
or after November 15, 2017 at par, plus accrued and unpaid interest, if any, and on or after November 15, 2015 at par plus a premium declining
ratably to par, plus accrued and unpaid interest, if any. Prior to November 15, 2015, the notes may be redeemed, in whole or in part, at a
redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on
or prior to November 15, 2014, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up
to 35% of the
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aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as
defined in the indenture.
The senior notes due 2022 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on
or after June 1, 2020 at par, plus accrued and unpaid interest, if any, and on or after June 1, 2017 at par plus a premium declining ratably to par,
plus accrued and unpaid interest, if any. Prior to June 1, 2017, the notes may be redeemed, in whole or in part, at a redemption price equal to par
plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to June 1, 2015, the
Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal
amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the
indenture.
The ABL facility does not contain any restriction against the incurrence of unsecured indebtedness. However, the ABL facility restricts the
incurrence of secured indebtedness if, after giving effect to the incurrence of such secured indebtedness, the Company's Secured Leverage Ratio
exceeds 4.0 to 1.0. At September 30, 2013, the Company's Secured Leverage Ratio was approximately 0.2 to 1.0. Secured Leverage Ratio is
defined as the ratio of (i) Secured Funded Indebtedness (as defined in the ABL facility) to (ii) Consolidated EBITDA (as defined in the ABL
facility).
The ABL facility is pre-payable and the commitments thereunder may be terminated, in whole or in part at any time without penalty or premium.
The indentures governing the senior notes due 2019-2022 contain terms which restrict the ability of Sally Beauty's subsidiaries to incur
additional indebtedness. However, in addition to certain other material exceptions, the Company may incur additional indebtedness under the
indentures if its Consolidated Coverage Ratio, after giving pro forma effect to the incurrence of such indebtedness, exceeds 2.0 to 1.0
("Incurrence Test"). At September 30, 2013, the Company's Consolidated Coverage Ratio was approximately 6.0 to 1.0. Consolidated Coverage
Ratio is defined as the ratio of (i) Consolidated EBITDA (as defined in the indentures) for the period containing the most recent four consecutive
fiscal quarters, to (ii) Consolidated Interest Expense (as defined in the indentures) for such period.
The indentures governing the senior notes due 2019-2022 restrict Sally Holdings and its subsidiaries from making certain dividends and
distributions to equity holders and certain other restricted payments (hereafter, a "Restricted Payment" or "Restricted Payments") to us.
However, the indentures permit the making of such Restricted Payments if, at the time of the making of such Restricted Payment, the Company
satisfies the Incurrence Test as described above and the cumulative amount of all Restricted Payments made since the issue date of the applicable
senior notes does not exceed the sum of: (i) 50% of Sally Holdings' and its subsidiaries' cumulative consolidated net earnings since July 1, 2006,
plus (ii) the proceeds from the issuance of certain equity securities or conversions of indebtedness to equity, in each case, since the issue date of
the applicable senior notes plus (iii) the net reduction in investments in unrestricted subsidiaries since the issue date of the applicable senior
notes plus (iv) the return of capital with respect to any sales or dispositions of certain minority investments since the issue date of the applicable
senior notes. Further, in addition to certain other baskets, the indentures permit the Company to make additional Restricted Payments in an
unlimited amount if, after giving pro forma effect to the incurrence of any indebtedness to make such Restricted Payment, the Company's
Consolidated Total Leverage Ratio (as defined in the indentures) is less than 3.25 to 1.00. At September 30, 2013, the Company's Consolidated
Total Leverage Ratio was approximately 2.7 to 1.0. Consolidated Total Leverage Ratio is defined as the ratio of (i) Consolidated Total
Indebtedness (as defined in the indentures) minus cash and cash equivalents on-hand up to $100.0 million, in each case, as of the end of the most
recently-ended fiscal quarter to (ii) Consolidated EBITDA (as defined in the indentures) for the period containing the most recent four
consecutive fiscal quarters.
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The ABL facility also restricts the making of Restricted Payments. More specifically, under the ABL facility, Sally Holdings may make
Restricted Payments if availability under the ABL facility equals or exceeds certain thresholds, and no default then exists under the facility. For
Restricted Payments up to $30.0 million during each fiscal year, borrowing availability must equal or exceed the lesser of $75.0 million or 15%
of the borrowing base for 45 days prior to such Restricted Payment. For Restricted Payments in excess of that amount, borrowing availability
must equal or exceed the lesser of $100.0 million or 20% of the borrowing base for 45 days prior to such Restricted Payment and the
Consolidated Fixed Charge Coverage Ratio (as defined below) must equal or exceed 1.1 to 1.0. Further, if borrowing availability equals or
exceeds the lesser of $150.0 million or 30% of the borrowing base, Restricted Payments are not limited by the Consolidated Fixed Charge
Coverage Ratio test. The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of (i) Consolidated EBITDA (as defined in the ABL
facility) during the trailing twelve-month period preceding such proposed Restricted Payment minus certain unfinanced capital expenditures
made during such period and income tax payments paid in cash during such period to (ii) fixed charges (as defined in the ABL facility). In
addition, during any period that borrowing availability under the ABL facility is less than the greater of $40.0 million or 10% of the borrowing
base, the level of the Consolidated Fixed Charge Coverage Ratio that the Company must satisfy is 1.0 to 1.0. As of September 30, 2013, the
Consolidated Fixed Charge Coverage Ratio was approximately 3.9 to 1.0.
When used in this Annual Report, the phrase "Consolidated EBITDA" is intended to have the meaning ascribed to such phrase in the ABL
facility or the indentures governing the senior notes due 2019-2022, as appropriate. EBITDA is not a recognized measurement under accounting
principles generally accepted in the United States of America ("GAAP") and should not be considered a substitute for financial performance and
liquidity measures determined in accordance with GAAP, such as net earnings, operating earnings and operating cash flows.
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. Further, 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 Factors—Risks Relating to Our Substantial
Indebtedness."
Capital Requirements
During the fiscal year ended September 30, 2013, we had total capital expenditures of approximately $84.9 million which were primarily to fund
the addition of new stores and remodeling, expansion or relocation of existing stores in the ordinary course of our business as well as corporate
projects. For the fiscal year 2014, we anticipate capital expenditures in the range of approximately $85.0 million to $90.0 million, excluding
acquisitions. Capital expenditures will be primarily to fund the addition of new stores and remodeling, expansion or relocation of existing stores
in the ordinary course of our business as well as corporate projects.
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Contractual Obligations
The following table is a summary of our contractual cash obligations and commitments outstanding by future payment dates at September 30,
2013 (in thousands):
Less than 1
year
Long-term debt
obligations,
including interest
obligations(a)
Obligations under
operating leases(b)
Purchase obligations
(c)
Other long-term
obligations(d)(e)
Total
Payments Due by Period
More than 5
1-3 years
3-5 years
years
Total
$ 180,736 $ 202,646 $ 202,386 $ 1,837,871 $ 2,423,639
156,415
237,360
122,298
68,405
584,478
15,245
20,560
19,000
37,208
92,013
9,374
10,905
5,180
8,201
33,660
$ 361,770 $ 471,471 $ 348,864 $ 1,951,685 $ 3,133,790
(a)
Long-term debt includes capital leases and future interest payments on debt facilities, based upon outstanding principal
amounts and interest rates as of September 30, 2013.
(b)
In accordance with GAAP, these obligations are not reflected in the accompanying consolidated balance sheets. The
amounts reported for operating leases do not include common area maintenance (CAM), property taxes or other
executory costs. Please see Note 12 of the "Notes to Consolidated Financial Statements" in Item 8—"Financial
Statements and Supplementary Data" contained elsewhere in this Annual Report for additional information about the
Company's operating leases. The amounts reported above, do not include obligations of the Company's franchisees
under operating leases of approximately $0.8 million for which the Company is contingently liable in the event of
payment default by the franchisee.
(c)
Purchase obligations reflect legally binding agreements entered into by us to purchase goods or services, that specify
minimum quantities to be purchased and with fixed or variable price provisions. In accordance with GAAP, these
obligations are not reflected in the accompanying consolidated balance sheets. Amounts shown do not, however, reflect
open purchase orders, mainly for merchandise, to be fulfilled within one year, which are generally cancellable.
(d)
Other long-term obligations, including current portion, principally represent obligations under insurance and selfinsurance programs, certain liabilities related to uncertain income tax benefits and commitments under various
acquisition-related agreements including non-compete, consulting and severance agreements and deferred compensation
arrangements. These obligations are included in accrued liabilities and other liabilities in the accompanying
consolidated balance sheets.
(e)
The table above does not include $4.8 million of unrecognized tax benefits due to uncertainty regarding the realization
and timing of the related future cash flows, if any.
The table above excludes amounts included in current liabilities (other than the current portion of long-term debt and current portion of other
liabilities) as these items will be paid within one year.
Our assumptions with respect to the interest rates applicable to borrowings under the ABL facility are subject to changes that may be material.
Interest obligations under the ABL facility are based on variable interest rates. We have made no attempt to project those rates for purposes of
the table above. In addition, other future events could cause actual payments to differ materially from these amounts.
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.
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Off-Balance Sheet Financing Arrangements
At September 30, 2013 and 2012, 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. Such letters of credit totaled
$23.9 million and $22.2 million, respectively.
Inflation
We believe inflation has not had a material effect on our results of operations during each of the last three fiscal years.
Critical Accounting 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 estimates include but are not limited to the valuation of inventory, vendor rebates and concessions, retention of risk,
income taxes, assessment of long-lived assets and intangible assets for impairment and share-based payments.
Valuation of Inventory
Inventory is 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 inventory to the lower of cost or market, including disposal costs, and for estimated
inventory shrinkage. Estimates of the future demand for the Company's products, historical turn-over rates, the age and sales history of the
inventory, and historic as well as anticipated changes in stock keeping units ("SKUs") are some of the key factors used by management in
assessing the net realizable value of inventory. We estimate inventory shrinkage between physical counts based upon our historical experience.
Actual results differing from these estimates could significantly affect our inventory and cost of products sold and distribution expenses.
Inventory shrinkage expense averaged approximately 1.0% of consolidated net sales in fiscal years 2013, 2012 and 2011. A 10% increase or
decrease in our estimate of inventory shrinkage at September 30, 2013, would impact net earnings by approximately $1.4 million, net of income
tax.
Vendor Rebates and Concessions
The Company deems a cash consideration received from a supplier to be a reduction of the cost of products sold unless it is in exchange for an
asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the Company 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 the related products and is reflected in cost
of products sold and distribution expenses in our consolidated statements of earnings as the related products are sold. Any portion of such cash
consideration received that is attributable to inventory on hand is reflected as a reduction of inventory. 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 at the amount we believe will be
collected. These receivables could be significantly affected if the actual amounts subsequently collected
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differ from management's expectations. A 10% increase or decrease in these receivables at September 30, 2013, would impact net earnings by
approximately $2.1 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 meet certain eligibility requirements. 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) 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, 2013 and 2012, we accrued an estimated liability relating to employee health insurance of
$5.7 million and $5.6 million, respectively.
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, 2013 would impact net earnings by
approximately $0.4 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, 2013 and 2012, our balance sheet included an estimated
liability related to these deductible and retention limits of approximately $30.6 million and $28.2 million, respectively.
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, 2013 would impact net earnings by approximately $1.9 million, net of income tax.
The change in the self-insurance liability was as follows (in thousands):
Fiscal Year Ended
September 30,
2013
2012
$ 34,945 $ 34,088
68,111
65,154
—
—
(65,790)
(64,297)
$ 37,266 $ 34,945
Balance at beginning of period
Self-insurance expense
Self-insurance liability of businesses acquired
Payments, net of employee contributions
Balance at end of period
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Income Taxes
We record income 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.
For the fiscal years ended September 30, 2013, 2012 and 2011, the effective income tax rates were 36.7%, 35.4% and 36.4%, respectively. The
lower fiscal year 2012 annual effective tax rate, compared to our average historical effective tax rate of approximately 37.0%, was primarily due
to tax benefits (approximately $10.3 million) resulting from a limited restructuring, for U.S. income tax purposes, completed in the fiscal year
2012.
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. We have recorded a valuation allowance to account for uncertainties regarding the recoverability of certain
deferred tax assets, primarily foreign loss carryforwards. 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.
Assessment of Long-Lived Assets and Intangible Assets for Impairment
Long-lived assets, such as property and equipment, including store equipment, and purchased intangible assets subject to amortization are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully
recoverable. The recoverability of long-lived assets and intangible assets subject to amortization is assessed by comparing the net carrying
amount of each asset to its total estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds the sum of its undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the estimated fair value of the asset.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill and
intangible assets with indefinite lives are not amortized; rather, they are reviewed for impairment at least annually, and whenever events or
changes in circumstances indicate it is more likely than not that the value of the asset may be impaired. When assessing goodwill and intangible
assets with indefinite lives for potential impairment, management compares the carrying amount of the asset to its fair value. In addition,
management considers whether there has been an impairment to the value of the asset by evaluating if various factors (including current
operating results, anticipated future results and cash flows, and relevant market and economic conditions) indicate a possible impairment.
As permitted, the Company adopted the provisions of Accounting Standards Update ("ASU") No. 2011-08 in connection with its goodwill
impairment test during the second quarter of the fiscal year 2012. This amendment allows an entity to first assess relevant qualitative factors in
order to determine whether it is necessary to perform the two-step quantitative goodwill impairment test otherwise required under ASC Topic
350, Intangibles—Goodwill and Other ("ASC 350"). In effect, the amendment eliminates the need to calculate the fair value of a reporting unit
in connection with the goodwill impairment test unless the entity
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determines, based on the qualitative assessment, that it is more likely than not that the reporting unit's fair value is less than its carrying amount,
including goodwill.
Based on the reviews performed by the Company, after taking into account the economic downturn experienced during the past several years in
certain geographic areas in which we operate, there were no material asset impairments recognized in the current or prior fiscal years presented.
Share-Based Payments
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 2013, 2012 and 2011, total compensation cost charged against income and included in selling, general and administrative
expenses for share-based compensation arrangements was $19.2 million, $16.9 million and $15.6 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 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. The expected volatility used for awards made during the fiscal year ended September 30, 2013,
reflects the average volatility for the Company's common stock. For awards made prior to the fiscal year 2012, the expected volatility used was
derived using the average volatility of both the Company and similar companies (based on industry sector) since it was not practicable to
estimate the Company's expected volatility on a stand-alone basis due to a lack of sufficient trading history. The risk-free interest rate is based on
the five-year 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 periodic 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 our historical forfeiture experience as a basis for this estimate. Actual forfeitures could
differ from these estimates and could significantly affect the amount and timing of the recognition of stock option expense. We have based all
these estimates on our assumptions as of September 30, 2013. Our estimates for future periods may be based on different assumptions and
accordingly may differ.
We believe that our share-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 share-based compensation expense that could be material. A 10%
change in our share-based compensation expense for the year ended September 30, 2013 would affect earnings by approximately $1.2 million,
net of income tax.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to
improve the reporting of reclassifications out of AOCI . This amendment requires an entity to present the changes in each component of AOCI
for the periods presented, to separately report significant amounts reclassified from each component of AOCI and to disclose among other things
the components, if any, of net income affected by such reclassifications. The disclosures about such reclassifications must be presented either
parenthetically on the face of the financial statements or disclosed in the notes to the financial statements. As permitted, the Company adopted
the provisions of ASU No. 2013-02 effective January 1, 2013 and its adoption did not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment , which amended ASC Topic 350,
Intangibles—Goodwill and Other ("ASC 350"). This amendment allows an entity to first assess relevant qualitative factors in order to determine
whether it is necessary to perform the
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quantitative impairment test for indefinite-lived intangible assets otherwise required under ASC 350. In effect, the amendment eliminates the
need to calculate the fair value of an indefinite-lived intangible asset in connection with the impairment test unless the entity determines, based
on the qualitative assessment, that it is more likely than not that the asset is impaired. As permitted, the Company adopted the provisions of ASU
No. 2012-02 effective January 1, 2013 and its adoption did not have a material effect on the Company's consolidated financial position, results of
operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05 which amended ASC Topic 220, Comprehensive Income ("ASC 220"). This amendment,
which must be applied retrospectively, allows an entity the option to present the components of net income, as well as total comprehensive
income and the components of other comprehensive income, either in a single continuous statement of comprehensive income or in two separate
consecutive statements. This amendment also eliminates the option to present the components of other comprehensive income in the statement of
stockholders' equity but does not change the items that must be reported. As permitted, the Company adopted the provisions of ASU No. 201105 effective January 1, 2013 and its adoption did not have a material effect on the Company's consolidated financial position, results of
operations or cash flows.
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 government
actions. We consider a variety of practices to manage these market risks, including, when deemed appropriate, the occasional use of derivative
financial instruments. Currently, we do not purchase or hold any derivative instruments for speculative or trading purposes.
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 Euro, the British pound sterling, the Canadian
dollar, the Chilean peso, and the Mexican peso. In addition, we currently have exposure to several currencies of countries located in South
America. Our various foreign currency exposures at times offset each other, sometimes providing a natural hedge against foreign currency risk.
For each of the fiscal years 2013, 2012 and 2011, approximately 19% of our consolidated net sales were made in currencies other than the U.S.
dollar. Consolidated net sales for the fiscal year ended September 30, 2013, are inclusive of an approximately $1.3 million positive impact from
changes in foreign currency exchange rates and other comprehensive income reflects $0.8 million in foreign currency translation adjustments.
For the fiscal years 2013, 2012 and 2011, fluctuations in the U.S. dollar exchange rates did not otherwise have a material effect on our
consolidated financial condition and consolidated results of operations.
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 our consolidated net sales by approximately 1.9% in the fiscal year 2013, and would have impacted our consolidated net assets by
approximately 2.7% at September 30, 2013.
The Company uses foreign exchange contracts including, at September 30, 2013, foreign currency options with an aggregate notional amount of
$12.0 million to manage the exposure to the U.S. dollar resulting from certain of our Sinelco Group subsidiaries' purchases of merchandise from
third-party suppliers. Sinelco's functional currency is the Euro. These foreign currency options enable Sinelco to buy U.S. dollars at a contractual
exchange rate of 1.32, are with a single counterparty and expire ratably through September 2014.
The Company also uses foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates in connection with
certain intercompany balances not permanently invested. As such, at September 30, 2013, we held: (a) a foreign currency forward which enables
us to sell approximately €13.9 million ($18.9 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of
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approximately 1.3526, (b) a foreign currency forward which enables us to sell approximately $5.5 million Canadian dollars ($5.3 million, at the
September 30, 2013 exchange rate) at the contractual exchange rate of 1.03115, (c) a foreign currency forward which enables us to buy
approximately $8.0 million Canadian dollars ($7.8 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.0329,
(d) a foreign currency forward which enables us to sell approximately 8.6 million Mexican pesos ($0.7 million, at the September 30, 2013
exchange rate) at the contractual exchange rate of 13.1806 and (e) a foreign currency forward which enables us to sell approximately
£4.2 million ($6.8 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of approximately 1.6129. All the foreign
currency forwards discussed in this paragraph are with a single counterparty (not the same counterparty as that on the options discussed in the
preceding paragraph) and expire on or before December 31, 2013.
In addition, the Company uses foreign exchange contracts including, at September 30, 2013, foreign currency forwards with an aggregate
notional amount of €3.6 million ($4.9 million, at the September 30, 2013 exchange rate) to mitigate the exposure to the British pound sterling
resulting from the sale of products and services among certain European subsidiaries of the Company. The foreign currency forwards discussed
in this paragraph enable the Company to buy British pound sterling in exchange for Euro currency at the weighted average contractual exchange
rate of 0.8425, are with a single counterparty (the same counterparty as that on the forwards discussed in the immediately preceding paragraph)
and expire ratably through September 2014.
The Company's foreign exchange contracts are not designated as hedges and do not currently meet the requirements for hedge accounting.
Accordingly, the changes in the fair value (i.e., marked-to-market adjustments) of these derivative instruments (which are adjusted quarterly) are
recorded in selling, general and administrative expenses in our consolidated statements of earnings. As such, selling, general and administrative
expenses include net losses of $2.8 million in the fiscal years ended September 30, 2013, and net gains of $2.0 million and $0.2 million in the
fiscal years ended September 30, 2012 and 2011, respectively, in connection with all of the Company's foreign currency derivatives, including
marked-to-market adjustments.
Interest rate risk
We and certain of our subsidiaries are sensitive to interest rate fluctuations primarily as a result of borrowings under our ABL facility from time
to time. 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 our 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. Based on the $76.0 million of borrowings under our ABL facility outstanding at
September 30, 2013, a change in the estimated interest rate up or down by 1 / 2 % would increase or decrease earnings before income taxes by
approximately $0.4 million. At September 30, 2013, the Company held no interest rate swaps or similar derivatives instruments.
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 and that our allowance for doubtful
accounts is sufficient to cover customer credit risks at September 30, 2013.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please see "Index to Financial Statements" which is located on page 85 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 8—Financial 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 costeffective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.
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.
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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, 2013, 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, 2013 using the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control—Integrated Framework (1992). Based
on this assessment, management has concluded that, as of September 30, 2013 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 85 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.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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.
The additional information required by Item 10 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy
Statement related to the 2014 Annual Meeting of Stockholders under the headings "Proposal 1—Election 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."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement related
to the 2014 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 herein by reference from our Proxy Statement related
to the 2014 Annual Meeting of Stockholders under the heading "Ownership of Securities."
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information as of September 30, 2013, about our common stock that may be issued under all of our existing equity
compensation plans:
Number of securities remaining
Plan Category
Equity
compensation
plans
approved by
security
holders
Equity
compensation
plans not
approved by
security
holders
Total
(1)
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights(1)
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))(2)
(c)
11,054,875 $
12.89
9,800,074
N/A
11,054,875 $
N/A
12.89
N/A
9,800,074
Includes options issued and available for exercise and shares available for issuance in connection with past awards under
the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan ("the 2010 Plan") and predecessor share-based
compensation plans. We currently grant awards only under the 2010 Plan.
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(2)
Represents shares that are available for issuance pursuant to restricted stock or other full value awards under the 2010
Plan, as amended.
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 herein by reference from our Proxy Statement related
to the 2014 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 herein by reference from our Proxy Statement related
to the 2014 Annual Meeting of Stockholders under the heading "Proposal 2—Ratification of Selection of Auditors."
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PART IV
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 85 of this Annual Report.
(b) Exhibits
The following exhibits are filed as part of this Annual Report or are incorporated herein by reference:
Exhibit No.
Description
3.1 Second Amended and Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated January 27, 2012, which is
incorporated herein by reference from Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 27, 2012
3.2 Fourth Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated August 27, 2012, which is incorporated herein
by reference from Exhibit 3.1 to the Company's Current Report on Form 8-K filed on August 27, 2012
4.1 Credit Agreement dated as of November 12, 2010 among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty
Supply LLC, as domestic borrowers, Beauty Systems Group (Canada), Inc., as Canadian borrower, SBH Finance B.V., as
foreign borrower, the guarantors from time to time party hereto, Bank of America, N.A., as administrative agent and
collateral agent, Bank of America, N.A. (acting through its Canada branch), as Canadian agent, the other lenders party hereto,
JPMorgan Chase Bank, N.A., as documentation agent, Wells Fargo Capital Finance, LLC, as syndication agent, Banc of
America Securities LLC, Wells Fargo Capital Finance, LLC, as joint lead arrangers and joint book managers, which is
incorporated herein by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q filed on February 3,
2011
4.2 Amendment No. 1 dated June 8, 2012, to that certain Credit Agreement dated as of November 12, 2010 among the
Borrowers, the Guarantors, the Administrative Agent, the Collateral Agent, the Canadian Agent and the Lenders party thereto
(as such terms are defined therein), which is incorporated herein by reference from Exhibit 4.1 to the Company's Current
Report on Form 8-K filed June 14, 2012
4.3 Second Amendment to Credit Agreement dated July 26, 2013, to that certain Credit Agreement dated as of November 12,
2010 among the Borrowers, the Guarantors, the Lenders party thereto, the Administrative Agent, the Collateral Agent, the
Syndication Agent and the Documentation Agent (as such terms are defined therein)*†
4.4 Amended and Restated Security Agreement by Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC,
as the domestic borrowers and the other domestic borrowers and domestic guarantors party hereto from time to time and
Bank of America, N.A. as collateral agent dated as of July 26, 2013*†
4.5 Amended and Restated General Security Agreement by Beauty Systems Group (Canada), Inc., as the Canadian borrower and
Bank of America, N.A., (acting through its Canada branch), as Canadian agent dated as of July 26, 2013*†
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4.6 Joinder to Loan Documents, dated as of December 20, 2011, by and among Sally Holdings LLC, Beauty Systems
Group LLC, Sally Beauty Supply LLC, Beauty Systems Group (Canada), Inc., SBH Finance B.V., the Guarantors named
therein, Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Bank of America, N.A., as administrative agent and
as collateral agent, which is incorporated herein by reference from Exhibit 4.10 to the Company's Quarterly Report on
Form 10-Q filed on February 2, 2012†
4.7 Indenture, dated as of November 8, 2011, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors listed therein
and Wells Fargo Bank, National Association (including the form of Note attached as an exhibit thereto), which is
incorporated herein by reference from Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 9, 2011
4.8 First Supplemental Indenture, dated as of December 20, 2011, among Sally Beauty Holdings, Inc., Sally Investment
Holdings LLC, Sally Holdings LLC, Sally Capital Inc., each existing Subsidiary Guarantor listed therein and Wells Fargo
Bank, National Association, which is incorporated herein by reference from Exhibit 4.12 to the Company's Quarterly Report
on Form 10-Q filed on February 2, 2012
4.9 Indenture, dated as of May 18, 2012, by and among Sally Holdings LLC, Sally Capital Inc. and Wells Fargo Bank, National
Association, which is incorporated herein by reference from Exhibit 4.1 to the Company's Current Report on Form 8-K filed
on May 18, 2012
4.10 Supplemental Indenture, dated as of May 18, 2012, by and among Sally Holdings LLC, Sally Capital Inc., the guarantors
listed therein and Wells Fargo Bank, National Association (including the form of Note attached as an exhibit hereto), which
is incorporated herein by reference from Exhibit 4.2 to the Company's Current Report on Form 8-K filed on May 18, 2012
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 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
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10.5 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
10.6 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 from Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on April 27, 2007
10.7 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
10.8 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
10.9 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 from Exhibit 10.4 to the Company's Current Report on Form 8-K
filed on April 27, 2007
10.10 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
10.11 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
10.12 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
10.13 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
10.14 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
10.15 Amendment and Restated Alberto-Culver Company Employee Stock Option Plan of 2003, which is incorporated herein by
reference from Exhibit 10.28 to the Company's Annual Report on Form 10-K filed on November 19, 2009
10.16 2010 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 10.29 to the Company's Annual Report on
Form 10-K filed on November 19, 2009
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10.17 2010 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 10.30 to the Company's Annual Report on Form 10-K
filed on November 19, 2009
10.18 2010 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 10.31 to the Company's Annual Report on Form 10-K filed on
November 19, 2009
10.19 2010 Form of Stock Option Agreement for Employees pursuant to the Alberto-Culver Company Employee Stock Option Plan
of 2003, which is incorporated herein by reference from Exhibit 10.32 to the Company's Annual Report on Form 10-K filed
on November 19, 2009
10.20 Form of Amended and Restated Indemnification Agreement with Directors, which is incorporated herein by reference from
Exhibit 10.33 to the Company's Annual Report on Form 10-K filed on November 19, 2009
10.21 2011 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2010 Omnibus
Incentive Plan, which is incorporated herein by reference from Exhibit 10.33 to the Company's Annual Report on Form 10-K
filed on November 18, 2010
10.22 2011 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive
Plan, which is incorporated herein by reference from Exhibit 10.34 to the Company's Annual Report on Form 10-K filed on
November 18, 2010
10.23 2011 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2010
Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.25 to the Company's Annual Report on
Form 10-K filed November 15, 2012
10.24 Form of Sally Beauty Holdings, Inc. 2012 Annual Incentive Plan, which is incorporated herein by reference from
Exhibit 10.34 to the Company's Annual Report on Form 10-K filed on November 16, 2011
10.25 Form of Option Exercise Period Extension and Restricted Stock Vesting Extension Agreement, which is incorporated herein
by reference from Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed February 2, 2012
10.26 Sally Beauty Holdings, Inc. Amended and Restated Independent Directors Compensation Policy, which is incorporated
herein by reference from Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed August 2, 2012
10.27 Amended and Restated Termination Agreement with Gary G. Winterhalter and the Company effective as of November 5,
2012, which is incorporated herein by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed
November 5, 2012
10.28 Amended and Restated Severance Agreement between Gary G. Winterhalter and the Company effective as of November 5,
2012, which is incorporated herein by reference from Exhibit 10.2 to the Company's Current Report on Form 8-K filed
November 5, 2012
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10.29 Form of Amended and Restated Severance Agreement between each of Mark L. Flaherty and John R. Golliher and the
Company effective as of November 5, 2012, which is incorporated herein by reference from Exhibit 10.3 to the Company's
Current Report on Form 8-K filed November 5, 2012
10.30 Severance Agreement between Matthew Haltom and the Company effective as of November 5, 2012, which is incorporated
herein by reference from Exhibit 10.4 to the Company's Current Report on Form 8-K filed November 5, 2012
10.31 Severance Agreement between Tobin Anderson and the Company effective as of November 12, 2013*
10.32 2012 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2010
Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.37 to the Company's Annual Report on
Form 10-K filed November 15, 2012
10.33 Amended and Restated Sally Beauty Holdings, Inc. Annual Incentive Plan, which is incorporated herein by reference from
Exhibit 10.38 to the Company's Annual Report on Form 10-K filed November 15, 2012
10.34 Amended and Restated Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan, which is incorporated herein by reference
from Exhibit 10.39 to the Company's Annual Report on Form 10-K filed November 15, 2012
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*
101 Pursuant to Rule 406T of Regulation S-T, the following financial information from our Annual Report on Form 10-K for the
fiscal year ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language) and furnished
electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Earnings; (iii) the
Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to
Consolidated Financial Statements.
*
Included herewith
†
Certain schedules and exhibits have been omitted pursuant to Item 601(b) (2) of Regulation S-K. The Registrant agrees to furnish
supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request.
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SIGNATURES
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 14th day of November, 2013.
SALLY BEAUTY HOLDINGS, INC.
By:
/s/ GARY G. WINTERHALTER
Gary G. Winterhalter
Chairman of the Board, 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
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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
/s/ GARY G. WINTERHALTER
Title
Date
Chairman of the Board, President, Chief Executive Officer and Director
(Principal Executive Officer)
November 14, 2013
Senior Vice President and Chief Financial Officer (Principal Financial
Officer)
November 14, 2013
Vice President, Chief Accounting Officer and Controller (Principal
Accounting Officer)
November 14, 2013
Lead Independent Director
November 14, 2013
Director
November 14, 2013
Director
November 14, 2013
Director
November 14, 2013
President of Beauty Systems Group and Director
November 14, 2013
Director
November 14, 2013
Director
November 14, 2013
Director
November 14, 2013
Gary G. Winterhalter
/s/ MARK J. FLAHERTY
Mark J. Flaherty
/s/ JANNA S. MINTON
Janna S. Minton
/s/ ROBERT R. MCMASTER
Robert R. McMaster
/s/ CHRISTIAN A. BRICKMAN
Christian A. Brickman
/s/ KATHERINE BUTTON BELL
Katherine Button Bell
/s/ MARSHALL E. EISENBERG
Marshall E. Eisenberg
/s/ JOHN R. GOLLIHER
John R. Golliher
/s/ JOHN A. MILLER
John A. Miller
/s/ MARTHA J. MILLER
Martha J. Miller
/s/ EDWARD W. RABIN
Edward W. Rabin
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SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Financial Statements
Years ended September 30, 2013, 2012 and 2011
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2013 and 2012
Consolidated Statements of Earnings for the years ended September 30, 2013, 2012 and
2011
Consolidated Statements of Comprehensive Income for the years ended September 30,
2013, 2012 and 2011
Consolidated Statements of Cash Flows for the years ended September 30, 2013, 2012 and
2011
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
September 30, 2013, 2012 and 2011
Notes to Consolidated Financial Statements for the years ended September 30, 2013, 2012
and 2011
85
Page
F-1
F-3
F-4
F-5
F-6
F-7
F-8
Table of Contents
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 (the Company) internal control over financial reporting as of September 30, 2013, based on
criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company'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 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 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, 2013, based on criteria established in Internal Control—Integrated Framework (1992) 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. and subsidiaries as of September 30, 2013 and 2012, and the related consolidated statements of
earnings, comprehensive income, cash flows, and stockholders' equity (deficit) for each of the years in the three-year period ended
September 30, 2013, and our report dated November 13, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
November 13, 2013
F-1
Table of Contents
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) and subsidiaries as of
September 30, 2013 and 2012, and the related consolidated statements of earnings, comprehensive income, cash flows, and stockholders' equity
(deficit) for each of the years in the three-year period ended September 30, 2013. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 2013, 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), the Company's
internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control—Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 13, 2013
expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
KPMG LLP
Dallas, Texas
November 13, 2013
F-2
Table of Contents
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2013 and 2012
(In thousands, except par value data)
2013
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, net
Accounts receivable, other
Income taxes receivable
Inventory
Prepaid expenses
Deferred income tax assets, net
Total current assets
Property and equipment, net
Goodwill
Intangible assets, excluding goodwill, net
Other assets
Total assets
Liabilities and Stockholders' Deficit
Current liabilities:
Current maturities of long-term debt
Accounts payable
Accrued liabilities
Income taxes payable
Total current liabilities
Long-term debt
Other liabilities
Deferred income tax liabilities, net
Total liabilities
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 500,000 shares; 164,762
and 180,548 shares issued and 164,425 and 180,241 shares
outstanding at September 30, 2013 and 2012, respectively
Preferred stock, $0.01 par value. Authorized 50,000 shares; none
issued
Additional paid-in capital
Accumulated deficit
Treasury Stock, 47 shares, at cost
Accumulated other comprehensive loss, net of tax
Total stockholders' deficit
Total liabilities and stockholders' deficit
2012
$
47,115 $ 240,220
57,049
59,496
39,196
42,260
4,931
23,734
808,313
735,356
26,727
29,376
32,486
33,465
1,015,817
1,163,907
229,540
202,661
538,278
532,331
130,097
128,437
36,354
38,464
$ 1,950,086 $ 2,065,800
$
78,018 $
1,908
273,456
262,209
184,762
200,267
6,417
13,004
542,653
477,388
1,612,685
1,615,322
24,286
24,232
73,941
63,943
2,253,565
2,180,885
1,644
1,802
—
—
91,022
540,007
(385,090)
(646,241)
(1,237)
—
(9,818)
(10,653)
(303,479)
(115,085)
$ 1,950,086 $ 2,065,800
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-3
Table of Contents
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Fiscal Years ended September 30, 2013, 2012 and 2011
(In thousands, except per share data)
Net sales
Cost of products sold and distribution expenses
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Operating earnings
Interest expense
Earnings before provision for income taxes
Provision for income taxes
Net earnings
Basic earnings per share
Diluted earnings per share
2013
2012
$ 3,622,216 $ 3,523,644 $
1,826,953
1,780,385
1,795,263
1,743,259
1,202,709
1,179,206
72,192
64,698
520,362
499,355
107,695
138,412
412,667
360,943
151,516
127,879
$ 261,151 $ 233,064 $
$
1.52 $
1.27 $
$
Weighted average shares:
Basic
Diluted
1.48 $
1.24 $
2011
3,269,131
1,674,526
1,594,605
1,086,414
59,722
448,469
112,530
335,939
122,214
213,725
1.17
1.14
171,682
183,420
183,020
176,159
188,610
188,093
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-4
Table of Contents
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Fiscal Years ended September 30, 2013, 2012 and 2011
(In thousands)
Net earnings
Other comprehensive income (loss):
Foreign currency translation adjustments
Deferred gain on interest rate swaps
Total other comprehensive income (loss), before tax
Income taxes related to other comprehensive income (loss)
Other comprehensive income (loss), net of tax
Total comprehensive income
2013
2012
2011
$ 261,151 $ 233,064 $ 213,725
835
8,272
(7,952)
—
6,450
9,080
835
14,722
1,128
—
(2,704)
(3,523)
835
12,018
(2,395)
$ 261,986 $ 245,082 $ 211,330
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-5
Table of Contents
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years ended September 30, 2013, 2012 and 2011
(In thousands)
2013
2012
2011
Cash Flows from Operating Activities:
Net earnings
$ 261,151 $ 233,064 $ 213,725
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization
72,192
64,698
59,722
Share-based compensation expense
19,201
16,852
15,560
Amortization of deferred financing costs
3,587
5,202
6,846
Excess tax benefit from share-based compensation
(15,385)
(14,390)
(3,712)
Net loss on disposal of property and equipment
72
89
327
Net loss on extinguishment of debt
220
38,376
2,765
Deferred income taxes
10,480
2,388
459
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable
3,053
4,288
(4,163)
Accounts receivable, other
3,306
(8,018)
(3,971)
Income taxes receivable
18,803
(23,734)
—
Inventory
(70,282)
(55,815)
(47,930)
Prepaid expenses
2,855
(2,559)
(3,262)
Other assets
(581)
5,176
2,145
Accounts payable and accrued liabilities
(7,059)
16,725
51,332
Income taxes payable
8,786
17,254
1,041
Other liabilities
55
(2,014)
957
Net cash provided by operating activities
310,454
297,582
291,841
Cash Flows from Investing Activities:
Capital expenditures
(84,879)
(69,086)
(59,955)
Proceeds from sales of property and equipment
120
108
384
Acquisitions, net of cash acquired
(22,218)
(43,535)
(87,164)
Net cash used by investing activities
(106,977)
(112,513) (146,735)
Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt
365,500
2,101,489
428,605
Repayments of long-term debt
(291,451) (1,921,284) (577,911)
Repurchases of common stock
(509,704)
(200,000)
—
Debt issuance costs
(1,998)
(31,297)
(5,397)
Proceeds from exercises of stock options
25,493
28,020
10,942
Excess tax benefit from share-based compensation
15,385
14,390
3,712
Net cash used by financing activities
(396,775)
(8,682) (140,049)
Effect of foreign exchange rate changes on cash and cash
equivalents
193
352
(1,070)
Net (decrease) increase in cash and cash equivalents
(193,105)
176,739
3,987
Cash and cash equivalents, beginning of year
240,220
63,481
59,494
Cash and cash equivalents, end of year
$ 47,115 $ 240,220 $ 63,481
Supplemental Cash Flow Information:
Interest paid(a)
Income taxes paid
(a)
$ 105,638 $
$ 111,422 $
110,005 $ 102,059
135,591 $ 123,749
For the fiscal year ended September 30, 2012, interest paid includes $24.4 million in call premiums paid upon the redemption of
outstanding notes.
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-6
Table of Contents
SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Fiscal Years ended September 30, 2013, 2012 and 2011
(In thousands)
Common Stock
Shares
Balance at
September 30,
2010
Net earnings
Other
comprehensive
loss
Stock options
subject to
redemption
Share-based
compensation
Stock issued
for stock
options
Balance at
September 30,
2011
Net earnings
Other
comprehensive
income
Repurchases
and
cancellations
of common
stock
Share-based
compensation
Stock issued
for stock
options
Balance at
September 30,
2012
Net earnings
Other
comprehensive
income
Repurchases
and
cancellations
of common
stock
Share-based
compensation
Stock issued
for stock
options
Balance at
September 30,
2013
182,230
—
Amount
$
1,822
—
Additional
Paid-in
Capital
$
650,315
—
Accumulated
Deficit
$
Treasury
Stock
(1,093,030) $
213,725
Accumulated
Other
Comprehensive
(Loss)
(103) $
—
Total
Stockholders'
Deficit
(20,276) $
—
—
—
—
—
—
—
—
946
—
—
—
946
96
1
15,559
—
—
—
15,560
1,731
18
14,436
—
—
—
14,454
184,057
—
1,841
—
681,256
—
—
—
—
(7,567)
(879,305)
233,064
(2,395)
(461,272)
213,725
(2,395)
(103)
—
(22,671)
—
(218,982)
233,064
—
—
12,018
12,018
(76)
(200,027)
—
103
—
(200,000)
126
1
16,851
—
—
—
16,852
3,625
36
41,927
—
—
—
41,963
180,241
—
1,802
—
540,007
—
—
—
—
(18,894)
(189)
(646,241)
261,151
—
(508,278)
—
—
—
—
(1,237)
(10,653)
—
835
(115,085)
261,151
835
—
(509,704)
126
1
19,200
—
—
—
19,201
2,952
30
40,093
—
—
—
40,123
(1,237) $
(9,818) $
(303,479)
164,425
$
1,644
$
91,022
$
(385,090) $
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
F-7
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Fiscal Years ended September 30, 2013, 2012 and 2011
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, through its
Sally Beauty Supply retail stores primarily in the U.S., Puerto Rico, Canada, Mexico, Chile, the United Kingdom, Ireland, Belgium, France,
Germany, the Netherlands and Spain. Additionally, the Company distributes professional beauty products to salons and salon professionals
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 regions of
the 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 under exclusive territory agreements with the manufacturers of the products.
Sally Beauty Supply began operations with a single store in New Orleans in 1964 and was acquired in 1969 by our former parent company, The
Alberto-Culver Company, which we refer to as Alberto-Culver. BSG became a subsidiary of Sally Beauty in 1995. In November 2006, Sally
Beauty separated from Alberto-Culver and became an independent company listed on the New York Stock Exchange. In November 2006, Sally
Beauty incurred approximately $1,850.0 million of long-term debt in connection with its separation into an independent company.
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"). These consolidated financial statements include the operations of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.
All references in these notes to "management" are to the management of Sally Beauty.
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.
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 disclosures of contingent liabilities in the financial statements. Our most
significant estimates relate to: the valuation of inventory, vendor concessions, retention of risk, income taxes, the assessment of long-lived assets
and intangible assets for impairment, and share-based payments. 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 in the preparation of the Company's consolidated financial
statements are reasonable.
F-8
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
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 fair value. Also included in cash equivalents are
proceeds due from customer credit and debit cards and PayPal transactions, which generally settle within one to three days, and were
$10.6 million and $20.0 million at September 30, 2013 and 2012, respectively.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of investments in cash equivalents,
accounts receivable and derivative instruments.
The Company invests from time to time in securities of financial institutions it deems to be of high creditworthiness. Accounts receivable are
deemed by the Company to be highly diversified due to the high number of individual customers comprising the Company's customer base and
their dispersion across diverse geographical regions. The counterparties to our derivative instruments are deemed by the Company to be of
substantial resources and strong creditworthiness. The Company believes that no significant concentration of credit risk exists with respect to its
investments in cash equivalents, its accounts receivable and its derivative instruments at September 30, 2013 and 2012.
Trade Accounts Receivable and Accounts Receivable, Other
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 the future collectability of amounts
receivable at the balance sheet date. The Company records allowances for doubtful accounts on the basis of historical collection data and current
customer information. Customer account balances are written off against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. In the Company's 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.
Accounts receivable, other, consist primarily of amounts expected to be received from vendors under various contractual agreements and are
recorded at the amount management estimates will be collected.
Inventory
Inventory consists primarily of beauty supplies and related accessories, and salon equipment for sale in the normal course of our business.
Inventory is stated at the lower of cost, determined using the first-in, first-out ("FIFO") method, or market (net realizable value). Inventory cost
reflects 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. When necessary, the Company adjusts
the carrying value of inventory to the lower of cost or market, including anticipated disposal costs and for estimated inventory shrinkage.
Estimates of the future demand for the Company's products, historical turn-over rates, the age and sales history of the inventory, and historic as
well as anticipated changes in stock keeping units ("SKUs") are some of the key factors used by management in assessing the net realizable
value of inventory.
The Company estimates inventory shrinkage between physical counts based on its historical experience. Physical inventory counts are performed
at substantially all stores and significant distribution centers at
F-9
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
least annually, and sooner when management has reason to believe that the risk of inventory shrinkage at a particular location is heightened.
Upon completion of physical inventory counts, the Company's consolidated financial statements are adjusted to reflect actual quantities on hand.
The Company has policies and processes in place that are intended to minimize inventory shrinkage. Inventory shrinkage expense has averaged
approximately 1% of our consolidated net sales during each of the past three fiscal years.
Lease Accounting
The Company's lease agreements for office space, company-operated stores and warehouse/distribution facilities are generally accounted for as
operating leases, consistent with applicable GAAP. 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 lease agreements to which the Company is a party 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 liabilities and other liabilities, as appropriate, on our consolidated balance sheets, and amortized on a straightline basis over the lease term (including renewal options determined to be reasonably assured) as a reduction of rent expense. The amortization
period used for deferred lease credits is generally consistent with the amortization period used for the constructed leasehold improvement asset
for a given location.
Valuation of Long-Lived Assets and Intangible Assets with Definite Lives
Long-lived assets, such as property and equipment, including store equipment, and purchased intangibles subject to amortization are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The
recoverability of long-lived assets and intangible assets subject to amortization is assessed by comparing the net carrying amount of each asset to
its total estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the
estimated fair value of the asset. There were no significant impairment losses recognized in our consolidated financial statements in the current
or prior fiscal years presented in connection with long-lived assets and intangible assets subject to amortization.
Intangible assets subject to amortization include customer relationships, certain distribution rights and non-competition agreements, and are
amortized, on a straight-line basis, over periods of one to twelve years. Such amortization periods are based on the estimated useful lives of the
assets and take into account the terms of any underlying agreements, but do not generally reflect all renewal terms contractually available to the
Company.
Goodwill and Intangible Assets with Indefinite Lives
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Intangible assets
with indefinite lives consist of trade names acquired in business
F-10
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
combinations. Goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually, during our second fiscal
quarter, and whenever events or changes in circumstances indicate it is more likely than not that the value of the asset may be impaired. When
assessing goodwill and intangible assets with indefinite lives for potential impairment, management considers whether the value of the asset has
been impaired by evaluating if various factors (including current operating results, anticipated future results and cash flows, and relevant market
and economic conditions) indicate a possible impairment and, if appropriate, compares the carrying amount of the asset to its fair value.
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2012-02, Testing
Indefinite-Lived Intangible Assets for Impairment , which amended Accounting Standards Codification ("ASC") Topic 350, IntangiblesGoodwill and Other ("ASC 350"). This amendment allows an entity to first assess relevant qualitative factors in order to determine whether it is
necessary to perform the quantitative impairment test for indefinite-lived intangible assets otherwise required under ASC 350. In effect, the
amendment eliminates the need to calculate the fair value of an indefinite-lived intangible asset in connection with the impairment test unless the
entity determines, based on the qualitative assessment, that it is more likely than not that the asset is impaired. As permitted, the Company
adopted this amendment during the second quarter of its fiscal year 2013 and its adoption did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
Based on the reviews performed, after taking into account the economic downturn experienced during the past several years in certain
geographic areas in which we operate, there was no impairment of goodwill or intangible assets with indefinite lives recognized in our financial
statements in the current or prior fiscal years presented.
Deferred Financing Costs
Certain costs incurred in connection with the issuance of debt are capitalized when incurred and are amortized over the estimated term of the
related debt agreements generally using the effective interest method. Such capitalized costs are included in other assets in our consolidated
balance sheets. Unamortized deferred financing costs are expensed proportionally when certain debt is prepaid or notes are redeemed.
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. Currently these self-insurance costs, less amounts recovered through payroll deductions and certain out-of-pocket amounts
incurred 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.
F-11
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
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, 2013 and 2012 are adequate.
Revenue Recognition
The Company recognizes sales revenue when a customer consummates a point-of-sale transaction at a store. The cost of sales incentive
programs, including customer and consumer coupons, is 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 (generally upon shipment). Appropriate provisions for sales
returns and cash discounts are made at the time the sales are recognized. Sales returns and allowances averaged approximately 2.0% of net sales
during 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,
vendor rebates and allowances, inventory shrinkage 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 when incurred.
Shipping and Handling
Shipping and handling costs (including freight and distribution expenses) related to delivery to customers are included in selling, general and
administrative expenses in our consolidated statements of earnings when incurred and amounted to $48.5 million, $41.3 million and
$41.2 million for the fiscal years 2013, 2012 and 2011, respectively.
Advertising Costs
Advertising costs relate mainly to print advertisements, digital marketing, trade shows and product education for salon professionals. Advertising
costs incurred in connection with print advertisements are expensed the first time the advertisement is run. Other advertising costs are expensed
when incurred. Advertising costs of $83.9 million, $79.8 million and $70.9 million for the fiscal years 2013, 2012 and 2011, respectively, are
included in selling, general and administrative expenses in our consolidated statements of earnings.
Vendor Rebates and Concessions
The Company deems a cash consideration received from a supplier to be a reduction of the cost of products sold unless it is in exchange for an
asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the Company 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 the related products and is reflected in cost
of products sold and distribution expenses in our consolidated statements of earnings as the related products are sold. Any portion of such cash
consideration received that is attributable to inventory on hand is reflected as a reduction of inventory.
F-12
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Income Taxes
The Company recognizes deferred income taxes for the estimated future tax consequences attributable to 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.
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 (the Company's reporting currency) 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 ("AOCI") in our consolidated balance sheets. Foreign currency transaction gains or
losses are included in our consolidated statements of earnings when incurred and were not significant in any of the periods presented in the
accompanying financial statements.
3. Recent Accounting Pronouncements and Accounting Changes
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to
improve the reporting of reclassifications out of AOCI . This amendment requires an entity to present the changes in each component of AOCI
for the periods presented, to separately report significant amounts reclassified from each component of AOCI and to disclose among other things
the components, if any, of net income affected by such reclassifications. The disclosures about such reclassifications must be presented either
parenthetically on the face of the financial statements or disclosed in the notes to the financial statements. As permitted, the Company adopted
the provisions of ASU No. 2013-02 effective January 1, 2013 and its adoption did not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment , which amended ASC Topic 350,
Intangibles-Goodwill and Other ("ASC 350"). This amendment allows an entity to first assess relevant qualitative factors in order to determine
whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets otherwise required under ASC 350. In
effect, the amendment eliminates the need to calculate the fair value of an indefinite-lived intangible asset in connection with the impairment test
unless the entity determines, based on the qualitative assessment, that it is more likely than not that the asset is impaired. As permitted, the
Company adopted the provisions of ASU No. 2012-02 effective January 1, 2013 and its adoption did not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
In June 2011, the FASB issued ASU No. 2011-05 which amended ASC Topic 220, Comprehensive Income ("ASC 220"). This amendment,
which must be applied retrospectively, allows an entity the option to
F-13
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
present the components of net income, as well as total comprehensive income and the components of other comprehensive income, either in a
single continuous statement of comprehensive income or in two separate consecutive statements. This amendment also eliminates the option to
present the components of other comprehensive income in the statement of stockholders' equity but does not change the items that must be
reported. As permitted, the Company adopted the provisions of ASU No. 2011-05 effective January 1, 2013 and its adoption did not have a
material effect on the Company's consolidated financial position, results of operations or cash flows.
Accounting Changes
The Company made no accounting changes during the fiscal year 2013.
4. Fair Value Measurements
The Company's financial instruments consist of cash equivalents, trade and other accounts receivable, accounts payable, foreign currency
derivative instruments and debt. The carrying amounts of cash equivalents, trade and other accounts receivable and accounts payable
approximate their respective fair values due to the short-term nature of these financial instruments.
The Company measures on a recurring basis and discloses the fair value of its financial instruments under the provisions of ASC Topic 820, Fair
Value Measurements , as amended ("ASC 820"). The Company defines "fair value" as the price that would be received to sell an asset or paid to
transfer a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 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; and
Level 3— Unobservable inputs for the asset or liability.
F-14
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at September 30, 2013 and 2012
(in thousands):
Total
Assets
Cash equivalents(a)
Foreign exchange contracts
(b)
Total assets
Liabilities
Long-term debt(c)
Foreign exchange contracts
(b)
Total liabilities
Level 3
$
— $
— $
—
—
$
152
152 $
—
— $
152
152
—
—
$ 1,753,822 $ 1,671,500 $ 82,322
—
36
—
36
$ 1,753,858 $ 1,671,500 $ 82,358
—
—
Total
Assets
Cash equivalents(a)
Foreign exchange contracts
(b)
Total assets
Liabilities
Long-term debt(c)
Foreign exchange contracts
(b)
Total liabilities
As of September 30, 2013
Level 1
Level 2
As of September 30, 2012
Level 1
Level 2
Level 3
$
155,000 $
155,000 $
—
—
$
4
155,004 $
—
155,000 $
4
4
—
—
$ 1,739,547 $ 1,731,625 $
7,922
—
132
—
$ 1,739,679 $ 1,731,625 $
132
8,054
—
—
(a)
Cash equivalents, at September 30, 2012, consist of highly liquid investments which have no maturity and are
valued using unadjusted quoted market prices for such securities. The Company may from time to time invest in
securities with maturities of three months or less (consisting primarily of investment-grade corporate or government
bonds), with the primary investment objective of minimizing the potential risk of loss of principal.
(b)
Foreign exchange contracts (including foreign currency forwards and options) are valued for purposes of this
disclosure using widely accepted valuation techniques, such as discounted cash flow analyses, and reasonable
estimates, such as market foreign currency exchange rates. Please see Note 14 for more information about the
Company's foreign exchange contracts.
(c)
Long-term debt (including current maturities and borrowings under the ABL facility) is carried in the Company's
consolidated financial statements at amortized cost of $1,690.7 million at September 30, 2013 and $1,617.2 million
at September 30, 2012. The senior notes due 2019 and senior notes due 2022 are valued for purposes of this
disclosure using unadjusted quoted market prices for such debt securities. Other long-term debt (consisting
primarily of borrowings under the ABL facility and capital lease obligations), is generally valued for purposes of
this disclosure using widely accepted valuation techniques, such as discounted cash flow analyses, and observable
inputs such as market interest rates. Please see Note 13 for more information about the Company's debt.
F-15
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
5. Accumulated Stockholders' Equity (Deficit)
The Company is authorized to issue up to 500.0 million shares of common stock with a par value of $0.01 per share and up to 50.0 million
shares of preferred stock with a par value of $0.01 per share. As of September 30, 2013, the Company had approximately 164.8 million shares of
its common stock issued and approximately 164.4 million shares outstanding. There have been no shares of the Company's preferred stock
issued.
In August 2012, the Company announced that its Board of Directors approved a share repurchase program authorizing the Company to
repurchase up to $300.0 million of its common stock (the "2012 Share Repurchase Program"). In addition, on March 5, 2013, the Company
announced that its Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $700.0 million of
its common stock over the eight quarters commencing on such date (the "2013 Share Repurchase Program"). In connection with the
authorization of the 2013 Share Repurchase Program, the Company's Board of Directors terminated the 2012 Share Repurchase Program.
Prior to such termination, the Company had repurchased approximately 10.4 million shares of its common stock at a cost of $266.4 million
under the 2012 Share Repurchase Program. In addition, during the period from March 5, 2013 through September 30, 2013, the Company
repurchased approximately 8.5 million shares of its common stock at a cost of $243.3 million under the 2013 Share Repurchase Program.
During the fiscal year ended September 30, 2013, the Company repurchased and retired approximately 18.9 million shares of its common stock
(under the 2012 Share Repurchase Program and 2013 Share Repurchase Program) at a cost of $509.7 million. The Company reduced common
stock and additional paid-in capital, in the aggregate, by these amounts. In addition, during the fiscal year ended September 30, 2012, the
Company repurchased and retired approximately 7.6 million shares of our common stock from two venture capital investment funds associated
with Clayton, Dubilier & Rice, LLC (the "CDR Investors") at a cost of $200.0 million and reduced common stock and additional paid-in capital,
in the aggregate, by that amount. Please see our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, for more
information about the CD&R Investors.
At September 30, 2013 and 2012, accumulated other comprehensive loss consists of cumulative foreign currency translation adjustments of
$9.8 million and $10.7 million, respectively, and is net of income taxes of $2.9 million at each date. Comprehensive income reflects changes in
accumulated stockholders' equity (deficit) 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 foreign currency translation
adjustments, net of income tax, and deferred gains (losses) on certain interest rate swap agreements, net of income tax, until the expiration of
such swaps in May 2012. Please see Note 14 for more information about the Company's interest rate swap agreements.
6. Earnings Per Share
Basic earnings per share, is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during
the period. Diluted earnings per share, is calculated similarly but includes the potential dilution from the exercise of all outstanding stock options
and stock awards, except when the effect would be anti-dilutive.
F-16
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):
Net earnings
Year ended September 30,
2013
2012
2011
$ 261,151 $ 233,064 $ 213,725
Weighted average basic shares
Dilutive securities:
Stock option and stock award programs
Weighted average diluted shares
Earnings per share:
Basic
Diluted
171,682
183,420
183,020
4,477
176,159
5,190
188,610
5,073
188,093
$
1.52 $
1.27 $
1.17
$
1.48 $
1.24 $
1.14
At September 30, 2012, options to purchase 44,340 shares of the Company's common stock were outstanding but not included in the
computation of diluted earnings per share, since these options were anti-dilutive. Anti-dilutive options are: (a) out-of-the-money options (options
the exercise price of which is greater than the average price per share of the Company's common stock during the period), and (b) in-the-money
options (options the exercise price of which is less than the average price per share of the Company's common stock during the period) for which
the sum of assumed proceeds, including any unrecognized compensation expense related to such options, exceeds the average price per share for
the period. At September 30, 2013 and 2011, all outstanding options to purchase shares of the Company's common stock were dilutive.
7. Share-Based Payments
The Company from time to time grants share-based awards to its employees and consultants under the Sally Beauty Holdings, Inc. 2010
Omnibus Incentive Plan (the "2010 Plan"), a stockholder-approved share-based compensation plan which allows for the issuance of up to
29.8 million shares of the Company's common stock. As such, during the fiscal years ended September 30, 2013, 2012 and 2011, the Company
granted approximately 1.6 million, 2.0 million and 3.0 million stock options, respectively, and 139,454, 31,805 and 199,500 restricted share
awards, respectively, to its employees and consultants under the 2010 Plan. In addition, during the fiscal years ended September 30, 2013, 2012
and 2011, the Company granted 36,076, 25,501 and 43,015 restricted stock units, respectively, to its non-employee directors under the 2010
Plan.
The Company measures the cost of services received from employees, directors and consultants in exchange for an award of equity instruments
based on the fair value of the award on the date of grant, and recognizes compensation expense on a straight-line basis over the vesting period or
over the period ending on the date a participant becomes eligible for retirement, if earlier. For the fiscal years 2013, 2012 and 2011, total
compensation cost charged against income and included in selling, general and administrative expenses in the Company's consolidated
statements of earnings for all share-based compensation arrangements was $19.2 million, $16.9 million and $15.6 million, respectively, and
resulted in an increase in additional paid-in capital by the same amounts. These amounts include, for the fiscal years 2013, 2012 and 2011,
$5.9 million, $5.3 million and $5.0 million, respectively, of accelerated expense related to certain
F-17
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
retirement eligible employees who continue vesting awards upon retirement, under the provisions of the 2010 Plan and certain predecessor
share-based plans such as the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the "2007 Plan"). For fiscal years 2013, 2012 and 2011,
the total income tax benefit recognized in our consolidated statements of earnings in connection with all share-based compensation awards was
$7.1 million, $6.2 million and $6.0 million, respectively.
Stock Option Awards
Each option has an exercise price equal to the closing 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 generally subject to forfeiture until the vesting period
is complete, subject to certain retirement provisions contained in the 2010 Plan and certain predecessor share-based compensation plans such as
the 2007 Plan.
The following table presents a summary of the activity for the Company's stock option awards for the fiscal year ended September 30, 2013:
Outstanding at September 30, 2012
Granted
Exercised
Forfeited or expired
Outstanding at September 30, 2013
Exercisable at September 30, 2013
Number of
Weighted
Outstanding
Average
Options (in
Exercise
Thousands)
Price
11,861 $
10.45
1,578
23.49
(2,952)
8.64
(79)
18.04
10,408 $
12.89
5,409 $
9.24
Weighted
Average
Aggregate
Remaining
Contractual
Intrinsic
Term (in
Value (in
Years)
Thousands)
6.5 $
173,601
6.2 $
138,139
4.9 $
91,545
The following table summarizes additional information about stock options outstanding under the Company's share-based compensation plans:
Range of Exercise Prices
$2.00 - 9.66
$11.39 - 23.49
Total
Options Outstanding
Options Exercisable
Number
Weighted
Outstanding at
Average
Number
Remaining Weighted Exercisable at Weighted
September 30, Contractual Average September 30, Average
2013 (in
Term (in
Exercise
2013 (in
Exercise
Thousands)
Years)
Price
Thousands)
Price
4,836
4.5 $
7.85
4,180 $
7.91
5,572
7.7
17.26
1,229
13.74
10,408
6.2 $
12.89
5,409 $
9.24
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 is
expensed on a straight-line
F-18
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
basis over the vesting period (generally four years) of the stock options or to the date a participant becomes eligible for retirement, if earlier.
The weighted average assumptions relating to the valuation of the Company's stock options are as follows:
Year Ended
September 30,
2013
2012
2011
5.0
5.0
5.0
56.3% 58.4% 59.0%
0.8%
1.1%
1.1%
0.0%
0.0%
0.0%
Expected life (in years)
Expected volatility
Risk-free interest rate
Dividend yield
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 who have been granted stock options. The expected volatility used for awards made during the fiscal
years 2013 and 2012, reflects the average volatility for the Company's common stock. For awards made prior to the fiscal year 2012, the
expected volatility used was derived using the average volatility of both the Company and similar companies (based on industry sector) since it
was not practicable to estimate the Company's expected volatility on a stand-alone basis due to a lack of sufficient trading history. The risk-free
interest rate is based on the zero-coupon U.S. treasury notes with a comparable term as of the date of the grant. Since the Company does not
currently expect to pay dividends, the dividend yield used is 0%.
The weighted average fair value of the stock options issued to the Company's grantees at the date of grant during the fiscal years 2013, 2012 and
2011 was $11.29, $9.60 and $5.74, respectively. The total fair value of stock options issued to the Company's grantees that vested during the
fiscal years 2013, 2012 and 2011 was $12.7 million, $10.4 million and $8.5 million, respectively.
The total intrinsic value of options exercised during the fiscal years 2013, 2012 and 2011 was $55.4 million, $53.2 million and $15.9 million,
and the tax benefit realized for the tax deductions from these option exercises was $18.7 million, $18.9 million and $6.2 million, respectively.
The total cash received during the fiscal years 2013, 2012 and 2011 from these option exercises was $25.5 million, $28.0 million and
$10.9 million, respectively.
At September 30, 2013, approximately $15.1 million of total unrecognized compensation costs related to unvested stock option awards are
expected to be recognized over the weighted average period of 2.3 years.
Stock Awards
Restricted Stock Awards
The Company from time to time grants restricted stock awards to employees and consultants under the 2010 Plan. A restricted stock award is an
award of shares of the Company's common stock (which have full voting and dividend 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 2010 Plan and certain predecessor share-based compensation plans such as the 2007 Plan.
F-19
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
The fair value of the Company's restricted stock awards is expensed on a straight-line basis over the period (generally five years) in which the
restrictions on these stock awards lapse ("vesting") or over the period ending on the date a participant becomes eligible for retirement, if earlier.
For these purposes, the fair value of the restricted stock award is determined based on the closing market price of the Company's common stock
on the date of grant.
The following table presents a summary of the activity for the Company's restricted stock awards for the fiscal year ended September 30, 2013:
Restricted Stock Awards
Unvested at September 30,
2012
Granted
Vested
Forfeited
Unvested at September 30,
2013
Number of
Shares (in
Thousands)
Weighted
Average Fair
Value Per Share
Weighted
Average
Remaining
Vesting Term
(in Years)
307 $
139
(109)
—
10.42
23.79
9.37
—
2.5
337 $
16.30
3.1
At September 30, 2013, approximately $2.5 million of total unrecognized compensation costs related to unvested restricted stock awards are
expected to be recognized over the weighted average period of 3.1 years.
Restricted Stock Units
The Company currently grants restricted stock unit ("RSU" or "RSUs") awards, which generally vest less than one year from the date of grant,
pursuant to the 2010 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, RSUs are generally retained by the Company as
deferred stock units that are not distributed until nine months after the independent director's service as a director terminates. With respect to
awards made by the Company after September 30, 2012, an independent director who receives an RSU award may elect, upon receipt of such
award, to defer until a later date delivery of the shares of common stock of the Company that would otherwise be issued to such director on the
vesting date. 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 unvested RSUs. Under the 2010 Plan, the Company may settle the vested deferred stock
units with shares of the Company's common stock or in cash.
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 one year). For these purposes, the fair value of the RSU is determined based on the closing market price of the
Company's common stock on the date of grant.
F-20
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
The following table presents a summary of the activity for the Company's RSUs for the fiscal year ended September 30, 2013:
Restricted Stock Units
Unvested at September 30,
2012
Granted
Vested
Forfeited
Unvested at September 30,
2013
Number of
Shares (in
Thousands)
Weighted
Average
Remaining
Vesting Term
(In Years)
Weighted
Average Fair
Value Per Share
— $
36
(32)
(4)
—
23.84
23.89
23.49
—
— $
—
—
During fiscal year 2013, all RSUs vested or were forfeited. Therefore, there are no unrecognized compensation costs as of September 30, 2013 in
connection with past RSU awards.
8. Allowance for Doubtful Accounts
The change in the allowance for doubtful accounts was as follows (in thousands):
Balance at beginning of period
Bad debt expense
Uncollected accounts written off, net of
recoveries
Allowance for doubtful accounts of acquired
companies
Balance at end of period
Year Ended September 30,
2013
2012
2011
$ 2,583 $ 2,086 $ 2,756
1,671
1,764
1,631
(1,698)
$
—
2,556 $
(1,336)
69
2,583 $
(2,423)
122
2,086
9. Property and Equipment
Property and equipment, net consists of the following (in thousands):
September 30,
2013
2012
$ 11,277 $ 11,197
60,100
59,656
211,736
188,844
321,659
295,128
604,772
554,825
(375,232)
(352,164)
$ 229,540 $ 202,661
Land
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Total property and equipment, gross
Less accumulated depreciation and amortization
Total property and equipment, net
Depreciation expense for the fiscal years 2013, 2012 and 2011 was $59.4 million, $51.0 million and $47.3 million, respectively. As further
described in Note 13, borrowings under our asset-based senior
F-21
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
secured loan (or ABL) facility (the "ABL facility") are secured by substantially all of our assets, those of our domestic subsidiaries, those of our
Canadian subsidiaries (in the case of borrowings under the Canadian sub-facility) and a pledge of certain intercompany notes.
Depreciation of property and equipment is calculated using the straight-line method based on the estimated useful lives of the respective classes
of assets and is reflected in depreciation and amortization expense in our consolidated statements of earnings. Buildings and 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 when incurred,
while expenditures for major renewals and improvements are capitalized.
10. Goodwill and Intangible Assets
The changes in the carrying amounts of goodwill by operating segment for the fiscal years 2012 and 2013 are as follows (in thousands):
Balance at September 30, 2011
Acquisitions
Foreign currency translation
Balance at September 30, 2012
Acquisitions
Foreign currency translation
Balance at September 30, 2013
Sally Beauty
Beauty Systems
Supply
Group
Total
75,536
430,337
505,873
15,200
9,189
24,389
(881)
2,950
2,069
$
89,855 $
442,476 $ 532,331
501
5,047
5,548
2,298
(1,899)
399
$
92,654 $
445,624 $ 538,278
As described in Note 17, during the fiscal year 2012, $15.0 million of the increase in Sally Beauty Supply's goodwill was attributable to the
Company's acquisition of Kappersservice Floral B.V. and two related companies (together, the "Floral Group") in November 2011. The
remaining increase in consolidated goodwill in the amount of $9.4 million was attributable to acquisitions which were not individually material
and to purchase price adjustments.
As described in Note 17, during the fiscal year 2013, $3.5 million of the increase in BSG's goodwill was attributable to the Company's
acquisition of certain assets and business operations of Essential Salon Products, Inc. ("Essential Salon"), a professional-only distributor of
beauty products operating in the northeastern region of the United States. The remaining increase in consolidated goodwill in the amount of
$2.0 million was attributable to acquisitions which were not individually material and to purchase price adjustments.
The Company completed its annual assessment of goodwill for impairment during the quarter ended March 31, 2013. No impairment losses were
recognized in the current or prior periods presented in connection with the Company's goodwill.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment , which amended ASC 350. This
amendment allows an entity to first assess relevant qualitative factors in order to determine whether it is necessary to perform the quantitative
impairment test for indefinite-lived
F-22
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
intangible assets otherwise required under ASC 350. In effect, the amendment eliminates the need to calculate the fair value of an indefinitelived intangible asset in connection with the impairment test unless the entity determines, based on the qualitative assessment, that it is more
likely than not that the asset is impaired. As permitted, the Company adopted the provisions of ASU No. 2012-02 effective January 1, 2013.
The Company completed its annual assessment of intangible assets, other than goodwill and including indefinite-lived intangible assets, for
impairment during the quarter ended March 31, 2013. No impairment losses were recognized in the current or prior periods presented in
connection with the Company's intangible assets.
The following table provides the carrying value for intangible assets with indefinite lives, excluding goodwill, and the gross carrying value and
accumulated amortization for intangible assets subject to amortization by operating segment at September 30, 2013 and 2012 (in thousands):
Sally Beauty
Supply
Balance at September 30, 2013:
Intangible assets with indefinite
lives:
Trade names
Intangible assets subject to
amortization:
Gross carrying amount
Accumulated amortization
Net value
Total intangible assets,
excluding goodwill,
net
Balance at September 30, 2012:
Intangible assets with indefinite
lives:
Trade names
Intangible assets subject to
amortization:
Gross carrying amount
Accumulated amortization
Net value
Total intangible assets,
excluding goodwill,
net
$
Beauty Systems
Group
27,968 $
26,809
(12,177)
14,632
27,465 $
119,614
(59,582)
60,032
Total
55,433
146,423
(71,759)
74,664
$
42,600 $
87,497 $ 130,097
$
27,258 $
27,455 $
26,430
(9,856)
16,574
$
43,832 $
106,486
(49,336)
57,150
54,713
132,916
(59,192)
73,724
84,605 $ 128,437
As described in Note 17, during the fiscal year ended September 30, 2013, intangible assets subject to amortization in the amount of $9.1 million
were recorded by BSG in connection with the Company's acquisition of certain assets and business operations of Essential Salon and
$4.0 million in connection with individually immaterial acquisitions completed in the year. As described in Note 17, during the fiscal year ended
September 30, 2012, intangible assets subject to amortization in the amount of $11.8 million were recorded by Sally Beauty Supply in
connection with the Company's acquisition of the Floral Group in November 2011.
F-23
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Amortization expense totaled $12.8 million, $13.7 million and $12.4 million for the fiscal years ended September 30, 2013, 2012 and 2011,
respectively. As of September 30, 2013, future amortization expense related to intangible assets subject to amortization is estimated to be as
follows (in thousands):
Fiscal Year:
2014
2015
2016
2017
2018
Thereafter
$ 13,998
13,553
12,163
10,047
8,810
16,093
$ 74,664
The weighted average amortization period remaining for intangible assets subject to amortization is approximately 6.4 years.
11. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
September 30,
2013
2012
$ 70,802 $ 79,935
36,311
38,376
20,890
19,000
11,340
11,540
—
10,194
4,373
4,124
11,109
9,626
29,937
27,472
$ 184,762 $ 200,267
Compensation and benefits
Interest payable
Deferred revenue
Rental obligations
Loss contingency obligation
Property and other taxes
Insurance reserves
Operating accruals and other
Total accrued liabilities
F-24
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
12. Commitments and Contingencies
Lease Commitments
The Company's principal leases relate to retail stores and warehousing properties. At September 30, 2013, future minimum payments under noncancelable operating leases, net of sublease income, are as follows (in thousands):
Fiscal Year:
2014
2015
2016
2017
2018
Thereafter
$ 156,415
131,540
105,820
75,858
46,440
68,405
$ 584,478
Certain of the Company's leases require the Company to pay a portion of real estate taxes, insurance, maintenance and special assessments
assessed by the lessor. Also, certain of the Company's leases include renewal options and escalation clauses. Aggregate rental expense for all
operating leases amounted to $206.2 million, $194.9 million and $192.6 million for the fiscal years 2013, 2012 and 2011, respectively, and is
included in selling, general and administrative expenses in our consolidated statements of earnings.
Contingencies
Legal Proceedings
The Company is, from time to time, 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.
Based upon an unfavorable verdict rendered in November 2012 in certain actions brought against the Company in March 2011, we recorded
$10.2 million in legal settlement costs as of September 30, 2012, which we believed to be our best estimate of the potential loss. During the
fiscal year ended September 30, 2013, the parties continued to engage in negotiations aimed at resolving the matter and, in November 2012,
entered into a settlement agreement whereby the Company agreed to pay the plaintiff the one-time cash sum of $8.5 million and agreed to certain
other terms of settlement in exchange for a full release of claims.
Other Contingencies
The Company provides healthcare benefits to most of its full-time employees. The Company is largely self-funded for the cost of the healthcare
plan (including healthcare claims), 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 liabilities (current portion) and other
F-25
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
liabilities (long-term portion) in our consolidated balance sheets. The Company carries insurance coverage in such amounts in excess of its selfinsured 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, 2013 and 2012, except as discussed in the second preceding paragraph.
13. Short-term Borrowings and Long-Term Debt
Details of long-term debt are as follows (in thousands):
ABL facility(a)
Senior notes due Nov. 2019
Senior notes due Jun. 2022(b)
Other, due 2014-2015(c)
Total
Capital leases and other
Less: current portion
Total long-term debt
As of September 30,
2013
2012
Interest Rates
$
76,000 $
— (i) Prime plus (0.50% to 0.75%) or;
(ii) LIBOR(a) plus (1.50% to 1.75%)
750,000
750,000
6.875%
858,381
859,308
5.750%(b)
1,310
2,407
4.93% to 5.79%
$ 1,685,691 $ 1,611,715
5,012
5,515
78,018
1,908
$ 1,612,685 $ 1,615,322
(a)
At September 30, 2013, borrowings outstanding under the ABL facility bear interest at the weighted average rate of 2.0%.
When used in this Annual Report, LIBOR means the London Interbank Offered Rate.
(b)
Includes unamortized premium of $8.4 million and $9.3 million as of September 30, 2013 and 2012, respectively, related
to notes issued in September 2012 with an aggregate principal amount of $150.0 million. The 5.75% interest rate relates to
notes in the aggregate principal amount of $850.0 million.
(c)
Represents pre-acquisition debt of Pro-Duo NV and Sinelco Group BVBA ("Sinelco").
In November 2006, the Company, through its subsidiaries (Sally Investment Holdings LLC and Sally Holdings LLC, which we refer to as "Sally
Investment" and "Sally Holdings," respectively) incurred $1,850.0 million of indebtedness in connection with the Company's separation from its
former parent, Alberto-Culver. Please see Note 1 for more information about the Company's separation from Alberto-Culver.
In the fiscal year ended September 30, 2011, Sally Holdings entered into a new $400 million, five-year asset-based senior secured loan facility
(the "ABL facility") and terminated its prior $400 million ABL credit facility. The availability of funds under the ABL facility, as amended on
June 8, 2012, is subject to a customary borrowing base comprised of: (i) a specified percentage of our eligible credit card and trade accounts
receivable (as defined therein) and (ii) a specified percentage of our eligible inventory (as defined therein), and reduced by (iii) certain
customary reserves and adjustments and by certain outstanding letters of credit. The ABL facility includes a $25.0 million Canadian sub-facility
for our Canadian operations.
F-26
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
On July 26, 2013, the Company, Sally Holdings and other parties to the ABL facility entered into a second amendment to the ABL facility
which, among other things, increased the maximum availability under the ABL Facility to $500.0 million (subject to borrowing base
limitations), reduced pricing, relaxed the restrictions regarding the making of Restricted Payments, extended the maturity to July 26, 2018 and
improved certain other covenant terms. At September 30, 2013, borrowings outstanding under the ABL facility were $76.0 million (which we
intend to repay in the foreseeable future with cash from operations) and the Company had $382.3 million available for borrowing under the ABL
facility, including the Canadian sub-facility. Borrowings under the ABL facility are secured by substantially all of our assets, those of Sally
Investment, those of our domestic subsidiaries, those of our Canadian subsidiaries (in the case of borrowings under the Canadian sub-facility)
and a pledge of certain intercompany notes. In addition, the terms of the ABL facility contain a commitment fee of 0.25% on the unused portion
of the facility.
In the fiscal year ended September 30, 2012, the Company issued $750.0 million aggregate principal amount of its 6.875% Senior Notes due
2019 (the "senior notes due 2019") and $850.0 million aggregate principal amount of its 5.75% Senior Notes due 2022 (the "senior notes due
2022"), including notes in the aggregate principal amount of $150.0 million which were issued at par plus a premium. Such premium is being
amortized over the term of the notes using the effective interest method. The net proceeds from such debt issuances were used to retire
outstanding indebtedness in the aggregate principal amount of approximately $1,391.9 million and for general corporate purposes.
The senior notes due 2019 and the senior notes due 2022 (together, the "senior notes due 2019-2022") are unsecured obligations of Sally
Holdings and Sally Capital Inc. (together, the "Issuers") and are jointly and severally guaranteed by the Company and Sally Investment, and by
each material domestic subsidiary of the Company. Interest on the senior notes due 2019-2022 is payable semi-annually. Please see Note 19 for
certain condensed financial statement data pertaining to Sally Beauty, the Issuers, the guarantor subsidiaries and the non-guarantor subsidiaries.
The senior notes due 2019 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on
or after November 15, 2017 at par, plus accrued and unpaid interest, if any, and on or after November 15, 2015 at par plus a premium declining
ratably to par, plus accrued and unpaid interest, if any. Prior to November 15, 2015, the notes may be redeemed, in whole or in part, at a
redemption price equal to par plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on
or prior to November 15, 2014, the Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up
to 35% of the aggregate principal amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity
offerings, as defined in the indenture.
The senior notes due 2022 carry optional redemption features whereby the Company has the option to redeem the notes, in whole or in part, on
or after June 1, 2020 at par, plus accrued and unpaid interest, if any, and on or after June 1, 2017 at par plus a premium declining ratably to par,
plus accrued and unpaid interest, if any. Prior to June 1, 2017, the notes may be redeemed, in whole or in part, at a redemption price equal to par
plus a make-whole premium as provided in the indenture, plus accrued and unpaid interest, if any. In addition, on or prior to June 1, 2015, the
Company has the right to redeem at par plus a specified premium, plus accrued and unpaid interest, if any, up to 35% of the aggregate principal
amount of notes originally issued, subject to certain limitations, with the proceeds from certain kinds of equity offerings, as defined in the
indenture.
F-27
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Maturities of the Company's long-term debt are as follows at September 30, 2013 (in thousands):
Fiscal Year:
2014
2015
2016-2018
Thereafter
$
77,203
107
—
1,608,381
$ 1,685,691
5,012
78,018
$ 1,612,685
Capital lease obligations
Less: current portion
Total
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.
The ABL facility does not contain any restriction against the incurrence of unsecured indebtedness. However, the ABL facility restricts the
incurrence of secured indebtedness if, after giving effect to the incurrence of such secured indebtedness, the Company's Secured Leverage Ratio
exceeds 4.0 to 1.0. At September 30, 2013, the Company's Secured Leverage Ratio was approximately 0.2 to 1.0. Secured Leverage Ratio is
defined as the ratio of (i) Secured Funded Indebtedness (as defined in the ABL facility) to (ii) Consolidated EBITDA, as defined in the ABL
facility.
The ABL facility is pre-payable, and the commitments thereunder may be terminated, in whole or in part at any time without penalty or
premium.
The indentures governing the senior notes due 2019-2022 contain terms which restrict the ability of Sally Beauty's subsidiaries to incur
additional indebtedness. However, in addition to certain other material exceptions, the Company may incur additional indebtedness under the
indentures if its Consolidated Coverage Ratio, after giving pro forma effect to the incurrence of such indebtedness, exceeds 2.0 to 1.0
("Incurrence Test"). At September 30, 2013, the Company's Consolidated Coverage Ratio was approximately 6.0 to 1.0. Consolidated Coverage
Ratio is defined as the ratio of (i) Consolidated EBITDA, as defined in the indentures, for the period containing the most recent four consecutive
fiscal quarters, to (ii) Consolidated Interest Expense, as defined in the indentures, for such period.
The indentures governing the senior notes due 2019-2022 restrict Sally Holdings and its subsidiaries from making certain dividends and
distributions to equity holders and certain other restricted payments (hereafter, a "Restricted Payment" or "Restricted Payments") to us.
However, the indentures permit the making of such Restricted Payments if, at the time of the making of such Restricted Payment, the Company
satisfies the Incurrence Test as described above and the cumulative amount of all Restricted Payments made since the issue date of the applicable
senior notes does not exceed the sum of: (i) 50% of Sally Holdings' and its subsidiaries' cumulative consolidated net earnings since July 1, 2006,
plus (ii) the proceeds from the issuance of certain equity securities or conversions of indebtedness to equity, in each case, since the issue date of
the applicable senior notes plus (iii) the net reduction in investments in unrestricted subsidiaries since the issue date of the applicable senior
notes plus (iv) the return of capital
F-28
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
with respect to any sales or dispositions of certain minority investments since the issue date of the applicable senior notes. Further, in addition to
certain other baskets, the indentures permit the Company to make additional Restricted Payments in an unlimited amount if, after giving pro
forma effect to the incurrence of any indebtedness to make such Restricted Payment, the Company's Consolidated Total Leverage Ratio (as
defined in the indentures) is less than 3.25 to 1.00. At September 30, 2013, the Company's Consolidated Total Leverage Ratio was
approximately 2.7 to 1.0. Consolidated Total Leverage Ratio is defined as the ratio of (i) Consolidated Total Indebtedness, as defined in the
indentures, minus cash and cash equivalents on-hand up to $100.0 million, in each case, as of the end of the most recently-ended fiscal quarter to
(ii) Consolidated EBITDA, as defined in the indentures, for the period containing the most recent four consecutive fiscal quarters.
The ABL facility also restricts the making of Restricted Payments. More specifically, under the ABL facility, Sally Holdings may make
Restricted Payments if availability under the ABL facility equals or exceeds certain thresholds, and no default then exists under the facility. For
Restricted Payments up to $30.0 million during each fiscal year, borrowing availability must equal or exceed the lesser of $75.0 million or 15%
of the borrowing base for 45 days prior to such Restricted Payment. For Restricted Payments in excess of that amount, borrowing availability
must equal or exceed the lesser of $100.0 million or 20% of the borrowing base for 45 days prior to such Restricted Payment and the
Consolidated Fixed Charge Coverage Ratio (as defined below) must equal or exceed 1.1 to 1.0. Further, if borrowing availability equals or
exceeds the lesser of $150.0 million or 30% of the borrowing base, Restricted Payments are not limited by the Consolidated Fixed Charge
Coverage Ratio test. The Consolidated Fixed Charge Coverage Ratio is defined as the ratio of (i) Consolidated EBITDA (as defined in the ABL
facility) during the trailing twelve-month period preceding such proposed Restricted Payment minus certain unfinanced capital expenditures
made during such period and income tax payments paid in cash during such period to (ii) fixed charges (as defined in the ABL facility). In
addition, during any period that borrowing availability under the ABL facility is less than the greater of $40.0 million or 10% of the borrowing
base, the level of the Consolidated Fixed Charge Coverage Ratio that the Company must satisfy is 1.0 to 1.0. As of September 30, 2013, the
Consolidated Fixed Charge Coverage Ratio was approximately 3.9 to 1.0.
When used in this Annual Report, the phrase "Consolidated EBITDA" is intended to have the meaning ascribed to such phrase in the ABL
facility or the indentures governing the senior notes due 2019-2022, as appropriate. EBITDA is not a recognized measurement under GAAP and
should not be considered a substitute for financial performance and liquidity measures determined in accordance with GAAP, such as net
earnings, operating earnings and operating cash flows.
The ABL facility and the indentures governing the senior notes due 2019-2022 contain other covenants regarding restrictions on the disposition
of assets, the granting of liens and security interests, the prepayment of certain indebtedness, and other matters and customary events of default,
including customary cross-default and/or cross-acceleration provisions. As of September 30, 2013, all the net assets of our consolidated
subsidiaries were unrestricted from transfer under our credit arrangements.
At September 30, 2013 and 2012, the Company had no off-balance sheet financing arrangements other than operating leases incurred in the
ordinary course of business as disclosed in Note 12 and outstanding letters of credit related to inventory purchases and self-insurance programs
which totaled $23.9 million and $22.2 million at September 30, 2013 and 2012, respectively.
F-29
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
14. Derivative Instruments and Hedging Activities
Risk Management Objectives of Using Derivative Instruments
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 foreign currency exchange rates and 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 derivative instruments from time to time
(including, foreign exchange contracts and interest rate swaps) by Sally Holdings.
The Company from time to time uses foreign exchange contracts (including foreign currency forwards and options), as part of its overall
economic risk management strategy, to fix the amount of certain foreign assets and obligations relative to its functional and reporting currency
(the U.S. dollar) or relative to the functional currency of certain of its consolidated subsidiaries, or to add stability to cash flows resulting from its
net investments (including intercompany notes not permanently invested) and earnings denominated in foreign currencies. The Company's
foreign currency exposures at times offset each other, sometimes providing a natural hedge against its foreign currency risk. In connection with
the remaining foreign currency risk, the Company uses foreign exchange contracts to effectively fix the foreign currency exchange rate
applicable to specific anticipated foreign currency-denominated cash flows thus limiting the potential fluctuations in such cash flows as a result
of foreign currency market movements.
The Company from time to time has used interest rate swaps, as part of its overall economic risk management strategy, to add stability to the
interest payments due in connection with its debt obligations. At September 30, 2013, our exposure to interest rate fluctuations relates to interest
payments under the ABL facility and the Company held no derivatives instruments in connection therewith.
As of September 30, 2013, the Company did not purchase or hold any derivative instruments for trading or speculative purposes.
Designated Cash Flow Hedges
In 2008, Sally Holdings entered into certain interest rate swap agreements with an aggregate notional amount of $300 million which enabled it to
convert a portion of its then variable interest rate obligation under the term loan B, to a fixed-interest rate obligation. These agreements were
designated and qualified as effective cash flow hedges. Accordingly, changes in the fair value of these derivative instruments (which were
adjusted quarterly) were recorded, net of income tax, in accumulated other comprehensive (loss) income ("AOCI") until the swap agreements
expired in May 2012. Amounts previously reported in AOCI which were related to such interest rate swaps were reclassified into interest
expense, as a yield adjustment, in the same period in which interest on the hedged variable-rate debt obligations affected earnings. As such, for
the fiscal years ended September 30, 2012 and 2011, the Company's other comprehensive income included deferred gains on these interest swaps
of $3.9 million and $5.6 million, respectively, net of income tax of $2.5 million and $3.5 million, respectively.
Non-designated Cash Flow Hedges
The Company may use from time to time derivative instruments (such as foreign exchange contracts and interest rate swaps) not designated as
hedges or that do not meet the requirements for hedge accounting, to manage its exposure to interest rate or foreign currency exchange rate
movements, as appropriate.
F-30
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
The Company uses foreign exchange contracts including, at September 30, 2013, foreign currency options with an aggregate notional amount of
$12.0 million to manage the exposure to the U.S. dollar resulting from certain of our Sinelco Group subsidiaries' purchases of merchandise from
third-party suppliers. Sinelco's functional currency is the Euro. These foreign currency options enable Sinelco to buy U.S. dollars at a contractual
exchange rate of 1.32, are with a single counterparty and expire ratably through September 15, 2014.
The Company also uses foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates in connection with
certain intercompany balances not permanently invested. As such, at September 30, 2013, we held: (a) a foreign currency forward which enables
us to sell approximately €13.9 million ($18.9 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.3526, (b) a
foreign currency forward which enables us to sell approximately $5.5 million Canadian dollars ($5.3 million, at the September 30, 2013
exchange rate) at the contractual exchange rate of 1.03115, (c) a foreign currency forward which enables us to buy approximately $8.0 million
Canadian dollars ($7.8 million, at the September 30, 2013 exchange rate) at the contractual exchange rate of 1.0329, (d) a foreign currency
forward which enables us to sell approximately 8.6 million Mexican pesos ($0.7 million, at the September 30, 2013 exchange rate) at the
contractual exchange rate of 13.1806 and (e) a foreign currency forward which enables us to sell approximately £4.2 million ($6.8 million, at the
September 30, 2013 exchange rate) at the contractual exchange rate of 1.6129. All the foreign currency forwards discussed in this paragraph are
with a single counterparty (not the same counterparty as that on the options discussed in the preceding paragraph) and expire on or before
December 31, 2013.
In addition, the Company uses foreign exchange contracts including, at September 30, 2013, foreign currency forwards with an aggregate
notional amount of €3.6 million ($4.9 million, at the September 30, 2013 exchange rate) to mitigate the exposure to the British pound sterling
resulting from the sale of products and services among certain European subsidiaries of the Company. The foreign currency forwards discussed
in this paragraph enable the Company to buy British pound sterling in exchange for Euro currency at the weighted average contractual exchange
rate of 0.8425, are with a single counterparty (the same counterparty as that on the forwards discussed in the immediately preceding paragraph)
and expire ratably through September 30, 2014.
The Company's foreign currency derivatives are not designated as hedges and do not currently meet the hedge accounting requirements of ASC
815. Accordingly, the changes in fair value of these derivative instruments (which are adjusted quarterly) are recorded in our consolidated
statements of earnings. As such, selling, general and administrative expenses include net losses of $2.8 million in the fiscal years ended
September 30, 2013, and net gains of $2.0 million and $0.2 million in the fiscal years ended September 30, 2012 and 2011, respectively, in
connection with all of the Company's foreign currency derivative instruments, including marked-to-market adjustments.
F-31
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Company's
consolidated balance sheet as of September 30, 2013 and 2012 (in thousands):
Asset Derivatives
As of
September 30,
Classification
2013
2012
Derivatives
designated as
hedging
instruments:
Interest Rate
Swaps
Other assets
Derivatives not
designated as
hedging
instruments:
Foreign
Exchange
Contracts
Prepaid expenses
—
—
$ 152
$ 152
Liability Derivatives
As of
September 30,
Classification
2013
2012
— Accrued liabilities
—
$
$
4 Accrued liabilities
4
$
$
—
—
—
—
36
36
$ 132
$ 132
The table below presents the effect of the Company's derivative financial instruments on the Company's consolidated statements of earnings for
the fiscal years ended September 30, 2013, 2012 and 2011 (in thousands):
Amount of Gain or
(Loss) Recognized in
OCI on Derivative
(Effective Portion), net
of tax
Derivatives
Designated as
Hedging
Instruments
Interest Rate Swaps
Amount of Gain or (Loss) Reclassified from
Accumulated OCI
into Income (Effective Portion)
Fiscal Year Ended
September 30,
2013
2012
2011
Classification
$ — $ 3,947 $ 5,557 Interest expense
Fiscal Year Ended
September 30,
2013
2012
2011
$ — $ (6,731) $ (10,174)
Amount of Gain or
(Loss) Recognized in
Derivatives Not Designated as
Hedging Instruments
Foreign Exchange Contracts
Total derivatives not designated as
hedging instruments
Classification of Gain or
(Loss) Recognized into
Income
Selling, general and administrative
expenses
Income on
Derivatives
Fiscal Year Ended
September 30,
2013
2012 2011
$ (2,846) $ 2,003 $ 194
$ (2,846) $ 2,003 $ 194
There were no gains or losses recognized in income on derivatives designated as hedging instruments as a result of ineffectiveness or the
exclusion of such derivatives from effectiveness testing during the fiscal years ended September 30, 2013, 2012 and 2011.
F-32
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Credit-risk-related Contingent Features
The counterparties to all our derivative 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 financial crisis that has affected the
banking systems and financial markets in recent years resulted in many well-known financial institutions becoming less creditworthy or having
diminished liquidity which could expose us to an increased level of counterparty credit risk. In the event that a counterparty defaults in its
obligation under our derivative instruments, we could incur substantial financial losses. However, at the present time, no such losses are deemed
probable.
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 portion of employee
contributions to the plan. The Company recognized expense of $6.7 million, $6.2 million and $5.9 million in the fiscal years ended
September 30, 2013, 2012 and 2011, respectively, related to such employer matching contributions and 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. The Company recognized expense of $3.2 million,
$3.3 million and $3.1 million in the fiscal years ended September 30, 2013, 2012 and 2011, respectively, related to such profit sharing
contributions and these amounts are included in selling, general and administrative expenses.
F-33
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
16. Income Taxes
The provision for income taxes for the fiscal years 2013, 2012 and 2011 consists of the following (in thousands):
Year Ended September 30,
2013
2012
2011
Current:
Federal
Foreign
State
Total current portion
Deferred:
Federal
Foreign
State
Total deferred portion
Total provision for income tax
$ 113,057 $ 97,866 $ 97,172
9,997
10,925
11,081
17,727
16,692
13,629
140,781
125,483
121,882
13,932
4,920
2,615
(2,822)
(2,888)
(2,525)
(375)
364
242
10,735
2,396
332
$ 151,516 $ 127,879 $ 122,214
The difference between the U.S. statutory federal income tax rate and the effective income tax rate is summarized below:
Year Ended
September 30,
2013
2012
2011
35.0% 35.0% 35.0%
2.8
3.4
2.8
(0.6)
(0.4)
(1.3)
—
(2.8)
—
(0.5)
0.2
(0.1)
36.7% 35.4% 36.4%
Statutory tax rate
State income taxes, net of federal tax benefit
Effect of foreign operations
Effect of limited restructuring
Other, net
Effective tax rate
F-34
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
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,
2013
2012
Deferred tax assets attributable to:
Share-based compensation expense
Accrued liabilities
Inventory adjustments
Foreign loss carryforwards
Unrecognized tax benefits
Other
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net
Deferred tax liabilities attributable to:
Depreciation and amortization
Total deferred tax liabilities
Net deferred tax liability
$
$
20,668 $ 18,771
26,817
33,495
3,771
5,208
28,776
23,405
437
605
3,408
2,011
83,877
83,495
(26,073)
(21,681)
57,804
61,814
99,259
99,259
41,455 $
92,292
92,292
30,478
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 deferred tax assets, primarily foreign loss carryforwards.
Domestic earnings before provision for income taxes were $386.6 million, $334.5 million and $300.1 million in the fiscal years 2013, 2012 and
2011, respectively. Foreign operations had earnings before provision for income taxes of $26.1 million, $26.4 million and $35.8 million in the
fiscal years 2013, 2012 and 2011, 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.
At September 30, 2013, undistributed earnings of the Company's foreign operations are intended to remain permanently invested to finance
anticipated future growth and expansion. Accordingly, federal and state income taxes have not been provided on accumulated but undistributed
earnings of $170.9 million and $140.8 million as of September 30, 2013 and 2012, respectively, as such earnings have been permanently
reinvested in the business. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not
practicable.
At September 30, 2013 and 2012, the Company had total operating loss carry-forwards of $96.4 million and $80.1 million, respectively, of
which $79.4 million and $65.1 million, respectively, are subject to a valuation allowance. At September 30, 2013, operating loss carry-forwards
of $25.3 million expire between 2014 and 2031 and operating loss carry-forwards of $71.1 million have no expiration date. At September 30,
2013 and 2012, the Company had tax credit carry-forwards of $2.0 million and $1.1 million, respectively, which expire in 2024 and of which
$0.5 million, at September 30, 2012, were subject to a valuation allowance.
F-35
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
The changes in the amount of unrecognized tax benefits for the fiscal years ended September 30, 2013 and 2012 are as follows (in thousands):
2013
2012
7,941 $ 10,836
26
90
(1)
(119)
218
171
—
(127)
(3,361)
(2,910)
$ 4,823 $ 7,941
Balance at beginning of the fiscal year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Settlements
Lapse of statute
Balance at end of fiscal year
$
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 September 30, 2013 and 2012 was $1.4 million and $3.6 million, respectively.
Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months, and the fact
that from time to time 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.
In January 2012, the IRS concluded the field work associated with their examination of the Company's consolidated federal income tax returns
for the fiscal years ended September 30, 2007 and 2008 and issued their examination report. The Company is appealing certain disputed items
and it does not anticipate the ultimate resolution of these items to have a material impact on the Company's financial statements.
The IRS is currently conducting an examination of the Company's consolidated federal income tax returns for the fiscal years ended
September 30, 2009, 2010 and 2011. The IRS had previously 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 2008 forward. Generally, states' statutes in the United States are open
for tax reviews from 2007 forward.
17. Acquisitions
In May 2013, the Company acquired certain assets and business operations of Essential Salon, a professional-only distributor of beauty products
operating in the northeastern region of the United States, for approximately $15.7 million, subject to certain adjustments. The assets acquired and
liabilities assumed, including intangible assets subject to amortization of $9.1 million, were recorded based on their preliminary estimated fair
values at the acquisition date. In addition, goodwill of $3.5 million (which is expected to be deductible for tax purposes) was recorded as a result
of this acquisition. The final valuation of the assets acquired and liabilities assumed will be completed within twelve months from the acquisition
date. In addition, during the fiscal year 2013, the Company completed several other individually immaterial acquisitions at an aggregate cost of
approximately $6.8 million and recorded additional intangible assets
F-36
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Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
subject to amortization of $4.0 million in connection with these acquisitions. We funded the acquisitions completed in the fiscal year 2013 with
cash from operations and borrowing under the ABL facility.
In November 2011, the Company acquired the Floral Group for approximately €22.8 million (approximately $31.2 million). The Floral Group is
a distributor of professional beauty products then with 19 stores located in the Netherlands. The results of operations of the Floral Group are
included in the Company's consolidated financial statements subsequent to the acquisition date. The assets acquired and liabilities assumed were
recorded at their respective fair values at the acquisition date. Goodwill of $15.0 million (which is not expected to be deductible for tax
purposes) and intangible assets subject to amortization of $11.8 million were recorded as a result of this acquisition based on their estimated fair
values. The acquisition was funded with cash from operations and with borrowings on our ABL facility in the amount of approximately
$17.0 million. In addition, during the fiscal year 2012, the Company completed several other individually immaterial acquisitions at an aggregate
cost of approximately $12.8 million and recorded additional goodwill in the amount of $9.4 million (the majority of which is expected to be
deductible for tax purposes) in connection with these acquisitions. Generally, we funded these acquisitions with cash from operations. The assets
acquired and liabilities assumed in connection with these acquisitions were recorded based on their respective fair values at the acquisition date.
In October 2010, the Company acquired Aerial, an 82-store professional-only distributor of beauty products operating in 11 states in the
midwestern region of the United States, for approximately $81.8 million. The assets acquired and liabilities assumed, including intangible assets
subject to amortization of $34.7 million, were recorded at their respective fair values at the acquisition date. In addition, goodwill of
$25.3 million (which is expected to be deductible for tax purposes) was recorded as a result of this acquisition. The acquisition of Aerial was
funded with borrowings in the amount of $78.0 million under the ABL facility (which were later paid in full) and with cash from operations. In
addition, during the fiscal year 2011, the Company completed several other individually immaterial acquisitions at an aggregate cost of
approximately $5.0 million and recorded additional goodwill in the amount of $4.3 million (the majority of which is expected to be deductible
for tax purposes) in connection with such acquisitions. Generally, we funded these acquisitions with cash from operations. The valuation of the
assets acquired and liabilities assumed in connection with these acquisitions was based on their fair values at the acquisition date.
These business combinations have been accounted for using the purchase method of accounting and, accordingly, the results of operations of the
entities acquired have been included in the Company's consolidated financial statements since their respective dates of acquisition.
18. 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 primarily in North America, Puerto Rico,
and parts of South America and Europe and (ii) BSG, including its franchise-based business Armstrong McCall, a full service beauty supply
distributor which offers professional brands of beauty products directly to salons and salon professionals through its own sales force and
professional-only stores (including franchise stores) in partially exclusive geographical territories in North America, Puerto Rico and parts of
Europe.
The accounting policies of both of our business segments are the same as described in the summary of significant accounting policies contained
in Note 2. Sales between segments, which were eliminated in consolidation, were not material for the fiscal years ended September 30, 2013,
2012 and 2011.
F-37
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Business Segments Information
Segment data for the fiscal years ended September 30, 2013, 2012 and 2011 is as follows (in thousands):
Year Ended September 30,
2013
2012
2011
Net sales:
Sally Beauty Supply
BSG
Total
Earnings before provision for income
taxes:
Segment operating profit:
Sally Beauty Supply(a)
BSG(a)
Segment operating profit
Unallocated expenses(a)(b)
Share-based compensation expense
Interest expense(c)
Total
Identifiable assets:
Sally Beauty Supply
BSG
Sub-total
Corporate
Total
Depreciation and amortization:
Sally Beauty Supply
BSG
Corporate
Total
Capital expenditures:
Sally Beauty Supply
BSG
Corporate
Total
(a)
$ 2,230,028 $ 2,198,468 $ 2,012,407
1,392,188
1,325,176
1,256,724
$ 3,622,216 $ 3,523,644 $ 3,269,131
$
437,018 $ 429,520 $ 380,963
200,492
182,699
164,660
637,510
612,219
545,623
(97,947)
(96,012)
(81,594)
(19,201)
(16,852)
(15,560)
(107,695)
(138,412)
(112,530)
$ 412,667 $ 360,943 $ 335,939
$
913,395 $ 864,598 $ 766,896
973,764
959,784
908,093
1,887,159
1,824,382
1,674,989
62,927
241,418
53,611
$ 1,950,086 $ 2,065,800 $ 1,728,600
$
$
$
$
37,077 $
24,964
10,151
72,192 $
31,397 $
25,984
7,317
64,698 $
28,763
25,099
5,860
59,722
60,565 $
15,744
8,570
84,879 $
42,158 $
11,977
14,951
69,086 $
34,946
14,145
10,864
59,955
For the fiscal year ended September 30, 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge
resulting from a loss contingency. For the fiscal year ended September 30, 2011, consolidated operating earnings
reflect a net favorable impact of $21.3 million; including a $27.0 million credit from a litigation settlement and
certain non-recurring charges of $5.7 million. This net benefit of $21.3 million is reflected in the
F-38
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
BSG segment and in unallocated expenses in the amount of $19.0 million and $2.3 million, respectively.
(b)
Unallocated expenses consist of corporate and shared costs.
(c)
For the fiscal year ended September 30, 2012, interest expense includes losses on extinguishment of debt in the
aggregate amount of $37.8 million in connection with the Company's redemption of outstanding notes and
repayment of the term B loan.
Geographic Area Information
Geographic data for the fiscal years ended September 30, 2013, 2012 and 2011 is as follows (in thousands):
Year Ended September 30,
2013
2012
2011
Net sales:(a)
United States
Foreign
Total
$ 2,943,959 $ 2,885,958 $ 2,688,062
678,257
637,686
581,069
$ 3,622,216 $ 3,523,644 $ 3,269,131
Identifiable assets:
United States
Foreign
Corporate
Total
$ 1,356,969 $ 1,325,787 $ 1,240,894
530,190
498,595
434,095
62,927
241,418
53,611
$ 1,950,086 $ 2,065,800 $ 1,728,600
(a)
Net sales are attributable to individual countries based on the location of the customer.
19. Parent, Issuers, Guarantor and Non-Guarantor Condensed Consolidated Financial Statements
The following consolidating financial information presents the condensed consolidating balance sheets as of September 30, 2013 and 2012, the
related condensed consolidating statements of earnings and comprehensive income, and the condensed consolidating statements of cash flows
for each of the three fiscal years in the period ended September 30, 2013 of: (i) Sally Beauty Holdings, Inc., or the "Parent;" (ii) Sally
Holdings LLC and Sally Capital Inc., or the "Issuers;" (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries
necessary for consolidation purposes; and (vi) Sally Beauty on a consolidated basis.
Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination
entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with
respect to the subsidiary guarantors have not been provided as management believes the following information is sufficient, as guarantor
subsidiaries are 100% indirectly owned by the Parent and all guarantees are full and unconditional. Additionally, substantially all of the assets of
the guarantor subsidiaries are pledged under the ABL facility and consequently may not be available to satisfy the claims of general creditors.
F-39
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Balance Sheet
September 30, 2013
(In thousands)
Sally
Holdings
Sally
LLC and
Beauty
Sally
NonConsolidating Holdings,
Capital Guarantor Guarantor
Inc. and
Inc.
Subsidiaries Subsidiaries Eliminations Subsidiaries
Parent
Assets
Cash and cash
equivalents
$
—$
—$
Trade, income taxes
and other accounts
receivable, less
allowance for
doubtful accounts
2,317
—
Due from affiliates
—
—
Inventory
—
—
Prepaid expenses
1,195
380
Deferred income tax
assets, net
(391)
(379)
Property and
equipment, net
2
—
Investment in
subsidiaries
237,696 2,530,825
Goodwill and other
intangible assets, net
—
—
Other assets
—
29,725
Total assets
$ 240,819 $ 2,560,551 $
Liabilities and
Stockholders' (Deficit)
Equity
Accounts payable
$
—$
—$
Due to affiliates
545,658
599,246
Accrued liabilities
191
36,341
Income taxes payable
—
3,319
Long-term debt
— 1,684,381
Other liabilities
—
—
Deferred income tax
liabilities, net
(1,551)
(432)
Total liabilities
544,298 2,322,855
Total
stockholders' (deficit)
equity
(303,479) 237,696
Total liabilities and
stockholders' (deficit)
equity
$ 240,819 $ 2,560,551 $
16,337 $
30,778 $
—$
—
(1,216,438)
—
—
47,115
56,432
1,215,625
605,727
13,253
42,427
813
202,586
11,899
31,504
1,752
—
32,486
152,982
76,556
—
229,540
388,569
—
(3,157,090)
101,176
—
808,313
26,727
—
483,583
1,254
2,965,266 $
184,792
5,375
556,978 $
—
668,375
—
36,354
(4,373,528) $ 1,950,086
210,661 $
813
121,426
1
181
22,043
62,795 $
70,721
26,804
3,097
6,141
2,243
—$
273,456
(1,216,438)
—
—
184,762
—
6,417
—
1,690,703
—
24,286
79,316
434,441
(3,392)
168,409
—
(1,216,438)
2,530,825
388,569
(3,157,090)
2,965,266 $
556,978 $
(4,373,528) $ 1,950,086
F-40
73,941
2,253,565
(303,479)
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Balance Sheet
September 30, 2012
(In thousands)
Sally
Holdings
Sally
LLC and
Beauty
Sally
NonConsolidating Holdings,
Capital Guarantor Guarantor
Inc. and
Inc.
Subsidiaries Subsidiaries Eliminations Subsidiaries
Parent
Assets
Cash and cash
equivalents
$
— $ 155,000 $
48,582 $
Trade, income taxes
and other accounts
receivable, less
allowance for
doubtful accounts
23,734
—
63,964
Due from affiliates
—
2
934,268
Inventory
—
—
551,017
Prepaid expenses
1,181
24
12,189
Deferred income tax
assets, net
(408)
(423)
38,805
Property and
equipment, net
—
—
140,238
Investment in
subsidiaries
(30,403) 2,194,771
367,435
Goodwill and other
intangible assets, net
—
—
475,623
Other assets
—
32,445
1,069
Total assets
$ (5,896) $ 2,381,819 $ 2,633,190 $
Liabilities and
Stockholders' (Deficit)
Equity
Accounts payable
$
—$
— $ 202,560 $
Due to affiliates
110,512
761,262
3,637
Accrued liabilities
141
38,171
134,387
Income taxes payable
—
4,136
4,596
Long-term debt
— 1,609,308
265
Other liabilities
—
—
21,060
Deferred income tax
liabilities, net
(1,464)
(655)
71,914
Total liabilities
109,189 2,412,222
438,419
Total
stockholders' (deficit)
equity
(115,085)
(30,403) 2,194,771
Total liabilities and
stockholders' (deficit)
equity
$ (5,896) $ 2,381,819 $ 2,633,190 $
F-41
36,638 $
37,792
3,637
184,339
15,982
—$
—
(937,907)
—
—
240,220
125,490
—
735,356
29,376
(4,509)
—
33,465
62,423
—
202,661
—
(2,531,803)
—
185,145
4,950
526,397 $
—
660,768
—
38,464
(3,469,710) $ 2,065,800
59,649 $
62,496
27,568
4,272
7,657
3,172
—$
262,209
(937,907)
—
—
200,267
—
13,004
—
1,617,230
—
24,232
(5,852)
158,962
—
(937,907)
63,943
2,180,885
367,435
(2,531,803)
(115,085)
526,397 $
(3,469,710) $ 2,065,800
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Statement of Earnings
Fiscal Year Ended September 30, 2013
(In thousands)
Net sales
Related party
sales
Cost of products
sold and
distribution
expenses
Gross profit
Selling, general
and
administrative
expenses
Depreciation and
amortization
Operating
earnings
(loss)
Interest expense
Earnings (loss)
before
provision
for income
taxes
Provision
(benefit) for
income taxes
Equity in
earnings of
subsidiaries,
net of tax
Net earnings
Sally
Holdings
Sally Beauty
LLC and
NonConsolidating Holdings, Inc.
Sally
Guarantor Guarantor
and
Parent Capital Inc. Subsidiaries Subsidiaries Eliminations Subsidiaries
$
— $
— $ 2,896,990 $
725,226 $
— $
3,622,216
—
—
2,890
—
(2,890)
—
—
—
—
—
1,437,620
1,462,260
392,223
333,003
(2,890)
—
1,826,953
1,795,263
9,951
434
912,262
280,062
—
1,202,709
—
—
52,284
19,908
—
72,192
(9,951)
—
(434)
107,265
497,714
32
33,033
398
—
—
520,362
107,695
(9,951)
(107,699)
497,682
32,635
—
412,667
(3,838)
(41,832)
190,753
6,433
—
151,516
333,131
267,264
26,202
333,131
—
26,202
—
—
835
267,264
261,151
Other
comprehensive
income (loss),
net of tax
—
Total
comprehensive
income
(loss)
$ 261,151 $
267,264 $
333,131 $
F-42
27,037 $
(626,597)
(626,597)
—
(626,597) $
—
261,151
835
261,986
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Statement of Earnings
Fiscal Year Ended September 30, 2012
(In thousands)
Net sales
Related party
sales
Cost of products
sold and
distribution
expenses
Gross profit
Selling, general
and
administrative
expenses
Depreciation and
amortization
Operating
earnings
(loss)
Interest expense
Earnings (loss)
before
provision
for income
taxes
Provision
(benefit) for
income taxes
Equity in
earnings of
subsidiaries,
net of tax
Net earnings
Sally
Holdings
Sally Beauty
LLC and
NonConsolidating Holdings, Inc.
Sally
Guarantor Guarantor
and
Parent Capital Inc. Subsidiaries Subsidiaries Eliminations Subsidiaries
$
— $
— $ 2,837,214 $
686,430 $
— $
3,523,644
—
—
2,899
—
(2,899)
—
—
—
—
—
1,406,817
1,433,296
376,467
309,963
(2,899)
—
1,780,385
1,743,259
10,391
674
908,964
259,177
—
1,179,206
1
—
46,159
18,538
—
64,698
(10,392)
—
(674)
137,876
478,173
66
32,248
470
—
—
499,355
138,412
(10,392)
(138,550)
478,107
31,778
—
360,943
(4,186)
(53,802)
187,788
(1,921)
—
127,879
324,018
239,270
33,699
324,018
—
33,699
3,947
—
8,071
239,270
233,064
Other
comprehensive
income, net of
tax
—
Total
comprehensive
income
(loss)
$ 233,064 $
243,217 $
324,018 $
F-43
41,770 $
(596,987)
(596,987)
—
(596,987) $
—
233,064
12,018
245,082
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Statement of Earnings
Fiscal Year Ended September 30, 2011
(In thousands)
Sally
Holdings
Sally Beauty
LLC and
NonConsolidating Holdings, Inc.
Sally
Guarantor Guarantor
and
Parent Capital Inc. Subsidiaries Subsidiaries Eliminations Subsidiaries
$
— $
— $ 2,639,741 $
629,390 $
— $
3,269,131
Net sales
Related party
sales
—
Cost of products
sold and
distribution
expenses
—
Gross profit
—
Selling, general
and
administrative
expenses
7,812
Depreciation and
amortization
1
Operating
earnings
(loss)
(7,813)
Interest expense,
net
—
Earnings (loss)
before
provision
for income
taxes
(7,813)
Provision
(benefit) for
income taxes
(2,945)
Equity in
earnings of
subsidiaries,
net of tax
218,593
Net earnings
213,725
Other
comprehensive
income (loss),
net of tax
—
Total
comprehensive
income
(loss)
$ 213,725 $
—
2,894
—
(2,894)
—
—
—
1,335,030
1,307,605
342,390
287,000
(2,894)
—
1,674,526
1,594,605
560
845,732
232,310
—
1,086,414
—
43,111
16,610
—
59,722
(560)
418,762
38,080
—
448,469
648
—
112,530
111,894
(12)
(112,454)
418,774
37,432
—
335,939
(43,613)
161,647
7,125
—
122,214
287,434
218,593
30,307
287,434
—
30,307
5,557
—
224,150 $
287,434 $
F-44
(7,952)
22,355 $
(536,334)
(536,334)
—
(536,334) $
—
213,725
(2,395)
211,330
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended September 30, 2013
(In thousands)
Sally Holdings
LLC and Sally
Capital Inc.
Parent
Net cash
provided
(used) by
operating
activities
$ 483,720 $
Cash Flows
from
Investing
Activities:
Capital
expenditures,
net of
proceeds
from sale of
property
and
equipment
(2)
Acquisitions,
net of cash
acquired
—
Net cash used by
investing
activities
(2)
Cash Flows
from
Financing
Activities:
Proceeds from
issuance of
long-term
debt
—
Repayments of
long-term
debt
—
Debt issuance
costs
—
Repurchases
of common
stock
(509,704)
Proceeds from
exercises of
stock
options
25,493
Excess tax
benefit from
share-based
compensation
493
Net cash (used)
provided by
financing
activities
(483,718)
Effect of foreign
exchange rate
changes on
cash and cash
equivalents
—
Net decrease in
cash and cash
equivalents
—
Cash and cash
equivalents,
beginning of
period
—
Cash and cash
equivalents,
end of period
$
— $
Guarantor
Subsidiaries
(229,002) $
30,386
NonGuarantor
Subsidiaries
$
25,350
Sally Beauty
Holdings, Inc.
and Subsidiaries
Consolidating
Eliminations
$
—
$
310,454
—
(54,358)
(30,399)
—
(84,759)
—
(21,594)
(624)
—
(22,218)
—
(75,952)
(31,023)
—
(106,977)
—
365,500
—
(291,451)
365,500
—
(289,500)
(83)
(1,998)
—
(1,868)
—
—
—
(1,998)
—
—
—
—
(509,704)
—
—
—
—
25,493
—
13,404
1,488
—
15,385
74,002
13,321
(380)
—
(396,775)
—
—
193
—
193
(155,000)
(32,245)
(5,860)
—
(193,105)
155,000
48,582
36,638
—
240,220
—
$
16,337
$
30,778
$
—
$
47,115
F-45
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended September 30, 2012
(In thousands)
Sally Holdings
LLC and Sally
Capital Inc.
Parent
Net cash
provided by
operating
activities
$ 171,980 $
Cash Flows
from
Investing
Activities:
Capital
expenditures
—
Acquisitions,
net of cash
acquired
—
Net cash used by
investing
activities
—
Cash Flows
from
Financing
Activities:
Proceeds from
issuance of
long-term
debt
—
Repayments of
long-term
debt
—
Debt issuance
costs
—
Repurchase of
common
stock
(200,000)
Proceeds from
exercises of
stock
options
28,020
Excess tax
benefit from
share-based
compensation
—
Net cash (used)
provided by
financing
activities
(171,980)
Effect of foreign
exchange rate
changes on
cash and cash
equivalents
—
Net increase
(decrease) in
cash and cash
equivalents
—
Cash and cash
equivalents,
beginning of
period
—
Cash and cash
equivalents,
end of period
$
— $
3,161
NonGuarantor
Subsidiaries
Guarantor
Subsidiaries
$
69,049
$
53,392
Sally Beauty
Holdings, Inc.
and Subsidiaries
Consolidating
Eliminations
$
—
$
297,582
—
(45,942)
(23,036)
—
(68,978)
—
(10,607)
(32,928)
—
(43,535)
—
(56,549)
(55,964)
—
(112,513)
2,101,475
14
(1,918,339)
(89)
(31,297)
—
(2,856)
—
2,101,489
—
(1,921,284)
—
—
—
(31,297)
—
—
—
—
(200,000)
—
—
—
—
28,020
—
13,574
816
—
14,390
151,839
13,499
—
(8,682)
—
—
155,000
25,999
—
22,583
155,000
$
48,582
(2,040)
352
$
F-46
—
352
(4,260)
—
176,739
40,898
—
63,481
36,638
$
—
$
240,220
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended September 30, 2011
(In thousands)
Parent
Net cash (used)
provided by
operating
activities
Cash Flows from
Investing
Activities:
Capital
expenditures
Acquisitions, net
of cash
acquired
Net cash used by
investing activities
Cash Flows from
Financing
Activities:
Proceeds from
issuance of
long-term debt
Repayments of
long-term debt
Debt issuance
costs
Proceeds from
exercises of
stock options
Excess tax benefit
from sharebased
compensation
Net cash provided
(used) by
financing
activities
Effect of foreign
exchange rate
changes on cash
and cash
equivalents
Net increase
(decrease) in cash
and cash
equivalents
Cash and cash
equivalents,
beginning of
period
Cash and cash
equivalents, end
of period
Sally Holdings
LLC and Sally
Capital Inc.
$ (10,942) $
$
112,035
NonGuarantor
Subsidiaries
$
38,371
Sally Beauty
Holdings, Inc.
and Subsidiaries
Consolidating
Eliminations
$
—
$
291,841
—
—
(41,478)
(18,093)
—
(59,571)
—
—
(84,924)
(2,240)
—
(87,164)
—
—
(126,402)
(20,333)
—
(146,735)
—
421,300
404
6,901
—
428,605
—
(568,300)
(141)
(9,470)
—
(577,911)
—
(5,397)
—
—
—
(5,397)
10,942
—
—
—
—
10,942
—
—
3,712
—
—
3,712
10,942
$
152,377
Guarantor
Subsidiaries
(152,397)
3,975
(2,569)
—
(140,049)
—
(1,070)
—
(1,070)
—
—
—
(20)
(10,392)
14,399
—
3,987
—
20
32,975
26,499
—
59,494
—
$
—
$
22,583
$
F-47
40,898
$
—
$
63,481
Table of Contents
Sally Beauty Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Fiscal Years ended September 30, 2013, 2012 and 2011
20. Subsequent Event
On October 24, 2013, Sally Holdings and Sally Capital Inc. (collectively, the "Issuers"), both indirect wholly-owned subsidiaries of the
Company, the Company and certain domestic subsidiaries of the Company entered into an underwriting agreement pursuant to which the Issuers
sold $200.0 million aggregate principal amount of the Issuers' 5.5% Senior Notes due 2023 (the "senior notes due 2023"). The senior notes due
2023 bear interest at an annual rate of 5.5%, were issued at par, and are guaranteed by the Company and certain domestic subsidiaries of the
Company. Interest on the senior notes due 2023 is payable semi-annually. The Company used the net proceeds from this debt issuance,
approximately $196.3 million, to repay borrowings outstanding under the ABL facility of $88.5 million and intends to use the remaining amount
for general corporate purposes.
21. Quarterly Financial Data (Unaudited)
Certain unaudited quarterly consolidated statement of earnings information for the fiscal years ended September 30, 2013 and 2012 is
summarized below (in thousands, except per share data):
Fiscal Year
2013:
Net sales
Gross profit
Net earnings
Earnings per common share
(a)
Basic
Diluted
2012:
Net sales
Gross profit
Net earnings
Earnings per common share
(a)
Basic
Diluted
(a)
1 st
Quarter
2 nd
Quarter
3 rd
Quarter
4 th
Quarter
$ 905,441 $ 898,239 $ 912,101 $ 906,435
$ 444,368 $ 444,454 $ 457,083 $ 449,358
$ 58,983 $ 64,889 $ 72,466 $ 64,812
$
$
0.33 $
0.32 $
0.37 $
0.36 $
0.43 $
0.42 $
0.39
0.38
$ 864,815 $ 889,281 $ 886,991 $ 882,557
$ 421,857 $ 436,786 $ 444,379 $ 440,236
$ 30,134 $ 67,813 $ 69,487 $ 65,630
$
$
0.16 $
0.16 $
0.36 $
0.35 $
0.38 $
0.37 $
0.36
0.35
The sum of the quarterly earnings per share may not equal the full year amount, as the computations of the
weighted average number of common shares outstanding for each quarter and for the full year are performed
independently.
F-48
Exhibit 4.3
SECOND AMENDMENT TO
CREDIT AGREEMENT
This Second Amendment to Credit Agreement (this “ Second Amendment ”) is made as of July 26, 2013 by and 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 (collectively, the “ Domestic Borrowers ”);
BEAUTY SYSTEMS GROUP (CANADA), INC., a New Brunswick corporation (the “ Canadian Borrower ”),
SBH FINANCE B.V., a private limited liability company, incorporated under the laws of the Netherlands (the “ Foreign Borrower ”),
the Persons named on Schedule 1.01 hereto (collectively, with each other Person that from time to time becomes a “Guarantor”
hereunder, the “ Guarantors ”);
each Lender from time to time party hereto;
BANK OF AMERICA, N.A., as Administrative Agent, and Collateral Agent;
BANK OF AMERICA, N.A. (acting through its Canada branch), as Canadian Agent,
WELL FARGO CAPITAL FINANCE, LLC, as Syndication Agent; and
JPMORGAN CHASE BANK, N.A., as Documentation Agent.
in consideration of the mutual covenants herein contained and benefits to be derived herefrom.
W I T N E S S E T H:
WHEREAS, on November 12, 2010, the Borrowers, the Guarantors, the Agents and the Lenders, entered in a certain Credit Agreement
(as amended pursuant to a First Amendment to Credit Agreement dated June 8, 2012 and as further amended, restated, supplemented or
otherwise modified, the “ Credit Agreement ”); and
WHEREAS, the Borrowers have requested that the Agents and the Lenders further amend certain provisions of the Credit Agreement,
in each case subject to the terms and conditions hereof.
WHEREAS, the Agents and the Lenders have agreed to so amend subject to the terms and conditions hereof.
NOW, THEREFORE, it is hereby agreed among the Borrowers, the Agent, and the Lenders as follows:
1.
Capitalized Terms . All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Credit
Agreement.
2.
Amendments to Credit Agreement .
a.
Credit Agreement . The Credit Agreement is hereby amended to delete the bold, stricken text (indicated textually in the same
manner as the following example: stricken text ) and to add the bold, double-underlined text (indicated textually in the same
manner as the following example: double-underlined text ) as set forth in the pages of the Credit Agreement attached as
Exhibit A hereto.
b.
Schedules and Exhibits to Credit Agreement . The Schedules and Exhibits to the Credit Agreement are hereby deleted in
their entirety and the Schedules and Exhibits attached to Exhibit A hereto are substituted in their stead.
3.
Ratification of Loan Documents . Except as provided herein, all terms and conditions of the Credit Agreement and the other Loan
Documents remain in full force and effect. The Borrowers hereby ratify, confirm, and reaffirm all representations, warranties, and
covenants contained therein and acknowledge and agree that the Obligations are and continue to be secured by the Collateral, as
modified hereby.
4.
Conditions to Effectiveness . This Second Amendment (including, without limitation, the amendments identified in the Credit
Agreement attached as Exhibit A hereto) shall be effective upon fulfillment, to the satisfaction of the Administrative Agent, of each of
the following conditions precedent:
a.
This Second Amendment and all documents described on Exhibit B hereto shall have been duly executed and delivered by the
Loan Parties and the Lenders party thereto and shall be in form and substance satisfactory to the Administrative Agent.
b.
All action on the part necessary for the valid execution, delivery and performance of this Second Amendment shall have been
duly and effectively taken by the Loan Parties and evidence thereof satisfactory to the Administrative Agent shall have been
provided to the Administrative Agent.
c.
All necessary governmental approvals to the Second Amendment shall have been obtained except to the extent the failure to
obtain could not reasonably be expected to have a Material Adverse Effect.
d.
After giving effect to the consummation of the transactions contemplated on the Effective Date and the Credit Extensions
made on the Effective Date, Excess Availability shall be not less than $375,000,000.
e.
Lien searches on the assets of the Loan Parties shall have been completed and there shall have been filed and recorded (and
the payment of filing and recordation fees in connection therewith) of such financing statements and other documents as may
be necessary to reflect the valid and perfected first priority liens and security interests of the Agents, in each case reasonably
satisfactory to the Administrative Agent.
2
5.
f.
The Administrative Agent shall have received satisfactory evidence of insurance required to be maintained by the Loan Parties
with respect to the Collateral under the Loan Documents, reasonably satisfactory to the Administrative Agent.
g.
The Lenders shall have received satisfactory opinions of counsel to the Loan Parties (which shall cover, among other things,
authority, legality, validity, binding effect and enforceability of the documents for the Second Amendment and the Loan
Documents, as amended hereby) and of appropriate local and foreign counsel.
h.
There shall not have occurred since March 31, 2013 any event or condition that has had or could be reasonably expected,
either individually or in the aggregate, to have a Material Adverse Effect.
i.
There shall not exist any action, suit, investigation or proceeding pending or, to the knowledge of the Borrowers, threatened in
any court or before any arbitrator or governmental authority that could reasonably be expected to have a Material Adverse
Effect.
j.
The Administrative Agent shall have received and be reasonably satisfied with detailed financial projections, including, in
each case, an income statement, balance sheet, statement of cash flow, and business assumptions for the Parent and its
Subsidiaries on (x) a monthly basis for the twelve month period following the Effective Date, and (y) on an annual basis, for
each Fiscal Year thereafter through the Maturity Date. In addition, the Administrative Agent shall have received and be
reasonably satisfied with a borrowing base availability analysis on a monthly basis for the twelve month period following the
Effective Date.
k.
The Administrative Agent shall have received a Borrowing Base Certificate (separately for the Domestic Facility and the
Canadian Sub-facility and on a combined basis) dated as of the Effective Date, executed by a financial officer of the
Borrowers.
l.
All actual accrued fees and expenses of Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”) and the Agents
(including the fees and expenses of counsel (including any local counsel) for the Agents and MLPFS) shall have been paid (it
being understood that the reimbursement obligations hereunder shall not exceed the actual amounts invoiced to the Agents and
MLPFS).
m.
The Administrative Agent, MLPFS and the Lenders shall have received payment of all fees in accordance with the terms of
the Fee Letter.
n.
No Default or Event of Default shall exist.
Representations and Warranties .
a.
The transactions contemplated hereby are within each Loan Party’s corporate powers and have been duly authorized by all
necessary corporate, membership, partnership or other necessary action. This Second Amendment has been duly executed and
delivered by each Loan Party that is a party hereto and this Second Amendment and the other Loan Documents constitutes a
legal, valid and binding obligation of such Loan Party, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency,
3
reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity,
regardless of whether considered in a proceeding in equity or at law.
b.
The transactions to be entered into and contemplated by this Second Amendment (a) do not require any consent or approval
of, registration or filing with, or any other action by, any Governmental Authority, except for such as have been obtained or
made and are in full force and effect, (b) will not violate any applicable Laws to which any Loan Party is subject or any
judgment, order, writ, injunction, license or permit applicable to any of the Loan Parties, (c) will not violate the Organization
Documents of any Loan Party, (d) will not violate or result in a default under any agreement or instrument binding upon any
Loan Party or its assets, or give rise to a right thereunder to require any payment to be made by any Loan Party, and (e) will
not result in the creation or imposition of any Lien on any asset of any Loan Party, except Liens created under the Loan
Documents.
6.
Waiver . In connection with this Amendment, each of UBS AG, Stamford Branch and UBS AG, Canada Branch (collectively, the “
Exiting Lenders ”) is terminating its Commitment in full pursuant to those certain letter agreements of even date herewith between each
of the Exiting Lenders and the Borrowers. By their execution of this Amendment, the Lenders hereby acknowledge and agree that
solely with respect to the termination of the Commitments of the Exiting Lenders in connection with this Amendment, the requirement
set forth in Section 2.06(f) of the Credit Agreement that Commitments be reduced in accordance with each Lender’s Applicable
Percentage is hereby waived.
7.
Release of Certain Liens. On the Effective Date, the Administrative Agent will automatically release (and cause the Collateral Agent
and the Canadian Agent to release) its Lien on the assets of the Loan Parties not constituting “Collateral” under and as defined in the
Security Agreement (as the Security Agreement has been amended as of the date hereof) and will execute and record in all appropriate
jurisdictions, at the Loan Parties’ expenses, such (a) Uniform Commercial Code financing statement releases and partial releases, as
appropriate, (b) mortgage releases relating to existing real property collateral in which the Administrative Agent or the Collateral Agent
holds a Lien to secure the Obligations and (c) any other documentation, agreements or instruments requested by the Loan Parties to
effectuate the provisions of this Section 7. Further, the Administrative Agent shall (and shall cause the Collateral Agent to) return all
personal property not constituting “Collateral” under and as defined in the Security Agreement (as the Security Agreement has been
amended as of the date hereof), including, without limitation, any stock certificates, to the Loan Parties.
8.
Miscellaneous
a.
This Second Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which
when so executed and delivered shall be an original, and all of which together shall constitute one instrument.
b.
This Second Amendment expresses the entire understanding of the parties with respect to the transactions contemplated
hereby. No prior negotiations or discussions shall limit, modify, or otherwise affect the provisions hereof.
c.
Any determination that any provision of this Second Amendment or any application hereof is invalid, illegal or unenforceable
in any respect and in any instance shall not
4
affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality or enforceability
of any other provisions of this Second Amendment.
d.
The Loan Parties represent and warrant that they have consulted with independent legal counsel of their selection in
connection with this Second Amendment and are not relying on any representations or warranties of the Agents or the Lenders
or their counsel in entering into this Second Amendment.
e.
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF.
[signature pages follow]
5
IN WITNESS WHEREOF, the parties have hereunto caused this Second Amendment to be executed and their seals to be hereto affixed
as of the date first above written.
DOMESTIC BORROWERS:
SALLY HOLDINGS LLC
BEAUTY SYSTEMS GROUP LLC
SALLY BEAUTY SUPPLY LLC
By:
/s/ Mark J. Flaherty
Name: Mark J. Flaherty
Title: Senior Vice President and
Chief Financial Officer
CANADIAN BORROWER:
BEAUTY SYSTEMS GROUP (CANADA), INC.
By:
/s/ Mark J. Flaherty
Name: Mark J. Flaherty
Title: Senior Vice President and
Chief Financial Officer
[Signature page to Second Amendment to Credit Agreement]
FOREIGN BORROWER :
/s/ E. T. Kromhout
On behalf of SBH Finance B.V.
By: ANT Management (Netherlands) B.V.
Title: Managing Director A
On behalf of ANT Management (Netherlands) B.V.
/s/ D. Zeelenberg
On behalf of SBH Finance B.V.
By: ANT Management (Netherlands) B.V.
Title: Managing Director A
On behalf of ANT Management (Netherlands) B.V.
By:
Title:
Date:
Place:
By:
Title:
Date:
Place:
E.T. Kromhout
Proxy holder A
26/7/2013
Rotterdam
D. Zeelenberg
Managing Director
26/7/2013
Rotterdam
/s/ E. T. Kromhout
On behalf of SBH Finance B.V.
By: Sally Beauty Worldwide Holdings B.V.
Title: Managing Director A
On behalf of Sally Beauty Worldwide Holdings B.V.
/s/ D. Zeelenberg
On behalf of SBH Finance B.V.
By: Sally Beauty Worldwide Holdings B.V.
Title: Managing Director A
On behalf of Sally Beauty Worldwide Holdings B.V.
By: ANT Management (Netherlands) B.V.
Title: Managing Director A
On behalf of ANT Management (Netherlands) B.V.
By: ANT Management (Netherlands) B.V.
Title: Managing Director A
On behalf of ANT Management (Netherlands) B.V.
By:
Title:
Date:
Place:
By:
Title:
Date:
Place:
E.T. Kromhout
Proxy holder A
26/7/2013
Rotterdam
D. Zeelenberg
Managing Director
26/7/2013
Rotterdam
/s/ Mark Faulkner
On behalf of SBH Finance B.V.
By: Sally Beauty Worldwide Holdings B.V.
Title: Managing Director A
On behalf of Sally Beauty Worldwide Holdings B.V.
/s/ Mark Faulkner
On behalf of SBH Finance B.V.
By: Mark Faulkner
Title: Managing Director B
By: Mark Faulkner
Title: Managing Director
Date:
Place: Denton, TX USA
By: Mark Faulkner
Title: Managing Director
Date:
Place: Denton, TX USA
[Signature page to Second Amendment to Credit Agreement]
GUARANTORS :
INNOVATIONS — SUCCESSFUL SALON SERVICES
NEKA SALON SUPPLY, INC.
PROCARE LABORATORIES, INC.
ARMSTRONG MCCALL HOLDINGS, INC.
ARMSTRONG MCCALL MANAGEMENT, L.C.
ARMSTRONG MCCALL HOLDINGS, L.L.C.
ARNOLD’S, INC.
ARMSTRONG MCCALL, L.P.
DIORAMA SERVICES COMPANY, LLC
SALLY CAPITAL INC.
SALLY BEAUTY DISTRIBUITON LLC
SALLY BEAUTY DISTRIBUTION OF OHIO, INC.
SALLY BEAUTY INTERNATIONAL FINANCE LLC
BEAUTY HOLDING LLC
SOREN ENTERPRISES, INC.
BEYOND THE ZONE, INC.
SILK ELEMENTS, INC.
HIGH INTENSITY PRODUCTS, INC.
NAIL LIFE, INC.
SEXY U PRODUCTS, INC.
FOR PERMS ONLY, INC.
ENERGY OF BEAUTY, INC.
MIRACLE LANE, INC.
TANWISE, INC
SATIN STRANDS, INC.
POWER IQ, INC.
DESIGN LENGTHS, INC.
BRENTWOOD BEAUTY LABORATORIES INTERNATIONAL, INC.
ION PROFESSIONAL PRODUCTS, INC.
NEW IMAGE PROFESSIONAL PRODUCTS, INC.
ESTHETICIAN SERVICES, INC.
FEMME COUTURE INTERNATIONAL, INC.
GENERIC VALUE PRODUCTS, INC.
LAND OF DREAMS, INC.
COLOREESE, INC.
AERIAL COMPANY, INC.
SALLY BEAUTY HOLDINGS, INC.
SALLY INVESTMENT HOLDINGS LLC
VENIQUE, INC.
By:
/s/ Mark J. Flaherty
Name: Mark J. Flaherty
Title: Senior Vice President and Chief
Financial Officer
SALON SUCCESS INTERNATIONAL, LLC
By:
/s/ Gary Winterhalter
Name: Gary Winterhalter
Title: Manager
[Signature page to Second Amendment to Credit Agreement]
BANK OF AMERICA, N.A. , as
Administrative Agent, as Collateral Agent, as Domestic L/C Issuer, as
Domestic Swing Line Lender, and as a Domestic Lender
By:
/s/ Matthew Potter
Name: Matthew Potter
Title:
Vice President
[Signature page to Second Amendment to Credit Agreement]
BANK OF AMERICA, N.A. (ACTING THROUGH ITS
CANADA BRANCH) , as Canadian Agent, as Canadian Swing Line
Lender, and as a Canadian Lender
By:
/s/ Medina Sales de Andrade
Name: Medina Sales de Andrade
Title:
Vice President
[Signature page to Second Amendment to Credit Agreement]
WELLS FARGO BANK, N.A., as a
Domestic Lender
By:
/s/ Peter Yelle
Name: Peter Yelle
Title:
Vice President
[Signature page to Second Amendment to Credit Agreement]
WELLS FARGO CAPITAL FINANCE CORPORATION
CANADA , as a Canadian Lender
By:
/s/ Domenic Cosentino
Name: Domenic Cosentino
Title:
Vice President
Wells Fargo Capital Finance Corporation Canada
[Signature page to Second Amendment to Credit Agreement]
WELLS FARGO BANK, N.A. (LONDON BRANCH) , as a
European Funding Agent for Wells Fargo Bank, N.A. and Wells
Fargo Capital Corporation Canada
By:
/s/ Peter Yelle
Name: Peter Yelle
Title:
Authorized Signatory
[Signature page to Second Amendment to Credit Agreement]
JPMORGAN CHASE BANK, N.A., as a Domestic Lender
By:
/s/ Kevin D. Padgett
Name: Kevin D. Padgett
Title:
Authorized Officer
[Signature page to Second Amendment to Credit Agreement]
JPMORGAN CHASE BANK, N.A., (through its Toronto branch) ,
as a Canadian Lender
By:
/s/ Agostino A. Marchetti
Name: Agostino A. Marchetti
Title:
SVP
[Signature page to Second Amendment to Credit Agreement]
PNC BANK, NATIONAL ASSOCIATION, as a Domestic Lender
By:
/s/ Biana Sidanova
Name: Biana Sidanova
Title:
Banking Officer
[Signature page to Second Amendment to Credit Agreement]
ROYAL BANK OF CANADA , as a Domestic Lender and as a
Canadian Lender
By:
/s/ John Flores
Name: John Flores
Title:
Authorized Signatory
[Signature page to Second Amendment to Credit Agreement]
FIFTH THIRD BANK, as a Domestic Lender
By:
/s/ Kirk Wolverton
Name: Kirk Wolverton
Title:
Vice President
[Signature page to Second Amendment to Credit Agreement]
CREDIT SUISSE AG, TORONTO BRANCH , as a Canadian
Lender
By:
/s/ Alain Daoust
Name: Alain Daoust
Title:
Authorized signatory
By:
/s/ Ash Bisaria
Name: Ash Bisaria
Title:
Authorized signatory
Ash Bisaria
Vice President, Financial Accounting
[Signature page to Second Amendment to Credit Agreement]
CREDIT SUISSE AG, CAYMEN ISLANDS BRANCH , as
Domestic Lender
By:
/s/ Christopher Day
/s/ Tyler R. Smith
Name: Christopher Day
Tyler R. Smith
Title:
Authorized Signatory
Authorized Signatory
[Signature page to Second Amendment to Credit Agreement]
DEUTSCHE BANK AG, NEW YORK BRANCH , as a Domestic
Lender
By:
/s/ Dusan Lazarov
Name: Dusan Lazarov
Title:
Director
/s/ Michael Getz
Michael Getz
Vice President
[Signature page to Second Amendment to Credit Agreement]
DEUTSCHE BANK AG, CANADA BRANCH , as a Domestic
Lender
By:
/s/ Scott Lampard
Name: Scott Lampard
Title:
Managing Director
By:
/s/ Marcellus Leung
Name: Marcellus Leung
Title:
Assistant Vice President
[Signature page to Second Amendment to Credit Agreement]
Exhibit A
Composite Credit Agreement
[see attached]
CREDIT AGREEMENT
Dated as of November 12, 2010
Amended June 8, 2012
Amended as of July 26, 2013
among
SALLY HOLDINGS LLC
BEAUTY SYSTEMS GROUP LLC
SALLY BEAUTY SUPPLY LLC
AS Domestic Borrowers
BEAUTY SYSTEMS GROUP (CANADA), INC.
as Canadian Borrower
SBH FINANCE B.V.
as Foreign Borrower
The Guarantors From Time to Time Party Hereto
BANK OF AMERICA, N.A.
as Administrative Agent and Collateral Agent,
BANK OF AMERICA, N.A. (acting through its Canada branch)
as Canadian Agent
The Other Lenders Party Hereto
JPMORGAN CHASE BANK, N.A.,
as Documentation Agent
WELLS FARGO CAPITAL FINANCE, LLC BANK, NATIONAL ASSOCIATION ,
as Syndication Agent
BANC OF AMERICA SECURITIES LLC
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
WELLS FARGO CAPITAL FINANCE, LLC BANK, NATIONAL ASSOCIATION
as Joint Lead Arrangers
and Joint Book Managers
TABLE OF CONTENTS
Section
Page
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
1.01
1.02
1.03
1.04
1.05
1.06
1.07
1.08
1.09
1
Defined Terms
Other Interpretive Provisions
Accounting Terms
Rounding
Times of Day
Letter of Credit Amounts
Currency Equivalents Generally
Québec Matters
Dutch Matters
1
59 63
60 64
64
61 64
61 65
61 65
61 65
61 65
ARTICLE II THE COMMITMENTS AND CREDIT EXTENSIONS
2.01
2.02
2.03
2.04
2.05
2.06
2.07
2.08
2.09
2.10
2.11
2.12
2.13
2.14
2.15
2.16
62 66
Committed Loans; Reserves
Borrowings, Conversions and Continuations of Committed Loans
Letters of Credit
Swing Line Loans
Prepayments
Termination or Reduction of Commitments
Repayment of Loans
Interest
Fees
Computation of Interest and Fees
Evidence of Debt
Payments Generally; Administrative Agent’s Clawback
Sharing of Payments by Lenders
Settlement Amongst Lenders
Increase in Commitments
Defaulting Lenders
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY; APPOINTMENT OF PARENT
3.01
3.02
3.03
3.04
3.05
3.06
3.07
3.08
Taxes
Illegality
Inability to Determine Rates
Increased Costs; Reserves on LIBOR Rate Loans
Compensation for Losses
Mitigation Obligations; Replacement of Lenders
Survival
Designation of Parent as Borrowers’ Agent
Conditions of Initial Credit Extension
Conditions to all Credit Extensions
97 107
97 107
101 110
ARTICLE V REPRESENTATIONS AND WARRANTIES
5.01
91 98
91 98
93 103
94 103
94 104
95 105
96 106
96 106
96 106
ARTICLE IV CONDITIONS PRECEDENT TO CREDIT EXTENSIONS
4.01
4.02
62 66
64 68
67 71
76 80
84
86
83 87
83 88
84 89
84 89
85 90
86 91
88 93
89 94
90 94
96
101 111
Existence, Qualification and Power
101 111
(i)
5.02
5.03
5.04
5.05
5.06
5.07
5.08
5.09
5.10
5.11
5.12
5.13
5.14
5.15
5.16
5.17
5.18
5.19
5.20
5.21
5.22
5.23
5.24
5.25
5.26
Authorization; No Contravention
Governmental Authorization; Other Consents
Binding Effect
Financial Statements; No Material Adverse Effect
Litigation
No Default
Ownership of Property; Liens
Environmental Compliance
Insurance
Taxes
Plans
Subsidiaries; Equity Interests
Margin Regulations; Investment Company Act
Disclosure
Compliance with Laws
Intellectual Property; Licenses, Etc.
Labor Matters
Security Documents
Solvency
Deposit Accounts; Credit Card Arrangements
Brokers
Customer and Trade Relations
Casualty
Senior Indebtedness Reserved
Anti-Terrorism
102 112
102 112
102 112
102 112
103 113
104 113
104 113
104 114
105 115
105 115
105 115
107 117
107 117
107 117
108 118
108 118
108 118
109 119
109 119
109 119
109 119
109 119
109 119
110 120
110 120
ARTICLE VI AFFIRMATIVE COVENANTS
6.01
6.02
6.03
6.04
6.05
6.06
6.07
6.08
6.09
6.10
6.11
6.12
6.13
6.14
6.15
6.16
6.17
6.18
6.19
110 120
Financial Statements
Certificates; Other Information
Notices
Payment of Obligations
Preservation of Existence, Etc.
Maintenance of Properties
Maintenance of Insurance
Compliance with Laws
Books and Records; Accountants
Inspection Rights
Additional Loan Parties
Cash Management
Information Regarding the Collateral
Physical Inventories
Environmental Laws
Further Assurances
Compliance with Terms of Leaseholds
Maintenance of New York Process Agent
Canadian Pension Benefit Plans
110 120
111 121
114 124
115 125
116 125
116 126
116 126
116 126
116 126
117 127
118 128
119 129
120 130
121 131
121 131
122 132
122 132
122 132
122 132
ARTICLE VII NEGATIVE COVENANTS
7.01
7.02
7.03
122 133
Liens
Investments
Secured Indebtedness
123 133
123 133
123 133
(ii)
7.04
7.05
7.06
7.07
7.08
7.09
7.10
7.11
7.12
7.13
7.14
Fundamental Changes
Dispositions
Restricted Payments
Prepayments of Indebtedness
Change in Nature of Business
Use of Proceeds
Amendment of Material Documents
Fiscal Year
Deposit Accounts; Credit Card Processors
Consolidated Fixed Charge Coverage Ratio
Limitations on Currency, Commodity and Other Hedging Transactions
ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES
8.01
8.02
8.03
8.04
127 137
Events of Default
Remedies Upon Event of Default
Application of Funds
Waivers By Loan Parties
127 137
130 140
130 141
135 145
ARTICLE IX ADMINISTRATIVE AGENT
9.01
9.02
9.03
9.04
9.05
9.06
9.07
9.08
9.09
9.10
9.11
9.12
9.13
9.14
9.15
9.16
9.17
9.18
9.19
9.20
135 145
Appointment and Authority
Rights as a Lender
Exculpatory Provisions
Reliance by Agents
Delegation of Duties
Resignation of Agents
Non-Reliance on Agents and Other Lenders
No Other Duties, Etc.
Agents May File Proofs of Claim
Collateral and Guaranty Matters
Notice of Transfer
Reports and Financial Statements
Agency for Perfection
Indemnification of Agents
Relation among Lenders
Defaulting Lender Reserved
Risk Participation
Domestic Parallel Debt Provisions
Foreign Parallel Debt
Parallel Debt Savings Clause
135 145
136 147
136 147
137 148
138 148
138 149
139 149
139 150
139 150
140 150
140 151
140 151
141 152
141 152
142 152
142 153
143 154
143 154
155
156
ARTICLE X MISCELLANEOUS
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10
123 133
124 134
124 134
125 135
125 135
125 135
125 136
126 136
126 137
126 137
127 137
146 156
Amendments, Etc.
Notices; Effectiveness; Electronic Communications
No Waiver; Cumulative Remedies
Expenses; Indemnity; Damage Waiver
Payments Set Aside
Successors and Assigns
Treatment of Certain Information; Confidentiality
Right of Setoff
Interest Rate Limitation
Counterparts; Integration; Effectiveness
(iii)
146 156
148 158
149 160
149 161
151 162
151 162
155 167
156 167
156 168
156 168
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Survival
Severability
Replacement of Lenders
Governing Law; Jurisdiction; Etc.
Waiver of Jury Trial
No Advisory or Fiduciary Responsibility
USA PATRIOT Act Notice; Proceeds of Crime Act
Foreign Asset Control Regulations
Time of the Essence
Designation as Senior Debt
Press Releases
Additional Waivers
Judgment Currency
No Strict Construction
Attachments
Language Keepwell
Language
(iv)
156 168
157 169
157 169
157 170
158 171
159 171
159 171
160 172
160 172
160 172
160 172
160 173
162 174
162 175
162 175
175
163 175
SCHEDULES
1.01
1.02
2.01
5.01
5.06
5.08(b)(1)
5.08(b)(2)
5.09
5.10
5.13
5.17
5.18
5.21(a)
5.21(b)
6.02
7.01
7.02
7.03
10.02
Guarantors
Existing Letters of Credit
Commitments and Applicable Percentages
Loan Parties Organizational Information
Litigation
Owned Real Estate
Leased Real Estate
Environmental Matters
Insurance
Subsidiaries; Other Equity Investments
Intellectual Property Matters
Collective Bargaining Agreements
DDAs
Credit Card Arrangements
Financial and Collateral Reporting
Existing Liens
Existing Investments
Existing Indebtedness
Administrative Agent’s Office; Certain Addresses for Notices
EXHIBITS
Form of
A-1
A-2
B-1
B-2
C-1
C-2
C-3
C-4
C-5
C-6
D
E
F
Domestic Committed Loan Notice
Canadian Committed Loan Notice
Domestic Swing Line Loan Notice
Canadian Swing Line Loan Notice
Domestic Revolving Note
Canadian Revolving Note
Domestic Swing Line Note
Canadian Swing Line Note
Foreign Note - Domestic
Foreign Note - Canada
Assignment and Assumption
Borrowing Base Certificate
Compliance Certificate
(v)
CREDIT AGREEMENT
This CREDIT AGREEMENT (“ Agreement ”) is entered into as of November 12, 2010, as amended on June 8, 2012 and on July 26,
2013, 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 (collectively, the “ Domestic Borrowers ”);
BEAUTY SYSTEMS GROUP (CANADA), INC., a New Brunswick corporation (the “ Canadian Borrower ”),
SBH FINANCE B.V., a private limited liability company, incorporated under the laws of the Netherlands (the “ Foreign Borrower ”),
the Persons named on Schedule 1.01 hereto (collectively, with each other Person that from time to time becomes a “Guarantor”
hereunder, the “ Guarantors ”);
each Lender from time to time party hereto;
BANK OF AMERICA, N.A., as Administrative Agent, and Collateral Agent;
BANK OF AMERICA, N.A. (acting through its Canada branch), as Canadian Agent,
WELL FARGO CAPITAL FINANCE, LLC, as Syndication Agent; and
JPMORGAN CHASE BANK, N.A., as Documentation Agent.
The Borrowers have requested that the Lenders provide a revolving credit facility, and the Lenders have indicated their willingness to
lend and the L/C Issuer has indicated its willingness to issue Letters of Credit, in each case on the terms and conditions set forth herein.
In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.01
Defined Terms . As used in this Agreement, the following terms shall have the meanings set forth below:
“Accelerated Borrowing Base Delivery Event” means either (i) the occurrence and continuance of any Event of Default, or
(ii) the failure of the Borrowers to maintain Excess Availability of at least the greater of (i) $40,000,000, or (ii) fifteen percent (15%) of
the Loan Cap. For purposes of this Agreement, the occurrence of an Accelerated Borrowing Base Delivery Event shall be deemed
continuing, (i) so long as such Event of Default has not been waived, and/or (ii) if the Accelerated Borrowing Base Delivery Event arises
as a result of the Borrowers’ failure to achieve Excess Availability as required hereunder, until the date Excess Availability shall have
been not less than the greater of (i) $40,000,000 or (ii) fifteen percent (15%) of the Loan Cap for forty-five (45) consecutive days. The
termination of an Accelerated Borrowing Base Delivery Event as provided herein shall in no way limit, waive or delay the occurrence of
(1)
a subsequent Accelerated Borrowing Base Delivery Event in the event that the conditions set forth in this definition again arise.
“Accommodation Payment” as defined in Section 10.22(d).
“Account” means “accounts” as defined in the UCC and in the PPSA, (or to the extent governed by the Civil Code of Québec, defined
as “claims” for the purposes of the Civil Code of Québec ) and also means a right to payment of a monetary obligation, whether or not earned by
performance, (a) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (b) for services rendered or to be
rendered, or (c) arising out of the use of a credit or charge card or information contained on or for use with the card.
“Accounts Receivable Reporting Requirement” means, at the time of determination (i) Excess Availability is less than 40% of the Loan
Cap or (ii) Eligible Trade Receivables multiplied by the Receivables Advance Rate comprise greater than 12.5% of the Combined Borrowing
Base.
“ACH” means automated clearing house transfers.
“Acquisition” means, with respect to any Person (a) an Investment in, or a purchase of a Controlling interest in, the Equity Interests of
any other Person, (b) a purchase or other acquisition of all or substantially all of the assets or properties of, another Person or of any business
unit of another Person, (c) any merger, amalgamation or consolidation of such Person with any other Person or other transaction or series of
transactions resulting in the acquisition of all or substantially all of the assets, or a Controlling interest in the Equity Interests, of any Person, or
(d) any acquisition of any Store locations of any Person, in each case in any transaction or group of transactions which are part of a common plan
(other than the acquisition of any Store locations of any franchisees in the ordinary course of business).
“Acquisition/Investment Payment Conditions” means, at the time of determination with respect to any specified transaction or payment,
that (a) no Default or Event of Default then exists or would arise as a result of entering into such transaction or the making of such payment, and
(b) if after giving pro forma effect to such transaction or payment, Excess Availability for the 45 day period immediately preceding, and on the
date of, such transaction or payment was equal to or greater than 15% of the Loan Cap. If after giving pro forma effect to such transaction or
payment, Excess Availability would be equal to or less than 50 35 % of the Loan Cap, the Parent shall furnish the Administrative Agent with
prior notice of any such transaction or payment which is subject to the Acquisition/Investment Payment Conditions, together with supporting
documentation evidencing the satisfaction of the Excess Availability requirements, no less than five (5) Business Days prior to the
consummation of any such transaction or payment.
“Additional Commitment Lender” shall have the meaning provided in Section 2.15.
“Adjusted LIBOR Rate” means, with respect to any LIBOR Borrowing for any Interest Period, an interest rate per annum (rounded
upwards, if necessary, to the next 1/16 of one percent (1%)) equal to the LIBOR Rate for such Interest Period multiplied by the Statutory
Reserve Rate. The Adjusted LIBOR Rate will be adjusted automatically as to all LIBOR Borrowings then outstanding as of the effective date of
any change in the Statutory Reserve Rate.
“Adjustment Date” means the first day of each Fiscal Quarter, commencing April 1, 2011.
“Administrative Agent” means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any
successor administrative agent.
(2)
“Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 10.02,
or such other address or account as the Administrative Agent may from time to time notify the Parent and the Lenders.
“Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
“Affiliate” means, with respect to any Person, (i) another Person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the Person specified, (ii) any director, officer, managing member, partner, trustee,
or beneficiary of that Person, (iii) any other Person directly or indirectly holding 10% or more of any class of the Equity Interests of that Person,
and (iv) any other Person 10% or more of any class of whose Equity Interests is held directly or indirectly by that Person.
“Agent(s)” means, individually, the Administrative Agent or the Canadian Agent, and collectively means all of them.
“Agent Parties” shall have the meaning specified in Section 10.02(c).
“Aggregate Total Commitments” means, at any time of calculation, without duplication, the sum of the Domestic Total Commitments
and the Canadian Total Commitments. As of the Closing Effective Date, the Aggregate Total Commitments are $ 400,000,000 500,000,000 .
“Agreement” means this Credit Agreement.
“Allocable Amount” has the meaning specified in Section 10.22(d) .
“Applicable Lenders” means the Required Lenders, all affected Lenders, or all Lenders, as the context may require.
“Applicable Margin” means:
(a) From and after the Closing Date until the first Adjustment Date, the percentages set forth in Level II of the pricing grid
below; and
(a)
(b) From and after the first Adjustment Effective Date and on each Adjustment Date thereafter, the Applicable
Margin shall be determined from the following pricing grid based upon the Average Daily Availability as of the Fiscal Quarter ended
immediately preceding such Adjustment Date; provided , however, that until the Adjustment Date which is April 1, 2011, the
Applicable Margin shall not be established at Level I (even if Average Daily Availability for Level I has been met); provided further
that notwithstanding anything to the contrary set forth herein, upon the occurrence of an Event of Default, the Administrative Agent
may, and at the direction of the Required Lenders shall, immediately increase the Applicable Margin to that set forth in Level III II
(even if the Average Daily Availability requirements for a different Level have been met) and interest shall accrue at the Default Rate;
provided further if any Borrowing Base Certificates are at any time restated or otherwise revised (including as a result of an audit) or if
the information set forth in any Borrowing Base Certificates otherwise proves to be false or incorrect such that the Applicable Margin
would have been higher than was otherwise in effect during any period, without constituting a waiver of any Default or Event of
Default arising as a result thereof, interest due under this Agreement shall be immediately and retroactively
(3)
recalculated at such higher rate for any applicable periods and shall be due and payable on demand.
Average Daily
Availability
Level
I
II
III II
Greater than or equal to $275,000,000
50% of the Loan Cap
Greater than or equal to $150,000,000 but
less than $275,000,000
Less than $150,000,000 50% of the Loan
Cap
LIBOR Margin/BA
Rate Margin/Euribor
Rate Margin
Domestic Prime Rate
Margin/US Index Rate
Margin/Canadian Prime
Rate Margin
2.25 1.50 %
1.25 0.50 %
2.50%
1.50%
2.75 1.75 %
1.75 0.75 %
“Applicable Percentage” means with respect to (a) any Domestic Lender at any time, the percentage (carried out to the ninth decimal
place) of the Domestic Total Commitments represented by such Domestic Lender’s Domestic Commitment at such time, (b) any Canadian
Lender at any time, the percentage (carried out to the ninth decimal place) of the Canadian Total Commitments represented by such Canadian
Lender’s Canadian Commitment at such time, and (c) any Lender at any time, the percentage (carried out to the ninth decimal place) of the
Aggregate Total Commitments represented by such Lender’s Commitment at such time. If the Domestic Commitments and/or Canadian
Commitments of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant
to Section 2.06 or Section 8.02 or if the Aggregate Total Commitments have expired, then the Applicable Percentages of each Lender shall be
determined based on the Applicable Percentages of such Lender most recently in effect, giving effect to any subsequent assignments. The initial
Applicable Percentages of each Lender is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption
pursuant to which such Lender becomes a party hereto, as applicable.
“Applicable Rate” means, at any time of calculation, the Applicable Margin for Loans which are LIBOR Rate Loans.
“Appraised Value” means the appraised orderly liquidation value, net of costs and expenses to be incurred in connection with any such
liquidation, which value is expressed as a percentage of Cost of Eligible Inventory as set forth in the inventory stock ledger of the Domestic
Loan Parties and the Canadian Borrower, which value shall be determined from time to time by the most recent appraisal undertaken by an
independent appraiser engaged by the Administrative Agent.
“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender (c) an entity or an
Affiliate of an entity that administers or manages a Lender, or (d) the same investment advisor or an advisor under common control with such
Lender, Affiliate or advisor, as applicable.
(4)
“Arrangers” mean Banc of America Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Capital
Finance, LLC Bank, National Association , in their capacities as joint lead arrangers and joint book managers.
“Assignee Group” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by
the same investment advisor.
“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the
consent of any party whose consent is required by Section 10.06(b)), and accepted by the Administrative Agent, in substantially the form of
Exhibit D or any other form approved by the Administrative Agent.
“Attributable Indebtedness” means, on any date, (a) in respect of any Capital Lease Obligation of any Person, the capitalized amount
thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any
Synthetic Lease Obligation, the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable
agreement or instrument that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease,
agreement or instrument were accounted for as a capital lease.
“Audited Financial Statements” means the audited consolidated balance sheet of the Parent and its Subsidiaries for the fiscal year ended
September 30, 2009 2012 , and the related consolidated statements of income or operations, Shareholders’ Equity and cash flows for such fiscal
year of the Parent and its Subsidiaries, including the notes thereto.
“Auto-Extension Letter of Credit” shall have the meaning specified in Section 2.03(b)(iii) .
“Availability Period” means the period from and including the Closing Date to the earliest of (a) the Maturity Date, (b) the date of
termination of the Aggregate Total Commitments pursuant to Section 2.06, and (c) the date of termination of the Commitment of each Lender to
make Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02.
“Availability Reserves” means such reserves as the Administrative Agent from time to time determines in its Permitted Discretion as
being appropriate (a) to reflect the impediments to the Agents’ ability to realize upon the Collateral, (b) to reflect claims and liabilities that the
Administrative Agent determines will need to be satisfied in connection with the realization upon the Collateral, (c) to reflect criteria, events,
conditions, contingencies or risks which adversely affect any component of the Domestic Borrowing Base, Canadian Borrowing Base or
Distribution Borrowing Base or the assets, business, financial performance or financial condition of any Loan Party, or (d) to reflect that a
Default or an Event of Default then exists. Without limiting the generality of the foregoing, Availability Reserves may include, in the
Administrative Agent’s Permitted Discretion, (but are not limited to) reserves based on: (i) (A) rent for any Store locations, and (B) for each
distribution center leased by a Loan Party unless the applicable lessor has delivered to the Collateral Agent or the Canadian Agent, as applicable,
a Collateral Access Agreement; (ii) customs duties, and other costs to release Inventory which is being imported into the United States or
Canada; (iii) outstanding Taxes and other governmental charges, including, without limitation, ad valorem, real estate, personal property, sales,
claims of the PBGC and other Taxes which may have priority over the interests of the Collateral Agent or the Canadian Agent in any Collateral;
(iv) salaries, wages, vacation pay and benefits due and owing to employees of any Loan Party, (v) Customer Credit Liabilities, (vi) customer
deposits, (viii) reserves for reasonably anticipated changes in the Appraised Value of Eligible Inventory between appraisals,
(viii) warehousemen’s, carrier’s or bailee’s charges and other Permitted Encumbrances which may have priority over the interests of the
Collateral Agent or the Canadian Agent in any Collateral, (ix) amounts due to vendors on account of consigned
(5)
goods (x) the Agents’ estimate of Canadian Priority Payable Reserves, (xi) reserves to reflect the liabilities and obligations of the Loan Parties
with respect to Bank Products then provided or outstanding, and (xii) reserves to reflect the reasonably anticipated liabilities and obligations of
the Loan Parties with respect to Cash Management Services then provided or outstanding. The amount of any Reserve established by the
Administrative Agent hereunder shall have a reasonable relationship to the event, condition or other matter which is the basis for such Reserve.
All such Reserves shall be established in good faith and without duplication for items already excluded from “Eligible Credit Card Receivables”,
“Eligible Inventory” and “Eligible Trade Receivables” as set forth in the lettered clauses in the definitions thereof or reserves or criteria deducted
in computing the Appraised Value of Eligible Inventory or the imposition of Inventory Reserves. To the extent required pursuant to Section 2.01
(e), the Administrative Agent shall give the Borrowers three (3) Business Days prior written notice of the imposition of any Reserve and, upon
delivery of such notice, the Administrative Agent shall be available to discuss the proposed Availability Reserves and the Borrowers may take
such action as may be required so that the event, condition or other matter that is the basis for the Availability Reserve no longer exists or has
been otherwise adequately addressed by the Borrowers to the reasonable satisfaction of the Administrative Agent.
“Average Daily Availability” shall mean the average daily Excess Availability for the immediately preceding Fiscal Quarter.
“BA Equivalent Loan” means any Canadian Loan in CD$ bearing interest at a rate determined by reference to the BA Rate in
accordance with the provisions of Article II.
“BA Equivalent Loan Borrowing” means any Committed Borrowing comprised of BA Equivalent Loans.
“BA Rate” means, for the Interest Period of each BA Equivalent Loan, the rate of interest per annum equal to the annual rates
applicable to CD$ bankers’ acceptances having an identical or comparable term as the proposed BA Equivalent Loan displayed and identified as
such on the display referred to as the “CDOR Page” (or any display substituted therefor) of Reuter Monitor Money Rates Service as at
approximately 10:00 A.M. (Toronto time) on such day (or, if such day is not a Business Day, as of 10:00 A.M. (Toronto time) on the
immediately preceding Business Day), plus five (5) basis points; provided that if such rates do not appear on the CDOR Page at such time on
such date, the rate for such date will be the annual discount rate (rounded upward to the nearest whole multiple of 1/100 of 1%) as of 10:00 A.M.
on such day at which a Canadian chartered bank listed on Schedule 1 of the Bank Act (Canada) as selected by the Canadian Agent is then
offering to purchase CD$ bankers’ acceptances accepted by it having such specified term (or a term as closely as possible comparable to such
specified term), plus five (5) basis points.
“Bank of America” means Bank of America, N.A. and its successors.
“Bank of America-Canada Branch” means Bank of America, N.A. (acting through its Canada branch), a banking corporation carrying
on business under the Bank Act (Canada).
“Bank of Canada Overnight Rate” means, on any date of determination, the rate of interest charged by the Bank of Canada on one-day
Canadian dollar loans to financial institutions, for such date.
“Bank Products” means any services or facilities provided to the Parent or any of its Subsidiaries by the Administrative Agent, the
Canadian Agent, any Lender, or any of their respective branches or Affiliates, including, without limitation, on account of (a) Swap Contracts
and (b) leasing, but excluding Cash Management Services.
(6)
“Blocked Account” has the meaning provided in Section 6.12(a)(ii).
“Blocked Account Agreement” means, with respect to an account established by a Loan Party, an agreement, in form and substance
satisfactory to the Administrative Agent and (if a party thereto) the Canadian Agent, establishing control (as defined in the UCC or other
applicable Law) of such Blocked Account by the Administrative Agent (for the benefit of itself and the other Credit Parties) or the Canadian
Agent (for the benefit of itself and the other Canadian Credit Parties) and whereby the bank maintaining such account agrees, upon the
occurrence and during the continuance of a Trigger Event, to comply only with the instructions originated by the Administrative Agent or the
Canadian Agent, as applicable, without the further consent of any Loan Party.
“Blocked Account Bank” means each bank with whom deposit accounts are maintained in which any funds of any of the Loan Parties
from one or more DDAs are concentrated and with whom a Blocked Account Agreement has been, or is required to be, executed in accordance
with the terms hereof.
“Borrower Materials” has the meaning specified in Section 6.02.
“Borrowers” means, collectively, the Domestic Borrowers, the Canadian Borrower and the Foreign Borrower.
“Borrowing” means a Committed Borrowing or a Swing Line Borrowing, as the context may require.
“Borrowing Base Certificate” means a certificate substantially in the form of Exhibit E hereto (with such changes therein as may be
required by the Administrative Agent to reflect the components of and reserves against the Domestic Borrowing Base as provided for hereunder
from time to time, and as may be required by the Canadian Agent to reflect the components of and reserves against the Canadian Borrowing
Base as provided for hereunder from time to time), executed and certified as being accurate and complete, by a Responsible Officer of the Parent
(with respect to the Domestic Borrowing Base) and the Canadian Borrower (with respect to the Canadian Borrowing Base) which shall include
appropriate exhibits, schedules, supporting documentation, and additional reports as reasonably requested in advance by the Administrative
Agent (with respect to the Domestic Borrowing Base) or the Canadian Agent (with respect to the Canadian Borrowing Base).
“Business Day” means (a) any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under
the Laws of, or are in fact closed in, the state where the Administrative Agent’s Office is located and, (b) if such day relates to any LIBOR Rate
Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank market and the
applicable Optional Currency in the relevant Eurocurrency Interbank Market, and (c) with respect to any Loan to be made in an Optional
Currency, a day on which dealings in the relevant Optional Currency can be carried on in the principal financial center of the country in which
such currency is legal tender, provided further that when used in connection with any Loan by a Canadian Lender, the term “Business Day” shall
also exclude any day on which banks are authorized or required by law to be closed in Toronto, Ontario, Canada, provided , however , that, with
respect to notices and determinations in connection with, and payments of principal and interest on, Loans denominated in Euros, such day is
also a day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer System (TARGET) (or, if such clearing
system ceases to be operative, such other clearing system (if any) determined by the Administrative Agent to be a suitable replacement) is open
for settlement of payment in Euros.
(7)
“Canadian Agent” means Bank of America- Canada Branch, for its own benefit and the benefit of the other Canadian Credit Parties, or
any successor Canadian agent.
“Canadian Agent’s Office” means the Canadian Agent’s address and, as appropriate, account as set forth on Schedule 10.02 , or such
other address or account as the Canadian Agent may from time to time notify the Canadian Borrower and the Canadian Lenders.
“Canadian Availability” means, as of any date of determination thereof, the result, if a positive number, of:
(a)
the Canadian Loan Cap
minus
(b)
the Canadian Total Outstandings on such date.
In calculating Canadian Availability at any time and for any purpose under this Agreement any amount calculated or referenced in
Dollars shall also refer to the Equivalent Amount in CD$.
“Canadian Borrower” has the meaning specified in the introductory paragraph hereto and, subject to the terms of this Agreement,
includes the Foreign Borrower.
“Canadian Borrowing” means a Canadian Committed Borrowing made to the Canadian Borrower or the Foreign Borrower (to the
extent based on Canadian Availability) or a Swing Line Borrowing made to the Canadian Borrower or the Foreign Borrower (to the extent based
on Canadian Availability), as the context may require.
“Canadian Borrowing Base” means, at any time of calculation, an Equivalent Amount in Dollars equal to:
(a)
the face amount of Eligible Credit Card Receivables of the Canadian Borrower multiplied by 90%;
plus
(b)
the Cost of Eligible Inventory of the Canadian Borrower, net of Inventory Reserves, multiplied by 85 90 %
multiplied by the Appraised Value of Eligible Inventory of the Canadian Borrower;
plus
(c)
the face amount of Eligible Trade Receivables of the Canadian Borrower multiplied by the Receivables Advance
Rate;
minus
(d)
the then amount of all Availability Reserves relating to the Canadian Borrower.
“Canadian Committed Borrowing” means a borrowing consisting of simultaneous Canadian Committed Loans of the same Type and, in
the case of BA Equivalent Loans or LIBOR Rate Loans, having the same Interest Period made by each of the Canadian Lenders pursuant to
Section 2.01.
(8)
“Canadian Committed Loan” means any loan at any time made by any Canadian Lender pursuant to Section 2.01.
“Canadian Commitments” means, as to each Canadian Lender, its obligation to (a) make Canadian Committed Loans to the Canadian
Borrower pursuant to Section 2.01(b), (b) make Canadian Committed Loans to the Foreign Borrower pursuant to Section 2.01(c), (c) purchase
participations in Canadian L/C Obligations, and (d) purchase participations in Swing Line Loans made to the Canadian Borrower and the
Foreign Borrower (to the extent based on Canadian Availability), in an aggregate principal amount at any one time outstanding not to exceed the
amount set forth opposite such Canadian Lender’s name on Schedule 2.01 or in the Assignment and Assumption pursuant to which such
Canadian Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement.
“Canadian Concentration Account” has the meaning provided in Section 6.12(c).
“Canadian Credit Extensions” mean each of the following: (a) a Canadian Borrowing and (b) a Canadian L/C Credit Extension.
“Canadian Credit Party” or “Canadian Credit Parties” means (a) individually, (i) each Canadian Lender and its branches and Affiliates,
(ii) the Canadian Agent and its Affiliates, (iii) each L/C Issuer of any Canadian Letter of Credit, (iv) the Arrangers, (v) each beneficiary of any
indemnification obligation undertaken by any Loan Party under any Loan Document with respect to the Canadian Liabilities, (vi) each holder of
any Other Canadian Liabilities, and (vii) the successors and assigns of each of the foregoing, and (b) collectively, all of the foregoing.
“Canadian L/C Borrowing” means an extension of credit resulting from a drawing under any Canadian Letter of Credit which has not
been reimbursed on or prior to the date required to be reimbursed by the Canadian Borrower or the Foreign Borrower, as applicable, pursuant to
Section 2.03(c)(i) or refinanced as a Canadian Committed Borrowing.
“Canadian L/C Credit Extension” means, with respect to any Canadian Letter of Credit, the issuance thereof or extension of the expiry
date thereof, or the increase of the amount thereof.
“Canadian L/C Obligations” means, as at any date of determination and without duplication, the aggregate Stated Amount of all
outstanding Canadian Letters of Credit plus the aggregate of all Unreimbursed Amounts under Canadian Letters of Credit, including all
Canadian L/C Borrowings.
“Canadian Lenders” means the Lenders having Canadian Commitments from time to time or at any time. Any Person may be a
Canadian Lender only if it is a financial institution that is listed on Schedule I, II or III of the Bank Act (Canada), has received an approval to
have a financial establishment in Canada pursuant to Section 522.21 of the Bank Act (Canada) or is not a foreign bank for purposes of the Bank
Act (Canada), and if such financial institution is not resident in Canada and is not deemed to be resident in Canada for purposes of the Income
Tax Act (Canada), then such financial institution deals at arm’s length with each Canadian Loan Party for purposes of the Income Tax Act
(Canada).
“Canadian Letter of Credit” means each Letter of Credit issued hereunder for the account of the Canadian Borrower or the Foreign
Borrower.
“Canadian Letter of Credit Sublimit” means an amount equal to $10,000,000. The Canadian Letter of Credit Sublimit is part of, and not
in addition to, the Canadian Total Commitments. A permanent reduction of the Canadian Total Commitments shall not require a corresponding
pro rata
(9)
reduction in the Canadian Letter of Credit Sublimit; provided, however, that if the Canadian Total Commitments are reduced to an amount less
than the Canadian Letter of Credit Sublimit, then the Canadian Letter of Credit Sublimit shall be reduced to an amount equal to (or, at Canadian
Borrower’s option, less than) the Canadian Total Commitments.
“Canadian Liabilities” means (a) all advances to, and debts (including principal, interest, fees, costs, and expenses), liabilities,
obligations, covenants, indemnities, and duties of, any Canadian Loan Party arising under any Loan Document or otherwise with respect to any
Canadian Loan or Canadian Letter of Credit (including payments in respect of reimbursement of disbursements, interest thereon and obligations
to provide cash collateral therefor), whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become
due, now existing or hereafter arising and including interest, fees, costs, expenses and indemnities that accrue after the commencement by or
against any Canadian Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in
such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding, (b) any Other Canadian Liabilities, and
(c) the Foreign Liabilities to the extent of any direct Borrowing by the Foreign Borrower or issuance of any Letter of Credit for the account of
the Foreign Borrower based on Canadian Availability, in accordance with Section 2.01(c).
“Canadian Loan” means an extension of credit by a Canadian Lender to the Canadian Borrower or the Foreign Borrower (to the extent
based on Canadian Availability) under Article II in the form of a Committed Loan or a Swing Line Loan.
“Canadian Loan Cap” means, at any time of determination, the lesser of (a) the Canadian Total Commitments and (b) the Canadian
Borrowing Base.
“Canadian Loan Parties” means, collectively, the Canadian Borrower, the Foreign Borrower and each Canadian Subsidiary that is a
Guarantor of the Canadian Liabilities. “Canadian Loan Party” means any one of such Persons.
“Canadian Note” means a promissory note made by the Canadian Borrower in favor of a Canadian Lender evidencing Canadian Loans
made by such Canadian Lender, substantially in the form of Exhibit C-1.
“Canadian Overadvance” means a Canadian Credit Extension to the extent that, immediately after the making of such Canadian Credit
Extension, the aggregate principal balance of all Canadian Credit Extensions then outstanding Total Outstandings exceeds the Canadian Loan
Cap as then in effect.
“Canadian Pension Plan” means a pension plan that is registered under the Pension Benefits Act (Ontario) or other applicable pension
benefits standards legislation of another Canadian province or territory and the Income Tax Act (Canada) and that is (a) maintained or sponsored
by any Canadian Loan Party or any Canadian Subsidiary for its employees, (b) maintained pursuant to a collective bargaining agreement, or
other arrangement under which more than one employer makes contributions and to which any Canadian Loan Party or any Canadian Subsidiary
is making or accruing an obligation to make contributions, or (c) a plan with respect to which any Canadian Loan Party has incurred or may
incur liability, including contingent liability either to such plan or to any Person or Governmental Authority, including the FSCO. For purposes
of clarity, “Canadian Pension Plan” shall not include the group registered retirement savings plan in which the employees of any Canadian Loan
Party or any Canadian Subsidiary participate and which is not subject to any pension benefits standards legislation or the registered pension plan
provisions of the Income Tax Act (Canada).
(10)
“Canadian Prime Rate” means, for any day, the greater of (i) a fluctuating rate of interest per annum equal to the rate of interest in effect
for such day as publicly announced from time to time by Bank of America-Canada Branch as its reference rate of interest for loans made in CD$
and designated as its “prime” rate being a rate set by Bank of America-Canada Branch based upon various factors, including Bank of AmericaCanada Branch’s costs and desired return, general economic conditions and other factors and is used as a reference point for pricing some loans,
provided that in the event that the Bank of America-Canada Branch (including any successor or assignor) does not at any time publicly announce
a prime rate, such rate shall be the “prime rate” publicly announced by a Schedule 1 chartered bank in Canada selected by the Canadian Agent,
(ii) the Bank of Canada Overnight Rate, plus 0.50%, and (iii) the BA Rate for a one month Interest Period as determined on such day, plus
1.0%. Any change in the prime rate announced by the Bank of America-Canada Branch shall take effect at the opening of business on the day
specified in the public announcement of such change. Each interest rate based on the Canadian Prime Rate hereunder, shall be adjusted
simultaneously with any change in the Canadian Prime Rate.
“Canadian Prime Rate Loan” means a Loan that bears interest based on the Canadian Prime Rate.
“Canadian Priority Payable Reserves” means, at any time, without duplication, the obligations, liabilities and indebtedness at such time
which have, or would in any proceeding have, a trust, deemed trust, right of garnishment, right of distress, charge or statutory Lien imposed to
provide for payment or Liens ranking or capable of ranking senior to or pari passu with Liens securing the Canadian Liabilities on any of the
Collateral under federal, provincial, state, county, territorial, municipal, or local law including, to the extent that there is such a trust, statutory
Liens or Liens in respect of the specified item that has or is capable of having such rank, claims for unremitted and accelerated rents, utilities,
taxes (including sales taxes and goods and services taxes (“GST”) and harmonized sales taxes (“HST”), value added taxes, amounts deducted or
withheld or not paid and remitted when due under the Income Tax Act (Canada), excise taxes, taxes payable pursuant to Part IX of the Excise Tax
Act (Canada) or similar provincial or territorial Law), the claims of a clerk, servant, travelling salesperson, labourer or worker (whether full-time
or part-time) who is owed wages (including any amounts protected by the Wage Earner Protection Program Act (Canada)), salaries,
commissions, disbursements, compensation or other amounts (such as union dues payable on behalf of employees) by the Loan Parties (but only
to the extent that the claims of such parties may rank or be capable of ranking senior to or pari passu with Liens securing the Obligations on any
of the Collateral), vacation pay, severance pay, employee source deductions, workers’ compensation obligations, government royalties or
pension fund obligations (including claims of FSCO and all amounts currently or past due and not contributed, remitted or paid to any Canadian
Pension Plan) (but only to the extent ranking or capable of ranking senior to or pari passu with Liens securing the Obligations on any of the
Collateral), together with the aggregate value, determined in accordance with GAAP, of all Eligible Inventory which may be or may become
subject to a right of a supplier to recover possession thereof or to exercise rights of revendication with respect thereto under any federal,
provincial, state, county, municipal, territorial or local law, where such supplier’s right may have priority over Liens securing the Obligations
including Eligible Inventory subject to a right of a supplier to repossess goods pursuant to Section 81.1 of the BIA or the Civil Code of Québec.
“Canadian Security Documents” means each General Security Agreement, Deed of Hypothec and each other security agreement or
other instrument or document executed and delivered by any Canadian Loan Party to the Canadian Agent pursuant to this Agreement or any
other Loan Document granting a Lien on assets of any Canadian Loan Party for the benefit of the Canadian Credit Parties, as security for the
Canadian Liabilities.
“Canadian Subsidiary” means any Subsidiary that is organized under the laws of Canada or any province or territory thereof.
(11)
“Canadian Swing Line Note” means the promissory note of the Canadian Borrower substantially in the form of Exhibit C-3, payable to
the order of the applicable Swing Line Lender, evidencing the Swing Line Loans made by the Swing Line Lender to the Canadian Borrower or
to the Foreign Borrower (to the extent based on Canadian Availability).
“Canadian Swing Line Sublimit” means an amount equal to the lesser of (a) $10,000,000 and (b) the Canadian Total Commitments.
The Canadian Swing Line Sublimit is part of, and not in addition to, the Canadian Total Commitments.
“Canadian Total Commitments” means the aggregate of the Canadian Commitments of all Canadian Lenders. On the Closing Effective
Date, the Canadian Total Commitments are $25,000,000.
“Canadian Total Outstandings” means, without duplication, the aggregate Outstanding Amount of all Canadian Loans and all Canadian
L/C Obligations.
“Capital Expenditures” means, with respect to any Person for any period, (a) all expenditures made (whether made in the form of cash
or other property) or costs incurred for the acquisition or improvement of fixed or capital assets of such Person (excluding normal replacements
and maintenance which are properly charged to current operations), in each case that are (or should be) set forth as capital expenditures in a
Consolidated statement of cash flows of such Person for such period, in each case prepared in accordance with GAAP, and (b) Capital Lease
Obligations incurred by a Person during such period.
“Capital Lease Obligations” means, with respect to any Person for any period, the obligations of such Person to pay rent or other
amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which
obligations are required to be classified and accounted for as liabilities on a balance sheet of such Person under GAAP and the amount of which
obligations shall be the capitalized amount thereof determined in accordance with GAAP.
“Cash Collateral Account” means (i) in the case of the Domestic L/C Obligations, an account established by one or more of the
Domestic Borrowers with the Administrative Agent, for its own benefit and the benefit of the other Domestic Credit Parties, at Bank of
America under the sole and exclusive dominion and control of the Administrative Agent, in the name of the Administrative Agent or as the
Administrative Agent shall otherwise direct, in which deposits are required to be made by the Domestic Borrowers in respect of the Domestic
L/C Obligations in accordance with Section 2.03(g) or 8.02(c); and (ii) in the case of the Canadian L/C Obligations, an account established by
the Canadian Borrower with the Canadian Agent, for its own benefit and the benefit of the other Canadian Credit Parties, at Bank of AmericaCanada Branch under the sole and exclusive dominion and control of the Canadian Agent, in the name of the Canadian Agent or as the Canadian
Agent shall otherwise direct, in which deposits are required to be made by the Canadian Borrower in respect of the Canadian L/C Obligations in
accordance with Section 2.03(g) or 8.02(c).
“Cash Collateralize” has the meaning specified in Section 2.03(g). Derivatives of such term have corresponding meanings.
“Cash Management Services” means any cash management services or facilities provided to the Parent or any of its Subsidiaries by the
Administrative Agent, the Canadian Agent or any Lender or any of their respective branches or Affiliates, including, without limitation, on
account of: (a) ACH transactions, (b) controlled disbursement services, treasury, depository, overdraft, and electronic funds transfer services,
(c) foreign exchange facilities, (d) credit card processing services, (e) purchase cards (f) electronic payables, and (g) credit or debit cards.
(12)
“CD$” or “Canadian Dollars” means lawful money of Canada.
“CD&R” means Clayton, Dubilier & Rice, Inc.
“CD&R Investors” means the collective reference to (i) CDRS Acquisition LLC, a Delaware limited liability company, and any
successor thereto (“CDRS Acquisition LLC”), (ii) Clayton, Dubilier & Rice Fund VII, L.P., a Cayman Islands exempted limited partnership, or
any successor thereto, (iii) CD&R Parallel Fund VII, L.P., a Cayman Islands exempted limited partnership, or any successor thereto, and (iv) any
Affiliate of any CD&R Investor.
“CDRS Acquisition LLC” as defined in the definition of “CD&R Investors.”
“CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq.
“CERCLIS” means the Comprehensive Environmental Response, Compensation, and Liability Information System maintained by the
United States Environmental Protection Agency.
“CFC” means a Person that is a controlled foreign corporation under Section 957 of the Code.
“Change in Law” means the occurrence, after the Effective Date of this Agreement , of any of the following: (a) the adoption or taking
effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or
application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having
the force of law) by any Governmental Authority; provided however , for purposes of this Agreement notwithstanding anything herein to the
contrary , (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or
issued in connection therewith are deemed to have gone into effect and been adopted after the Closing and (y) all requests, rules, guidelines or
directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or
similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed
to be a “Change in Law”, regardless of the date enacted, adopted or issued .
“Change of Control” means an event or series of events by which:
(a)
any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than one or
more Permitted Holders, shall be, directly or indirectly, the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities
Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group
has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “ option right ”)) of shares
of Voting Stock having more than 50% of the total voting power of all outstanding shares of Holdings (taking into account all such Equity
Interests that such “person” or “group” has the right to acquire pursuant to any option right); or
(b)
the Continuing Directors shall cease to constitute a majority of the members of the Board of Directors of Holdings;
(c)
any “change in control” as defined in the Senior Term Loan Credit Agreement or either Notes Indenture; or
or
(13)
(d)
Holdings fails at any time to own, directly or indirectly, 100% of the Equity Interests of the Parent free and clear of
all Liens, except where such failure is as a result of a transaction permitted by the Loan Documents; or
(e)
the Parent fails at any time to own, directly or indirectly, 100% of the Equity Interests of each other Loan Party free
and clear of all Liens (other than the Liens in favor of the Collateral Agent or the Canadian Agent, as the case may be), except where
such failure is as a result of a transaction permitted by the Loan Documents.
“Closing Date” means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with Section 10.01
November 12, 2010 .
“Code” means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, as amended and in effect.
“Collateral” means any and all “Collateral” as defined in any applicable Security Document and all other property of any Loan Party
that is or is intended under the terms of the Security Documents to be subject to Liens in favor of the Collateral Agent (for the benefit of itself
and the other Credit Parties) or the Canadian Agent (for the benefit of itself and the other Canadian Credit Parties), as applicable.
“Collateral Access Agreement” means an agreement reasonably satisfactory in form and substance to the Agents executed by (a) a
bailee or other Person in possession of Collateral, or (b) any landlord of Real Estate leased by any Loan Party, pursuant to which such Person
(i) acknowledges the Collateral Agent’s or Canadian Agent’s, as applicable, Lien on the Collateral, (ii) releases or subordinates such Person’s
Liens in the Collateral held by such Person or located on such Real Estate, (iii) provides the applicable Agent with access to the Collateral held
by such bailee or other Person or located in or on such Real Estate, (iv) as to any landlord, provides the applicable Agent with a reasonable time
to sell and dispose of the Collateral from such Real Estate, and (v) makes such other agreements with the Agents as the Agents may reasonably
require.
“Collateral Agent” means Bank of America, acting in such capacity for its own benefit and the ratable benefit of the other Domestic
Credit Parties.
“Combined Borrowing Base” means the sum of the Domestic Borrowing Base and the Canadian Borrowing Base.
“Commercial Letter of Credit” means any letter of credit or similar instrument (including, without limitation, bankers’ acceptances)
issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by a
Loan Party in the ordinary course of business of such Loan Party.
“Commitment” means, as to each Lender, its Domestic Commitment and its Canadian Commitment.
“Committed Borrowing” means each Canadian Committed Borrowing and each Domestic Committed Borrowing.
“Committed Loan” means any loan at any time made by any Lender (including, without limitation, any Domestic Committed Loan and
any Canadian Committed Loan) pursuant to Section 2.01.
(14)
“Committed Loan Notice” means a notice of (a) a Committed Borrowing, (b) a Conversion of Committed Loans from one Type to the
other, or (c) a continuation of LIBOR Rate Loans or BA Equivalent Loans, pursuant to Section 2.02(b), which, if in writing, shall be
substantially in the form of Exhibit A-1 (Domestic Committed Loan Notice) or Exhibit A-2 (Canadian Committed Loan Notice), as applicable.
“Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.).
“Compliance Certificate” means a certificate substantially in the form of Exhibit F.
“Concentration Accounts” means, collectively, the Canadian Concentration Account and the Domestic Concentration Account.
“Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however
denominated) or that are franchise Taxes or branch profits Taxes.
“Consolidated” means, when used to modify a financial term, test, statement, or report of a Person, the application or preparation of
such term, test, statement or report (as applicable) based upon the consolidation, in accordance with GAAP, of the financial condition or
operating results of such Person and its Subsidiaries.
“Consolidated EBITDA” means, at any date of determination, an amount equal to Consolidated Net Income of Holdings and its
Subsidiaries on a Consolidated basis for the most recently completed Measurement Period, plus (a) the following to the extent deducted in
calculating such Consolidated Net Income: (i) Consolidated Interest Charges, (ii) the provision for Federal, state, local and foreign income
Taxes, (iii) depreciation and amortization expense and, (iv) all other non-cash charges and non-cash losses, including all non-cash compensation
to officers, directors and employees paid in the form of Equity Interests and all write-downs of assets and goodwill, (v) all cash expenses
incurred in connection with (A) any capital markets transaction (including any merger or acquisition transaction) for the issuance of debt, equity
or convertible security, and (B) the issuance of any Indebtedness (including the Obligations), (vi) losses incurred in any Disposition, (vii) fees,
cash and expenses incurred in the early extinguishment of Indebtedness, (viii) non-cash losses or non-cash reserves incurred from or by
discontinued operations, (ix) any loss accounted for by the equity method of accounting, net of any Investments made by Holdings or any of its
Subsidiaries in the Person which has incurred such loss during such Measurement Period, (x) non-cash fees and expense reimbursements paid to
members of the Board of Directors in connection with their service on such Board of Directors, and (xi) only with respect to determining
compliance with Section 7.13 hereof, any Specified Equity Contribution, minus (b) the following to the extent included in calculating such
Consolidated Net Income: (i) Federal, state, provincial, territorial, municipal, local and foreign income tax credits and (ii) all non-cash items
increasing Consolidated Net Income (in each case of or by the Holdings and its Subsidiaries for such Measurement Period), all as determined on
a Consolidated basis in accordance with GAAP.
“‘Consolidated Fixed Charge Coverage Ratio’ means, at any date of determination, the ratio of (a) (i) Consolidated EBITDA for such
period minus (ii) the unfinanced portion of all Capital Expenditures (excluding any Capital Expenditure made with all or any portion of the
proceeds, applied within twelve months of receipt thereof, from (x) any casualty insurance, condemnation or eminent domain, or (y) any sale of
assets (other than Inventory) and excluding (z) any Capital Expenditure made with all or any portion of the proceeds from the sale of Equity
Interests, provided that any such Capital Expenditure is made or committed to be made within six (6) months after the date of receipt of the
initial proceeds from the sale of such Equity Interests) minus (iii) the aggregate amount of Federal, state, provincial, territorial, municipal, local
and foreign income taxes paid in cash during such period to (b) the Debt Service
(15)
Charges, in each case, of or by Holdings and its Subsidiaries for the most recently completed Measurement Period, all as determined on a
Consolidated basis in accordance with GAAP.
“Consolidated Funded Indebtedness” means, as of any date of determination, for Holdings and its Subsidiaries on a Consolidated basis,
without duplication, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money
(including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (b) all
purchase money Indebtedness, (c) all direct obligations arising under letters of credit (including standby and commercial), bankers’ acceptances
and bank guaranties, (d) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the
ordinary course of business), (e) all Attributable Indebtedness, and (f) all Indebtedness of the types referred to in clauses (a) through (f) above of
any partnership (other than a joint venture that is itself a corporation or limited liability company) in which Holdings or any of its Subsidiaries is
a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Holdings and such Subsidiary.
“Consolidated Interest Charges” means, for any Measurement Period, the sum of (a) all interest, premium payments, debt discount,
fees, charges and related expenses in connection with borrowed money (including capitalized interest) or in connection with the deferred
purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, including, without limitation, all commissions,
discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing and net costs under Swap
Contracts, but excluding any non-cash or deferred interest financing costs and expense, and (b) the portion of rent expense with respect to such
period under Capital Lease Obligations that is treated as interest in accordance with GAAP, minus interest income (accrued and received or
receivable in cash for such period), in each case of or by Holdings and its Subsidiaries for the most recently completed Measurement Period, all
as determined on a Consolidated basis in accordance with GAAP.
“Consolidated Net Income” means, as of any date of determination, the net income of Holdings and its Subsidiaries for the most
recently completed Measurement Period, all as determined on a Consolidated basis in accordance with GAAP, provided, however, that there
shall be excluded (a) all extraordinary and/or non-recurring and/or unusual gains, losses, items, credits and expenses for such Measurement
Period, (b) the income (or loss) of any Person during such Measurement Period in which any Person (other than any Subsidiary of Holdings) has
a joint interest, except to the extent of the amount of cash dividends or other distributions actually paid in cash to Holdings and its Subsidiaries
during such period, (c) the income (or loss) of any Person during such Measurement Period and accrued prior to the date it becomes a Subsidiary
of Holdings or any of its Subsidiaries or is merged into or consolidated with Holdings or any of its Subsidiaries or that Person’s assets are
acquired by Holdings or any of its Subsidiaries, and (d) the income of any direct or indirect Subsidiary of Holdings and its Subsidiaries to the
extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by
operation of the terms of its Organization Documents or any agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary, except that Holdings’ and its Subsidiaries’ equity in any net loss of any such Subsidiary for such
Measurement Period shall be included in determining Consolidated Net Income.
“Continuing Directors” means the directors of Holdings on the Closing Effective Date and each other director if, in each case, such
other director’s nomination for election to the board of directors of Holdings is recommended by at least a majority of the then Continuing
Directors.
“Contractual Obligation” means, as to any Person, any provision of any agreement, instrument or other undertaking to which such
Person is a party or by which it or any of its property is bound.
(16)
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings
correlative thereto.
“Convert”, “Conversion” and “Converted” each refers to a conversion of Committed Loans of one Type into Committed Loans of the
other Type.
“Cost” means the lower of cost or market value of Inventory, based upon the Borrowers’ accounting practices, known to the
Administrative Agent, which practices are in effect on the Closing Effective Date as such calculated cost is determined from invoices received
by the Borrowers, the Borrowers’ purchase journals or the Borrowers’ stock ledger. “Cost” does not include inventory capitalization costs or
other non-purchase price charges (such as freight) used in the Borrowers’ calculation of cost of goods sold.
“Covenant Compliance Event” means either (a) that an Event of Default has occurred and is continuing, or (b) Excess Availability is
less than the greater of (a) 15 10 % of the Loan Cap, or (b) $40,000,000. For purposes hereof, the occurrence of a Covenant Compliance Event
shall be deemed continuing (i) so long as such Event of Default has not been waived, and/or (ii) if the Covenant Compliance Event arises as a
result of the Borrowers’ failure to achieve Excess Availability as required hereunder, until Excess Availability has exceeded the greater of (a) 15
10 % of the Loan Cap, or (b) $40,000,000 for forty-five (45) consecutive Business Days, in which case a Covenant Compliance Event shall no
longer be deemed to be continuing for purposes of this Agreement. The termination of a Covenant Compliance as provided herein shall in no
way limit, waive or delay the occurrence of a subsequent Covenant Compliance Event in the event that the conditions set forth in this definition
again arise.
“Credit Card Notifications” has the meaning provided in Section 6.12(a)(i).
“Credit Card Receivables” means each “payment intangible” (as defined in the UCC) and each Account, together with all income,
payments and proceeds thereof, owed by a major credit or debit card issuer (including, but not limited to, Visa, MasterCard and American
Express and such other issuers approved by the Administrative Agent) to a Domestic Loan Party or to the Canadian Borrower resulting from
charges by a customer of such Loan Party on credit or debit cards issued by such issuer in connection with the sale of goods by such Loan Party,
or services performed by such Loan Party, in each case in the ordinary course of its business.
“Credit Extension” means each of (a) a Canadian Credit Extension and (b) a Domestic Credit Extension.
“Credit Party” or “Credit Parties” means collectively, each Canadian Credit Party and each Domestic Credit Party.
“Credit Party Expenses” means: (a) all reasonable and documented out-of-pocket expenses incurred by any of the Agents and their
respective Affiliates, in connection with this Agreement and the other Loan Documents, including, without limitation (but in any event subject to
the limitations described below), (i) the reasonable and documented actual fees, charges and disbursements of (A) counsel for any of the Agents
and their Affiliates (limited to not more than one primary counsel, one Canadian counsel and one European counsel and necessary local counsel
(limited to one local counsel for each other jurisdiction), (B) outside consultants for any of the Agents (solely after the occurrence of an Event of
Default), (C) appraisers (but only to the extent expressly provided to be paid by the Borrowers as set forth in this Agreement or the other Loan
Documents), (D) commercial finance examinations (but only to the
(17)
extent expressly provided to be paid by the Borrowers as set forth in this Agreement or the other Loan Documents), and (E) all such out-ofpocket expenses incurred during any workout or restructuring negotiations in respect of the Obligations, and (ii) all reasonable and documented
out-of-pocket expenses incurred in connection with (A) the syndication of the credit facility provided for herein, (B) the preparation, negotiation,
administration, management, execution and delivery of this Agreement and the other Loan Documents or any amendments, modifications or
waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (C) the enforcement or
protection of their rights in connection with this Agreement or the other Loan Documents or efforts to preserve, protect, collect, or enforce the
Collateral or in connection with any proceeding under any Debtor Relief Laws, or (D) any workout or restructuring negotiations in respect of any
Obligations; and (b) with respect to each L/C Issuer, all reasonable and documented out-of-pocket expenses incurred in connection with the
issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder; and (c) all reasonable and
documented out-of-pocket expenses incurred by the Credit Parties who are not the Agents, the L/C Issuer or any Affiliate of any of them in
connection with the enforcement of the Credit Parties’ rights and remedies under any of the Loan Documents or applicable Law including in the
course of any work-out or restructuring of the Loans or other Obligations during the pendency of any Event of Default, provided that such Credit
Parties shall be entitled to reimbursement for no more than one counsel representing all such Credit Parties (absent a conflict of interest in which
case the Credit Parties may engage and be reimbursed for additional counsel).
“Customer Credit Liabilities” means at any time, the aggregate remaining value at such time of (a) outstanding gift certificates and gift
cards of the Borrowers entitling the holder thereof to use all or a portion of the certificate or gift card to pay all or a portion of the purchase price
for any Inventory, and (b) outstanding merchandise credits of the Borrowers.
“DDA” means each checking, savings or other demand deposit account maintained by any of the Loan Parties. All funds in each DDA
shall be conclusively presumed to be Collateral and proceeds of Collateral and the Agents and the Lenders shall have no duty to inquire as to the
source of the amounts on deposit in any DDA.
“Debt Service Charges” means for any Measurement Period, the sum of (a) Consolidated Interest Charges paid or required to be paid
for such Measurement Period, plus (b) principal payments required to be made on account of Indebtedness (excluding the Obligations, any
Synthetic Lease Obligations and any Indebtedness which has been refinanced at its maturity, but including, without limitation, Capital Lease
Obligations, all amortization of the Senior Term Loans, all payments of excess cash flow on account of any Indebtedness, and the full amount of
any non-recourse Indebtedness, and scheduled mandatory payments on account of Disqualified Stock (whether in the nature of dividends,
redemption, repurchase or otherwise) required to be made during such period)) for such Measurement Period, in each case determined on a
Consolidated basis in accordance with GAAP.
“Debtor Relief Laws” means each of (i) the Bankruptcy Code of the United States, (ii) the Bankruptcy and Insolvency Act (Canada), the
Companies’ Creditors Arrangement Act (Canada) and the Winding-up and Restructuring Act (Canada), and (iii) all other liquidation,
conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or
similar debtor relief Laws of the United States, Canada, or other applicable jurisdictions from time to time in effect and affecting the rights of
creditors generally.
“Default” means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time,
or both, would be an Event of Default.
(18)
“Default Rate” means (a) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Rate plus two percent (2%) per
annum, and (b) otherwise, when used with respect to Obligations, the Canadian Liabilities or the Foreign Liabilities, an interest rate two percent
(2%) per annum in excess of the rate then applicable to such Obligation, Canadian Liability or Foreign Liability.
“Defaulting Lender” means , subject to Section 2.16(b), any Lender that (a) has failed to (i) fund all or any portion of the Committed
Loans, participations in L/C Obligations or participations in Swing Line Loans required to be funded by it hereunder its Loans within three (3)
two Business Day Days of the date such Loans were required to be funded by it hereunder (other than as a result of a good faith dispute), or ( b)
has otherwise failed to ii) pay over to the Administrative Agent to the Agents, the L/C Issuer, the Swing Line Lender or any other Lender any
other amount required to be paid by it hereunder within one Business Day (including in respect of its participation in Letters of Credit or
Swing Line Loans) within two Business Days of the date when due (other than as a result of a good faith dispute), or (c) has been deemed
insolvent or become the subject of any proceeding under any Debtor Relief Law unless, in the case of any Lender subject to this clause (c), the
Administrative Agent shall have determined that such Lender intends, and has all approvals required to enable it, to continue to perform its
obligations as a Lender hereunder..“Deteriorating Lender” means any Defaulting Lender or any Lender as to which (a) (b) has notified any
Borrower, any Agent, the L/C Issuer or the Swing Line Lender has a good faith belief (based upon information reasonably believed by it to be
true and correct) that such Lender has defaulted in fulfilling its obligations under one or more other syndicated credit facilities, or (b) a Person
that Controls such Lender has been deemed insolvent or become the subject of any in writing that it does not intend to comply with its
funding obligations hereunder, or has made a public statement to that effect, (c) has failed, within two Business Days after written
request by the Administrative Agent or any Borrower, to confirm in writing to the Administrative Agent and the Borrowers that it will
comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to
this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrowers), or (d) has, or has a direct or
indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law unless, in the case of such Person , or
(ii), had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person
charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other
state or federal regulatory authority acting in such a capacity unless, in the case of any Lender subject to this clause ( b d ), the
Administrative Agent shall have determined that such Lender intends, and has all approvals required to enable it, to continue to perform its
obligations as a Lender hereunder . ; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or
acquisition of any Equity Interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long
as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United
States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental
Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the
Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above, and of the effective
date of such status, shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender
(subject to Section 2.16(b)) as of the date established therefor by the Administrative Agent in a written notice of such determination,
which shall be delivered by the Administrative Agent to the Borrowers, the L/C Issuer, the Swing Line Lender and each other Lender
promptly following such determination.
“Deteriorating Lender” means any Defaulting Lender or any Lender as to which (a) the L/C Issuer or the Swing Line Lender has a good
faith belief (based upon information reasonably believed by it to be true and correct) that such Lender has defaulted in fulfilling its obligations
under one or more other syndicated credit facilities, or (b) a Person that Controls such Lender has been deemed insolvent or become the subject
of any proceeding under any Debtor Relief Law unless, in the case of such Person subject to this clause (b), the Administrative Agent shall have
determined that such Lender intends, and has all approvals required to enable it, to continue to perform its obligations as a Lender hereunder.
“Determination Date” shall mean the date upon which each of the following has occurred:
(19)
(a)
The Canadian Commitments and/or the Domestic Commitments have been terminated by the Required Lenders (or
are deemed terminated) upon the occurrence of an Event of Default; and
(b)
The Obligations, the Foreign Liabilities and/or the Canadian Liabilities have been declared to be due and payable (or
has become automatically due and payable) and have not been paid in accordance with the terms of this Agreement.
“Disposition” or “Dispose” means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction and
any sale, transfer, license or other disposition of (whether in one transaction or in a series of transactions) of any property (including, without
limitation, any Equity Interests) by any Person (or the granting of any option or other right to do any of the foregoing), including any sale,
assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated
therewith.
“Disqualified Stock” means any Equity Interest that, by its terms (or by the terms of any security into which it is convertible, or for
which it is exchangeable, in each case at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior
to the date that is ninety-one (91) days after the date on which the Loans mature. The amount of Disqualified Stock deemed to be outstanding at
any time for purposes of this Agreement will be the maximum amount that Holdings and its Subsidiaries may become obligated to pay upon
maturity of, or pursuant to any mandatory redemption provisions of, such Disqualified Stock or portion thereof, plus accrued dividends.
“Distribution” means collectively, Sally Beauty Distribution, LLC, a Delaware limited liability company, and Sally Distribution of
Ohio, Inc., a Delaware corporation, or any successor thereof.
“Distribution Availability” means, as of any date of determination thereof by the Administrative Agent, the result, if a positive number,
of:
(a)
the Distribution Borrowing Base
Minus
(b)
The aggregate unpaid balance of Credit Extensions to, or for the account of, the Borrowers and attributable to the
Distribution Borrowing Base.
For purposes hereof, all Credit Extensions to the Foreign Borrower based on the Domestic Borrowing Base shall be deemed to have been made
on account of Distribution Availability and shall be attributable to the Distribution Borrowing Base.
“Distribution Borrowing Base” means, at any time of calculation, an amount equal to:
(a)
the Cost of Eligible Inventory of Distribution, net of Inventory Reserves, multiplied by 85 90 % multiplied by the
Appraised Value of Eligible Inventory;
minus
(b)
the then amount of all Availability Reserves applicable to Distribution.
(20)
“Documentation Agent” means JPMorgan Chase Bank, N.A.
“Dollars” and “$” mean lawful money of the United States.
“Domestic Availability” means, as of any date of determination thereof by the Administrative Agent, the result, if a positive number, of:
(a)
The Domestic Loan Cap
Minus
(b)
The aggregate unpaid balance of Credit Extensions to, or for the account of, the Borrowers.
“Domestic Borrowers” means each of Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC and, subject to the
terms of this Agreement, the Foreign Borrower.
“Domestic Borrowing” means a Domestic Committed Borrowing or a Swing Line Borrowing made to the Domestic Borrowers or the
Foreign Borrower (to the extent based on Domestic Availability), as the context may require.
“Domestic Borrowing Base” means, at any time of calculation, an amount equal to:
(a)
the face amount of Eligible Credit Card Receivables of the Domestic Loan Parties multiplied by 90%;
plus
(b)
the Cost of Eligible Inventory of the Domestic Loan Parties, net of Inventory Reserves, multiplied by 85 90 %
multiplied by the Appraised Value of Eligible Inventory of the Domestic Loan Parties;
plus
(c)
the face amount of Eligible Trade Receivables of the Domestic Loan Parties multiplied by the Receivables Advance
Rate;
minus
(d)
the then amount of all Availability Reserves.
“Domestic Committed Borrowing” means a borrowing consisting of simultaneous Domestic Committed Loans of the same Type and, in
the case of LIBOR Rate Loans, having the same Interest Period made by each of the Domestic Lenders pursuant to Section 2.01.
“Domestic Committed Loan” means any loan at any time made by any Domestic Lender pursuant to Section 2.01.
“Domestic Commitments” means, as to each Domestic Lender, its obligation to (a) make Domestic Committed Loans to the Domestic
Borrowers pursuant to Section 2.01, (b) make Domestic Committed Loans to the Foreign Borrower pursuant to Section 2.01(c), (c) purchase
participations in Domestic L/C Obligations, and (c) purchase participations in Swing Line Loans made to the Domestic
(21)
Borrowers or the Foreign Borrower (to the extent based on Domestic Availability), in an aggregate principal amount at any one time outstanding
not to exceed the amount set forth opposite such Domestic Lender’s name on Schedule 2.01 or in the Assignment and Assumption pursuant to
which such Domestic Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this
Agreement.
“Domestic Concentration Account” has the meaning provided in Section 6.12(c).
“Domestic Credit Extensions” mean each of the following: (a) a Domestic Borrowing and (b) a Domestic L/C Credit Extension.
“Domestic Credit Party” or “Domestic Credit Parties” means (a) individually, (i) each Domestic Lender and its Affiliates, (ii) the
Administrative Agent and its Affiliates, (iii) each L/C Issuer of any Domestic Letter of Credit, (iv) the Arrangers, (v) each beneficiary of any
indemnification obligation undertaken by any Loan Party under any Loan Document with respect to the Obligations, (vi) each holder of any
Other Domestic Liabilities, and (vii) the successors and assigns of each of the foregoing, and (b) collectively, all of the foregoing.
“Domestic L/C Borrowing” means an extension of credit resulting from a drawing under any Domestic Letter of Credit which has not
been reimbursed on or prior to the date required to be reimbursed by the Domestic Borrowers or by the Foreign Borrower pursuant to
Section 2.03(c)(i) or refinanced as a Domestic Committed Borrowing.
“Domestic L/C Credit Extension” means, with respect to any Domestic Letter of Credit, the issuance thereof or extension of the expiry
date thereof, or the increase of the amount thereof.
“Domestic L/C Obligations” means, as at any date of determination and without duplication, the aggregate Stated Amount of all
outstanding Domestic Letters of Credit plus the aggregate of all Unreimbursed Amounts under Domestic Letters of Credit, including all
Domestic L/C Borrowings.
“Domestic Lenders” means the Lenders having Domestic Commitments from time to time or at any time.
“Domestic Letter of Credit” means each Letter of Credit issued hereunder for the account of the Domestic Borrowers or the Foreign
Borrower (to the extent based on Domestic Availability).
“Domestic Letter of Credit Sublimit” means an amount equal to $ 50,000,000 70,000,000 . The Domestic Letter of Credit Sublimit is
part of, and not in addition to, the Domestic Total Commitments. A permanent reduction of the Domestic Total Commitments shall not require a
corresponding pro rata reduction in the Domestic Letter of Credit Sublimit; provided, however, that if the Domestic Total Commitments are
reduced to an amount less than the Domestic Letter of Credit Sublimit, then the Domestic Letter of Credit Sublimit shall be reduced to an
amount equal to (or, at Parent’s option, less than) the Domestic Total Commitments.
“Domestic Loan” means an extension of credit by a Domestic Lender to the Domestic Borrowers or the Foreign Borrower (to the extent
based on Domestic Availability) under Article II in the form of a Committed Loan or a Swing Line Loan.
“Domestic Loan Cap” means, at any time of determination, the lesser of (a) the Domestic Total Commitments or (b) the Domestic
Borrowing Base.
(22)
“Domestic Loan Parties” means, collectively, the Domestic Borrowers and each Domestic Subsidiary that is a Guarantor of the
Obligations. “Domestic Loan Party” means any one of such Persons.
“Domestic Note” means a promissory note made by the Domestic Borrowers in favor of a Domestic Lender evidencing Domestic Loans
made by such Domestic Lender, substantially in the form of Exhibit C-2.
“Domestic Overadvance” means a Domestic Credit Extension to the extent that, immediately after the making of such Domestic Credit
Extension, the aggregate principal balance of all Domestic Credit Extensions then outstanding exceeds the Domestic Loan Cap as then in effect.
“Domestic Parallel Debt” has the meaning specified in Section 9.18 .
“Domestic Pension Plan” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a
Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by a Loan Party or any ERISA Affiliate or to which a
Loan Party or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in
Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.
“Domestic Prime Rate Loan” means a Loan that bears interest based on the U.S. Prime Rate.
“Domestic Principal Obligations” means the Obligations owing to the Credit Parties (other than the Domestic Parallel Debt and the
Obligations of the Domestic Loan Parties).
“Domestic Swing Line Note” means the promissory note of the Domestic Borrowers substantially in the form of Exhibit C-4, payable
to the order of the applicable Swing Line Lender, evidencing the Swing Line Loans made by such Swing Line Lender to the Domestic
Borrowers or to the Foreign Borrower (to the extent based on Domestic Availability).
“Domestic Swing Line Sublimit” means an amount equal to the lesser of (a) $25,000,000 and (b) the Domestic Total Commitments.
The Domestic Swing Line Sublimit is part of, and not in addition to, the Domestic Total Commitments.
“Domestic Subsidiary” means any Subsidiary that is not a Foreign Subsidiary.
“Domestic Total Commitments” means the aggregate of the Domestic Commitments of all Domestic Lenders. On the Closing
Effective Date, the Domestic Total Commitments are $ 400,000,000 500,000,000 .
“Domestic Total Outstandings” means, without duplication, the aggregate Outstanding Amount of all Domestic Loans and all Domestic
L/C Obligations.
“Dutch FSA” means the Dutch Financial Supervision Act ( Wet op het financieel toezicht ) and its subordinated and implementing
decrees and regulations (as amended and restated from time to time).
“Dutch Loan Party” means a Loan Party or any subsidiary thereof that is incorporated or organised under Dutch law.
“Dutch Pledge of Intragroup Loan Receivables” means the deed of pledge of intragroup loan receivables governed by Dutch law,
between the Foreign Borrower as pledgor and the Collateral Agent
(23)
and the Canadian Agent as pledgees, pursuant to which all intragroup loan receivables owed to the Foreign Borrower by any Foreign Subsidiary
will be pledged in favor of the Collateral Agent and the Canadian Agent.
“Dutch Pledge of Limited Partnership Rights” means the deed of pledge of limited partnership rights governed by Dutch law, between
Sally Beauty International, Inc. as pledgor and the Collateral Agent as pledgee, pursuant to which 65% of the rights of Sally Beauty
International, Inc. under the Dutch law governed limited partnership Sally Beauty International Holdings C.V. will be pledged in favor of the
Collateral Agent.
“Effective Date” means the first date all the conditions precedent in Section 4.01 are satisfied or waived in accordance with
Section 10.01.
“Dutch Pledge of Shares” means the notarial deed of pledge of shares governed by Dutch law, between Sally Beauty International, Inc.
as pledgor, Sally Beauty Supply B.V. as company and the Collateral Agent as pledgee, pursuant to which 65% of the issued and outstanding
shares in the capital of Sally Beauty Supply B.V. will be pledged in favor of the Collateral Agent.
“Dutch Security Documents” means the Dutch Pledge of Shares, the Dutch Pledge of Intragroup Loan Receivables and the Dutch
Pledge of Limited Partnership Rights.
“Eligible Assignee” means (a) a Credit Party or any of its Affiliates; (b) a bank, insurance company, or Person engaged in the business
of making commercial loans, which Person, together with its Affiliates, has a combined capital and surplus in excess of $250,000,000; (c) an
Approved Fund; (d) any Person to whom a Credit Party assigns its rights and obligations under this Agreement as part of an assignment and
transfer of such Credit Party’s rights in and to a material portion of such Credit Party’s portfolio of asset based credit facilities, and (e) any other
Person (other than a natural person) approved by (i) the Administrative Agent, and (ii) unless an Event of Default has occurred and is continuing,
the Parent (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, “Eligible Assignee”
shall not include a Permitted Holder, a Loan Party or any of the Loan Parties’ or Permitted Holders Affiliates or Subsidiaries.
“Eligible Credit Card Receivables” means at the time of any determination thereof, each Credit Card Receivable that satisfies the
following criteria at the time of creation and continues to meet the same at the time of such determination: such Credit Card Receivable (i) has
been earned by performance and represents the bona fide amounts due to a Domestic Loan Party or the Canadian Borrower, as applicable, from a
credit card payment processor and/or credit card issuer, and in each case originated in the ordinary course of business of such Domestic Loan
Party or Canadian Borrower, and (ii) is not ineligible for inclusion in the calculation of the Domestic Borrowing Base or the Canadian
Borrowing Base, as applicable, pursuant to any of clauses (a) through (j) below. Without limiting the foregoing, to qualify as an Eligible Credit
Card Receivable, an Account a Credit Card Receivable shall indicate no Person other than a Domestic Loan Party or the Canadian Borrower as
payee or remittance party. In determining the amount to be so included, the face amount of an Account a Credit Card Receivable shall be
reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims,
credits or credits pending, promotional program allowances, price adjustments, finance charges or other allowances (including any amount that a
Borrower may be obligated to rebate to a customer, a credit card payment processor, or credit card issuer pursuant to the terms of any agreement
or understanding (written or oral)) and (ii) the aggregate amount of all cash received in respect of such Account Credit Card Receivable but not
yet applied by the applicable Loan Parties to reduce the amount of such Credit Card Receivable. Except as otherwise agreed by the
Administrative Agent, any Credit
(24)
Card Receivable included within any of the following categories shall not constitute an Eligible Credit Card Receivable:
(a)
Credit Card Receivables which do not constitute a “payment intangible” (as defined in the UCC) or an Account;
(b)
Credit Card Receivables that have been outstanding for more than five (5) Business Days from the date of sale;
Credit Card Receivables (i) that are not subject to a perfected first-priority security interest and Lien in favor of the
(c)
Collateral Agent or Canadian Agent, as applicable, or (ii) with respect to which a Domestic Loan Party or the Canadian Borrower does
not have good, valid and marketable title thereto, free and clear of any Lien (other than Liens granted to the Collateral Agent or
Canadian Agent, as applicable, pursuant to the Security Documents and Permitted Encumbrances);
Credit Card Receivables which are disputed, are with recourse, or with respect to which a claim, counterclaim, offset
(d)
or chargeback has been asserted (to the extent of such claim, counterclaim, offset or chargeback);
(e)
Credit Card Receivables as to which the processor has the right under certain circumstances to require a Loan Party
to repurchase the Accounts Credit Card Receivables from such credit card processor;
(f)
Credit Card Receivables due from an issuer or payment processor of the applicable credit card which is the subject of
any proceeding under any Debtor Relief Law;
(g)
Credit Card Receivables which are not a valid, legally enforceable obligation of the applicable issuer with respect
thereto;
(h)
Credit Card Receivables which do not conform to all representations, warranties or other provisions in the Loan
Documents relating to Credit Card Receivables;
(i)
Credit Card Receivables owed to a Loan Party which is not a Material Subsidiary and which is the subject of any
case under any Debtor Relief Law; or
(j)
collection.
Credit Card Receivables which the Administrative Agent determines in its Permitted Discretion to be uncertain of
“Eligible Inventory” means, as of the date of determination thereof, without duplication, items of Inventory of a Domestic Loan Party
or the Canadian Borrower that are finished goods, merchantable and readily saleable to the public in the ordinary course of business, in each case
that, (A) complies with each of the representations and warranties respecting Inventory made by the Loan Parties in the Loan Documents, and
(B) is not excluded as ineligible by virtue of one or more of the criteria set forth below. The following items of Inventory shall not be included
in Eligible Inventory:
(a)
Inventory that is not solely owned by a Domestic Loan Party or the Canadian Borrower or a Domestic Loan Party or
the Canadian Borrower does not have good and valid title thereto;
(25)
(b)
Inventory that is leased by or is on consignment to a Domestic Loan Party or the Canadian Borrower or which is
consigned by a Domestic Loan Party or the Canadian Borrower to a Person which is not a Loan Party;
(c)
Inventory that is not located in the United States of America in the case of Inventory of a Domestic Borrower
(excluding territories or possessions of the United States) or Canada in the case of Inventory of the Canadian Borrower (excluding
territories or possessions thereof) at a location that is owned or leased by a Loan Party, except Inventory in transit between such owned
or leased locations;
(d)
Inventory that is comprised of goods which (i) are damaged, defective, “seconds,” or otherwise unmerchantable,
(ii) are to be returned to the vendor, (iii) are obsolete or slow moving, or custom items, work-in-process, raw materials, or that
constitute spare parts, promotional, marketing, packaging and shipping materials or supplies used or consumed in a Domestic Loan
Parties’ or the Canadian Borrower’s business, (iv) are seasonal in nature and which have been packed away for sale in the subsequent
season, (v) not in compliance with all standards imposed by any Governmental Authority having regulatory authority over such
Inventory, its use or sale, or (vi) are bill and hold goods;
(e)
Inventory that is not subject to a perfected first-priority security interest and Lien in favor of the Collateral Agent or
the Canadian Agent, as applicable;
(f)
Inventory that consists of samples, labels, bags, and other similar non-merchandise categories;
(g)
Inventory that is not insured in compliance with the provisions of Section 5.10 hereof;
(h)
Inventory that has been sold but not yet delivered or as to which a Loan Party has accepted a deposit;
(i)
Inventory that is subject to any licensing, patent, royalty, trademark, trade name or copyright agreement with any
third party from which any Loan Party or any of its Subsidiaries has received notice of a dispute in respect of any such agreement, or
which would require the payment of fees or royalties to, or the consent of, the licensor under such agreement for any sale or other
disposition of such Inventory by the Administrative Agent or the Canadian Agent, unless the Administrative Agent has imposed a
Reserve for the payment of any such fees or royalties;
(j)
Relief Law; or
Inventory of a Loan Party which is not a Material Subsidiary and which is the subject of any case under any Debtor
Inventory acquired in a Permitted Acquisition and which is not of the type usually sold in the ordinary course of the
(k)
Loan Parties’ business, unless and until the Administrative Agent has completed or received (A) an appraisal of such Inventory from
appraisers satisfactory to the Administrative Agent and establishes Inventory Reserves (if applicable) therefor, and otherwise agrees that
such Inventory shall be deemed Eligible Inventory, and (B) such other due diligence as the Agents may require, all of the results of the
foregoing to be reasonably satisfactory to the Agents.
Notwithstanding the foregoing, the Administrative Agent may, from time to time, in the exercise of its Permitted Discretion,
on not less than three (3) Business Days’ prior notice to the
(26)
Parent, change the criteria for Eligible Inventory as reflected on the Borrowing Base Certificate which the Administrative Agent has
determined in the exercise of its Permitted Discretion could adversely affect, or would reasonably be expected to adversely affect,
Eligible Inventory in any material respect. Any such change in criteria shall have a reasonable relationship to the event, condition or
other circumstance that is the basis for such change. Upon delivery of the notice of such change pursuant to the foregoing sentence, the
Administrative Agent shall be available to discuss the proposed change, and the applicable Borrower may take such action as may be
required so that the event, condition or circumstance that is the basis for such change no longer exists, in a manner and to the extent
reasonably satisfactory to the Administrative Agent in the exercise of its Permitted Discretion. Any Inventory of the Loan Parties that
is not Eligible Inventory shall nevertheless be part of the Collateral as and to the extent provided in the Security Documents.
“Eligible Trade Receivables” means Accounts arising from the sale of the Domestic Loan Parties’ or the Canadian Borrower’s
Inventory (other than those consisting of Credit Card Receivables) that satisfies the following criteria at the time of creation and continues to
meet the same at the time of such determination: such Account (i) has been earned by performance and represents the bona fide amounts due to a
Domestic Loan Party or the Canadian Borrower from an account debtor, and in each case originated in the ordinary course of business, and
(ii) in each case is acceptable to the Administrative Agent in its Permitted Discretion, and is not ineligible for inclusion in the calculation of the
Domestic Borrowing Base or the Canadian Borrowing Base, as applicable, pursuant to any of clauses (a) through (u) below. Without limiting
the foregoing, to qualify as an Eligible Trade Receivable, an Account shall indicate no Person other than a Domestic Loan Party or the Canadian
Borrower as payee or remittance party. In determining the amount to be so included, the face amount of an Account shall be reduced by, without
duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending,
promotional program allowances, price adjustments, finance charges or other allowances (including any amount that a Loan Party may be
obligated to rebate to a customer pursuant to the terms of any agreement or understanding (written or oral)) and (ii) the aggregate amount of all
cash received in respect of such Account but not yet applied by the Loan Parties to reduce the amount of such Eligible Trade Receivable. Any
Account included within any of the following categories shall not constitute an Eligible Trade Receivable:
(a)
Accounts that are not evidenced by an invoice;
(b)
Accounts that the account debtor has failed to pay within ninety (90) days of original invoice date;
(c)
Accounts owed by an account debtor (or its Affiliates) where 50% or more of the total amount of all Accounts owed
by that account debtor (or its Affiliates) are deemed ineligible under clause (b) above;
(d)
Accounts having any credit balances greater than ninety (90) days past their invoice date,
Accounts with respect to an Account Debtor whose total obligations owing to Borrowers or Subsidiary Guarantors
(e)
exceed 10% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage;
provided , however , that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage
shall be determined by the Administrative Agent based on all of the otherwise Eligible Accounts prior to giving effect to any
eliminations based upon the foregoing concentration limit,
(27)
(f)
Accounts (i) that are not subject to a perfected first-priority security interest and Lien in favor of the Collateral Agent
or the Canadian Agent, as applicable, or (ii) with respect to which a Domestic Loan Party or the Canadian Borrower does not have
good, valid and marketable title thereto, free and clear of any Lien (other than Liens granted to the Collateral Agent or the Canadian
Agent, as applicable, pursuant to the Security Documents and Permitted Encumbrances);
(g)
Accounts which are disputed or with respect to which a claim, counterclaim, offset or chargeback has been asserted,
but only to the extent of such dispute, counterclaim, offset or chargeback;
(h)
Accounts which arise out of any sale made not in the ordinary course of business, made on a basis other than upon
credit terms usual to the business of the Loan Parties;
(i)
Accounts which are owed by any Affiliate or any employee of a Loan Party;
(j)
Accounts for which all consents, approvals or authorizations of, or registrations or declarations with any
Governmental Authority required to be obtained, effected or given in connection with the performance of such Account by the account
debtor or in connection with the enforcement of such Account by the Agents have not been duly obtained, effected or given and are not
in full force and effect;
(k)
Accounts due from an account debtor which is the subject of any proceeding under any Debtor Relief Law, has had a
trustee or receiver appointed for all or a substantial part of its property, has made an assignment for the benefit of creditors or has
suspended its business;
(l)
Accounts due from (i) the federal government of the United States of America unless such Accounts have been
assigned by the applicable Borrower to the Administrative Agent in accordance with the Federal Assignment of Claims Act of 1940 or
(ii) the federal government of Canada or a political subdivision thereof, or any province or territory, or any municipality or department
or agency or instrumentality thereof unless the provisions of the Financial Administration Act (Canada) or any applicable provincial,
territorial or municipal law of similar purpose and effect restricting the assignment thereof, as the case may be, have been complied
with, or any other Governmental Authority except to the extent reasonably acceptable to the Agents;
(m)
Accounts (i) owing from any Person that is also a supplier to or creditor of a Loan Party or any of its Subsidiaries
unless such Person has waived any right of setoff in a manner acceptable to the Administrative Agent, or (ii) representing any
manufacturer’s or supplier’s credits, discounts, incentive plans or similar arrangements entitling a Loan Party or any of its Subsidiaries
to discounts on future purchase therefrom;
Accounts arising out of sales on a bill-and-hold, guaranteed sale, sale-or-return, sale on approval or consignment
(n)
basis or subject to any right of return;
(o)
Accounts arising out of sales to account debtors outside the United States (with respect to Accounts of a Domestic
Borrower) or Canada (with respect to Accounts of the Canadian Borrower), unless such Accounts are fully backed by an irrevocable
letter of credit on terms, and issued by a financial institution, acceptable to the Administrative Agent and such irrevocable letter of
credit is in the possession of, and drawable by, the Administrative Agent, or
(28)
Canadian Agent, as applicable or other assurances of payment have been provided as determined in the Administrative Agent’s sole
discretion ;
(p)
Accounts evidenced by a promissory note or other instrument;
(q)
Accounts consisting of amounts due from vendors as rebates or allowances;
(r)
Accounts which are in excess of the credit limit for such account debtor established by the Loan Parties in the
ordinary course of business and consistent with past practices;
(s)
Accounts which include extended payment terms (datings) beyond those generally furnished to other account debtors
in the ordinary course of business;
(t)
Accounts owed to a Loan Party which is not a Material Subsidiary and which is the subject of any case under any
Debtor Relief Law;
(u)
Accounts which the Administrative Agent determines in its Permitted Discretion to be uncertain of collection; or
Accounts acquired in a Permitted Acquisition, unless and until the Agents (i) have completed due diligence with
(k)
respect to such Accounts as the Agents may require, all of the results of the foregoing to be reasonably satisfactory to the Agents, and
(ii) establish Receivables Reserves (if applicable) therefor.
Notwithstanding the foregoing, the Administrative Agent may, from time to time, in the exercise of its Permitted Discretion,
on not less than three (3) Business Days’ prior notice to the Parent, change the criteria for Eligible Trade Receivables as reflected on the
Borrowing Base Certificate which the Administrative Agent has determined in the exercise of its Permitted Discretion could adversely
affect, or would reasonably be expected to adversely affect, Eligible Trade Receivables in any material respect. Any such change in
criteria shall have a reasonable relationship to the event, condition or other circumstance that is the basis for such change. Upon
delivery of the notice of such change pursuant to the foregoing sentence, the Administrative Agent shall be available to discuss the
proposed change, and the applicable Borrower may take such action as may be required so that the event, condition or circumstance that
is the basis for such change no longer exists, in a manner and to the extent reasonably satisfactory to the Administrative Agent in the
exercise of its Permitted Discretion. Any Accounts of the Loan Parties that are not Eligible Trade Receivables shall nevertheless be
part of the Collateral as and to the extent provided in the Security Documents.
Notwithstanding the foregoing, if the Accounts Receivable Reporting Requirement is not then in effect and the Borrowers have not elected to
provide detailed reporting of Accounts, then 20% of all Accounts (whether or not eligible) as set forth in the most recent Borrowing Base
Certificate delivered to the Administrative Agent shall be deemed ineligible and, other than the requirement that in all events the determination
of eligibility shall require compliance with subsections (f), (h) and (t) above, no further determination of eligibility (including any adjustments or
determinations of eligibility using the Administrative Agent’s Permitted Discretion) set forth in this definition or otherwise shall be made, except
that the foregoing shall in no way limit the right of the Administrative Agent to establish and maintain the Dilution Reserve (as defined in the
definition of Reserves). Any calculation or report made pursuant to this paragraph will be on the same basis that the Administrative Agent and
the Loan Parties’ utilized prior to the Closing Effective Date in agreeing to the foregoing provision.
(29)
“Environmental Laws” means any and all federal, state, provincial, territorial, municipal, local, and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating
to pollution and the protection of the environment or the release of any materials into the environment, including those related to Hazardous
Materials, air emissions and discharges to waste or public systems.
“Environmental Liability” means any liability, obligation, damage, loss, claim, action, suit, judgment, order, fine, penalty, fee, expense,
or cost, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of any
Borrower, any other Loan Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal or presence of any Hazardous Materials,
(c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any
contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“Equipment” shall mean “equipment”, as defined in the UCC or in the PPSA, and shall also mean all furniture, store fixtures, motor
vehicles, rolling stock, machinery, office equipment, plant equipment, tools, dies, molds, and other goods, property, and assets which are used
and/or were purchased for use in the operation or furtherance of a Loan Party’s business, and any and all accessions or additions thereto, and
substitutions therefor.
“Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such
Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other
ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other
ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or
such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein),
whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of
determination.
“Equivalent CD$ Amount” means, on any date, the rate at which Canadian Dollars may be exchanged into Dollars, determined by
reference to the Bank of Canada noon rate as published on the Reuters Screen BOFC on the immediately preceding Business Day. In the event
that such rate does not appear on such Reuters page, “Equivalent Amount” shall mean, on any date, the amount of Dollars into which an amount
of Canadian Dollars may be converted or the amount of Canadian Dollars into which an amount of Dollars may be converted, in either case, at,
in the case of the Canadian Borrower, the Canadian Agent’s spot buying rate in Toronto as at approximately 12:00 noon (Toronto time) on such
date and, in the case of a Domestic Borrower, the Administrative Agent’s spot buying rate in New York as at approximately 12:00 noon (New
York City time) on the immediately preceding Business Day.
“Equivalent Amount” means, as applicable, (a) the Equivalent CD$ Amount, and (b) with respect to any other Optional Currency, the
equivalent amount thereof determined by the Administrative Agent at such time on the basis of the Spot Rate.
“ERISA” means the Employee Retirement Income Security Act of 1974.
“ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Loan Parties within the
meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the
Code).
(30)
“ERISA Event” means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by a Loan Party or any ERISA Affiliate
from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)
(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial
withdrawal by a Loan Party or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization;
(d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or
the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which constitutes
grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer
Plan; or (f) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of
ERISA, upon a Loan Party or any ERISA Affiliate.
“Euros” and the designation “ € ”: the currency introduced on January 1, 1999 at the start of the third stage of European economic and
monetary union pursuant to the Treaty (expressed in euros).
“Euribor Rate” means for any Interest Period with respect to a Euribor Rate Loan, the rate at which euro interbank term deposits in the
applicable currency are being offered by one prime bank to another within the EMU zone as determined by the Administrative Agent at
approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period, (for delivery on the first day
of such Interest Period) with a term equivalent to such Interest Period.
“Euribor Rate Loan” means a Loan that bears interest based on the Euribor Rate.
“Eurocurrency Interbank Market” means any lawful recognized market in which deposits of Dollars and the relevant Optional
Currencies are offered by international banking units of United States banking institutions and by foreign banking institutions to each other and
in which foreign currency and exchange operations are customarily conducted.
“Event of Default” has the meaning specified in Section 8.01. An Event of Default shall be deemed to be continuing unless and until
that Event of Default has been duly waived as provided in Section 10.01 hereof.
“Excess Availability” means the difference between (a) the Loan Cap and (b) the outstanding Credit Extensions to the Borrowers.
“Excluded Swap Obligation” means, with respect to any Loan Party, any Swap Obligation if, and to the extent that, all or a
portion of the guaranty of such Loan Party under the Facility Guaranty of, or the grant under a Loan Document by such Loan Party of
a security interest to secure, such Swap Obligation (or any guaranty thereof) is or becomes illegal under the Commodity Exchange Act
(or the application or official interpretation thereof) by virtue of such Loan Party’s failure for any reason to constitute an “eligible
contract participant” as defined in the Commodity Exchange Act (determined after giving effect to Section 10.26 hereof and any and all
guarantees of such Loan Party’s Swap Obligations by other Loan Parties) at the time the guaranty of such Loan Party, or grant by such
Loan Party of a security interest, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a Master
Agreement governing more than one Swap Contract, such exclusion shall apply only to the portion of such Swap Obligation that is
attributable to Swap Contracts for which such guaranty or security interest becomes illegal.
“Excluded Taxes” means , with respect to any Agent, any Lender, the L/C Issuer or any other recipient of any payment to be made by
or on account of any obligation of any Loan Party hereunder, (a) taxes Recipient, any of the following Taxes imposed on or with respect to
any Recipient or required to be withheld or deducted from a payment to a Recipient (a) Taxes imposed on or measured by its overall net
income (however denominated), and franchise taxes imposed on it Taxes (in lieu of net income taxes), by the jurisdiction (or any political
subdivision thereof) under the laws of which such receipient is organized or in which and branch profits Taxes, in each case, (i) imposed as a
result of such Recipient being
(31)
organized under the laws of, or having its principal office is located or in which it is otherwise treated as doing business or , in the case of any
Lender, in which its applicable Lending Office is located, (b) any branch profits taxes imposed by the United States or any similar tax imposed
by any other jurisdiction in which any Loan Party is located, (c Lending Office located in, the jurisdiction imposing such Tax (or any
political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes
imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment
pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant
to an assignment request by the Borrower under Section 10.13) or (ii) such Lender changes its Lending Office, except in each case to the
extent that, pursuant to Section 3.01(a)(ii) or (c), amounts with respect to such Taxes were payable either to such Lender’s assignor
immediately before such Lender became a party hereto or to such Lender immediately before it changed its Lending Office, (c) Taxes
attributable to such Recipient’s failure to comply with Section 3.01(e), (d ) in the case of a Foreign Lender (other than a Canadian Lender or
an assignee pursuant to a request by the Parent under Section 10.13) or L/C Issuer, any withholding tax that is imposed on amounts payable to
such Foreign Lender or L/C Issuer at the time such Foreign Lender or L/C Issuer becomes a party to this Agreement (or designates a new lending
office) or is attributable to such Foreign Lender’s or L/C Issuer’s failure or inability (other than as a result of a Change in Law after such Foreign
Lender or L/C Issuer becomes a party hereto) to comply with Section 3.01(e), except to the extent that such Foreign Lender (or its assignor, if
any) was entitled, at the time of designation of a new Lending Office (or assignment), to receive additional amounts from the Loan Parties with
respect to such withholding tax pursuant to Section 3.01(a), and ( d e ) in the case of a Canadian Lender (other than an assignee pursuant to a
request by the Canadian Borrower under Section 10.13), any withholding tax that is imposed on amounts payable to such Canadian Lender at the
time such Canadian Lender becomes a party to this Agreement (or designates a new Lending Office) or is attributable to such Canadian Lender’s
failure or inability (other than as a result of a Change in Law) to comply with Section 3.01(e), except to the extent that such Canadian Lender (or
its assignor, if any) was entitled, at the time of designation of a new Lending Office (or assignment), to receive additional amounts from the
Canadian Borrower with respect to such withholding tax pursuant to Section 3.01(a), and (f) any U.S. federal withholding Taxes imposed
pursuant to FATCA. For the avoidance of doubt, any Participant that is entitled to the benefits of Section 3.01(a) shall be treated as a Lender
for purposes of this defined term.
“Executive Order” has the meaning set forth in Section 10.18.
“Existing Credit Agreement” means that certain Credit Agreement dated as of November 16, 2006 among Sally Holdings LLC, General
Electric Capital Corporation, as administrative agent (successor to Merrill Lynch Capital Corporation) and the other parties thereto.
“Existing Letters of Credit” means those outstanding letters of credit issued under the Existing Credit Agreement listed on Schedule
1.02 hereto.
“Facility Guaranty” means (a) a Guarantee of the Obligations (including, without limitation, for clarity, the Canadian Liabilities and
the Foreign Liabilities) made by a Guarantor which is a Domestic Loan Party in favor of the Administrative Agent and the other Credit Parties,
in form reasonably satisfactory to the Administrative Agent, (b) a Guarantee of the Canadian Liabilities made by a Guarantor which is a
Canadian Loan Party in favor of the Canadian Agent and the other Canadian Credit Parties, in form reasonably satisfactory to the Administrative
Agent, and (c) a Guarantee of the Foreign Liabilities
(32)
made by the Canadian Borrower in favor of the Canadian Agent and the other Canadian Credit Parties, to the extent of any Credit Extensions
received by the Foreign Borrower on account of Canadian Availability, each in form reasonably satisfactory to the Administrative Agent.
“FATCA” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor
version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official
interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code.
“Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve
Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate
for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day,
and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate
(rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined
by the Administrative Agent.
“Fee Letter” means the letter agreement, dated September 23 July 5 , 2010 2013 , among the Parent, the Administrative Agent and
Banc of America Securities LLC Merrill Lynch Pierce, Fenner & Smith Incorporated .
“Fiscal Month” means any fiscal month of any Fiscal Year, which month shall generally end on the last day of each calendar month in
accordance with the fiscal accounting calendar of the Loan Parties.
“Fiscal Quarter” means any fiscal quarter of any Fiscal Year, which quarters shall generally end on the last day of each March, June,
September or December of such Fiscal Year in accordance with the fiscal accounting calendar of the Loan Parties.
“Fiscal Year” means any period of twelve (12) consecutive months ending on September 30 of each calendar year.
“Foreign Assets Control Regulations” has the meaning set forth in Section 10.18.
“Foreign Borrower” has the meaning specified in the introductory paragraph hereto.
“Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Parent is resident for
tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a
single jurisdiction.
“Foreign Liabilities” means (a) all advances to, and debts (including principal, interest, fees, costs, and expenses), liabilities,
obligations, covenants, indemnities, and duties of, the Foreign Borrower arising under any Loan Document or otherwise with respect to any
Loan or Letter of Credit (including payments in respect of reimbursement of disbursements, interest thereon and obligations to provide cash
collateral therefor), whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now
existing or hereafter arising and including interest, fees, costs, expenses and indemnities that accrue after the commencement by or against the
Foreign Borrower or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such
proceeding, regardless of whether such interest, fees, expenses and other amounts are allowed claims in such proceeding.
(33)
“Foreign Note” means a promissory note made by the Foreign Borrower in favor of a Canadian Lender evidencing Canadian Loans
made by such Canadian Lender to the Foreign Borrower, substantially in the form of Exhibit C-6, or a promissory note made by the Foreign
Borrower in favor of a Domestic Lender evidencing Domestic Loans made by such Domestic Lender to the Foreign Borrower, substantially in
the form of Exhibit C-5.
“Foreign Parallel Debt” has the meaning specified in Section 9.19.
“ Foreign Principal Obligations” means the Obligations owing to the Credit Parties (other than the Foreign Parallel Debt).
“Foreign Subsidiary” means each Subsidiary of the Parent (i) which is organized and existing under the laws of any jurisdiction outside
of the United States of America or (ii) that is a Foreign Subsidiary Holdco, or (iii) that is a direct Subsidiary of a Foreign Subsidiary. For the
avoidance of doubt, any Subsidiary of the Parent that is organized and existing under the laws of Puerto Rico shall be a Foreign Subsidiary.
“Foreign Subsidiary Holdco” means any Subsidiary of the Parent, so long as such Subsidiary has no material assets other than securities
or Indebtedness of one or more Foreign Subsidiaries (or Subsidiaries thereof), and intellectual property relating to such Foreign Subsidiaries (or
Subsidiaries thereof) and other assets relating to an ownership interest in any such securities, Indebtedness or Subsidiaries.
“FRB” means the Board of Governors of the Federal Reserve System of the United States.
“Fronting Exposure” means, at any time there is a Defaulting Lender, (a) with respect to the L/C Issuer, such Defaulting
Lender’s Applicable Percentage of the outstanding L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s
participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with
respect to the Swing Line Lender, such Defaulting Lender’s Applicable Percentage of Swing Line Loans other than Swing Line Loans as
to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders in accordance with the terms hereof.
“Fronting Fee” has the meaning specified in Section 2.03(j).
“FSCO” means the Financial Services Commission of Ontario and any Person succeeding to the functions thereof and includes the
Ontario Superintendent of Financial Services and any other Governmental Authority empowered or created by the Pension Benefits Act
(Ontario) or any Governmental Authority of any other Canadian jurisdiction exercising similar functions in respect of any Canadian Pension
Plan of any Canadian Loan Party and any Governmental Authority succeeding to the functions thereof.
“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise
investing in commercial loans and similar extensions of credit in the ordinary course of its business.
“GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United
States, that are applicable to the circumstances as of the date of determination, consistently
(34)
applied; provided that , with respect to Foreign Subsidiaries of Parent organized under the laws of Canada, or any province or territory thereof,
unless GAAP is being applied, “GAAP” shall mean principles which are consistent with those promulgated or adopted by the Canadian Institute
of Chartered Accountants and its predecessors (or successors) in effect and applicable to the accounting period in respect of which reference to
GAAP is being made.
“General Security Agreements” means (a) each General Security Agreement dated as of the Closing Date among the respective
Canadian Loan Parties and the Canadian Agent for the benefit of the Canadian Credit Parties and (b) any other general security agreement
entered into after the Closing Date by any Guarantor of the Canadian Liabilities, in form and substance satisfactory to the Administrative Agent.
“Governmental Authority” means the government of the United States, Canada, or any other nation, or any political subdivision thereof,
whether state, local, provincial, territorial or municipal and any agency, authority, instrumentality, regulatory body, court, tribunal, central bank
or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government
(including any supra-national bodies such as the European Union or the European Central Bank).
“Guarantee” means, as to any Person, (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the “primary obligor”) in any manner,
whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of
assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation,
(iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the
primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring
in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such
obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other
obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or
otherwise, of any holder of such Indebtedness to obtain any such Lien). The amount of any Guarantee shall be deemed to be an amount equal to
the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith.
The term “Guarantee” as a verb has a corresponding meaning.
“Guarantor” means (a) with respect to the Obligations (including, without limitation, the Canadian Liabilities and the Foreign
Liabilities), the Persons named on Schedule 1.01 hereof as Guarantors and each other Person that shall be required to execute and deliver a
Facility Guaranty of the Obligations pursuant to Section 6.11(a), (b) with respect to the Canadian Liabilities, the Persons named on Schedule
1.01 hereof as Canadian Guarantors (including the Foreign Borrower) and each other Person that shall be required to execute and deliver a
Facility Guaranty of the Canadian Liabilities pursuant to Section 6.11(b), and (c) with respect to the Foreign Liabilities, the Persons named on
Schedule 1.01 hereof as Foreign Guarantors (including the other Canadian Loan Parties) and each other Person that shall be required to execute
and deliver a Facility Guaranty of the Foreign Liabilities pursuant to Section 6.11(b) , and (d) with respect to any Swap Obligation of a
Specified Loan Party (determined before giving effect to Section 10.26) under the Facility Guaranty, each Borrower .
(35)
“Hazardous Materials” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other
pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas,
infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.
“Holdings” means Sally Beauty Holdings, Inc., a Delaware corporation, the ultimate parent of the Loan Parties, and any successor
thereto.
“Honor Date” has the meaning specified in Section 2.03(c)(i) .
“Increase Effective Date” shall have the meaning provided therefor in Section 2.15(d).
“Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as
indebtedness or liabilities in accordance with GAAP:
(a)
all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds,
debentures, notes, loan agreements or other similar instruments;
(b)
the maximum amount of all unreimbursed obligations of such Person arising under letters of credit (including
standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments that secure Indebtedness;
(c)
net obligations of such Person under any Swap Contract;
(d)
all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts
payable in the ordinary course of business);
indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such
(e)
Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness
shall have been assumed by such Person or is limited in recourse;
(f)
indebtedness (a) in respect of any Capital Lease Obligation of any Person, the capitalized amount thereof that would
appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease
Obligation of any Person, the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable
agreement or instrument that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such
lease, agreement or instrument were accounted for as a capital lease;
(g)
all obligations on account of Disqualified Stock; and
(h)
all Guarantees of such Person in respect of any of the foregoing.
For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a
joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such
Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be
deemed to be the Swap Termination Value thereof as of such date.
(36)
“Indemnified Taxes” means (a) Taxes , other than Excluded Taxes , imposed on or with respect to any payment made by or on
account of any obligation of any Loan Party under any Loan Document and (b) to the extent not otherwise described in (a), Other
Taxes .
“Indemnitees” has the meaning specified in Section 10.04(b).
“Information” has the meaning specified in Section 10.07.
“Intellectual Property” means all present and future: trade secrets, know-how and other proprietary information; trademarks, trademark
applications, internet domain names, service marks, trade dress, trade names, business names, designs, logos, slogans (and all translations,
adaptations, derivations and combinations of the foregoing) indicia and other source and/or business identifiers, and all registrations or
applications for registrations which have heretofore been or may hereafter be issued thereon throughout the world; copyrights and copyright
applications; (including copyrights for computer programs) and all tangible and intangible property embodying the copyrights, unpatented
inventions (whether or not patentable); patents and patent applications; industrial design applications and registered industrial designs; license
agreements related to any of the foregoing and income therefrom; books, records, writings, computer tapes or disks, flow diagrams, specification
sheets, computer software, source codes, object codes, executable code, data, databases and other physical manifestations, embodiments or
incorporations of any of the foregoing; all other intellectual property; and all common law and other rights throughout the world in and to all of
the foregoing.
“Intercreditor Agreement” means that certain Intercreditor Agreement, dated as of November 16, 2006 (as amended, restated,
supplemented or modified from time to time between (a) Merrill Lynch Capital, a division of Merrill Lynch Financial Business Services, Inc., as
ABL Agent and (b) Merrill Lynch Capital Corporation, as Term Agent, as confirmed pursuant to a letter agreement dated as of November 12,
2010 between the Administrative Agent and the Term Agent.
“Interest Payment Date” means, (a) as to any LIBOR Rate Loan, Euribor Rate Loan, or BA Equivalent Loan, the last day of each
Interest Period applicable to such LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan and the Maturity Date; provided , however , that
if any Interest Period for a LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan exceeds three months, the date that falls every three
months after the beginning of such Interest Period shall also be an Interest Payment Date; and (b) as to any Prime Rate Loan (including a Swing
Line Loan), the first calendar day of each April, July, October and January and the Maturity Date.
“Interest Period” means, as to each LIBOR Rate Loan, Euribor Rate Loan, or BA Equivalent Loan, the period commencing on the date
such Committed Borrowing is disbursed, converted into or continued as such Type of Committed Borrowing and ending on the date one, two,
three or six months thereafter, as selected by the Parent, the Canadian Borrower or the Foreign Borrower, as applicable, in its Committed Loan
Notice; provided that:
(i)
any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next
succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the
next preceding Business Day;
(ii)
any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the
calendar month at the end of such Interest Period;
(37)
(iii)
no Interest Period shall extend beyond the Maturity Date; and
(iv)
notwithstanding the provisions of clause (iii) no Interest Period shall have a duration of less than one (1) month, and
if any Interest Period applicable to a LIBOR Rate Loan, Euribor Rate Loan or a BA Equivalent Loan, as applicable, would be for a
shorter period, such Interest Period shall not be available hereunder.
For purposes hereof, the date of a Committed Borrowing initially shall be the date on which such Committed Borrowing is made and thereafter
shall be the effective date of the most recent conversion or continuation of such Committed Borrowing.
“Intermediate Holdco” means Sally Investment Holdings LLC, a Delaware limited liability company, the direct parent of the Parent, or
any successor thereto.
“Internal Control Event” means a material weakness in, or fraud that involves management or other employees who have a significant
role in, Holdings and/or its Subsidiaries’ internal controls over financial reporting, in each case as described in the Securities Laws.
“Inventory” means all “inventory” as defined in the UCC or the PPSA, as applicable, and shall also include, without limitation, all:
(a) goods which (i) are leased by a Person as lessor, (ii) are held by a Person for sale or lease or to be furnished under a contract of service,
(iii) are furnished by a Person under a contract of service, or (iv) consist of raw materials, work in process, or materials used or consumed in a
business; (b) goods of said description in transit; (c) goods of said description which are returned, repossessed or rejected; and (d) packaging,
advertising, and shipping materials related to any of the foregoing.
“Inventory Reserves” means such reserves as may be established from time to time by the Administrative Agent in its Permitted
Discretion with respect to the determination of the saleability, at retail, of the Eligible Inventory or which reflect such other factors as affect the
market value of the Eligible Inventory. Without limiting the generality of the foregoing, Inventory Reserves may, in the Administrative Agent’s
Permitted Discretion, include (but are not limited to) reserves based on:
(a)
obsolescence;
(b)
seasonality;
(c)
shrink;
(d)
imbalance;
(e)
change in Inventory character;
(f)
change in Inventory composition;
(g)
change in Inventory mix;
(h)
mark-downs (both permanent and point of sale);
(i)
retail mark-ons and mark-ups inconsistent with prior period practice and performance, industry standards, current
business plans or advertising calendar and planned advertising events;
(38)
(j)
out-of-date and/or expired Inventory; and
(k)
seller’s reclamation or repossession rights under any Debtor Relief Laws.
The amount of any Reserve established by the Administrative Agent hereunder shall have a reasonable relationship to the
event, condition or other matter which is the basis for such Reserve. All such Reserves shall be established in good faith and without
duplication for items already excluded from “Eligible Credit Card Receivables”, “Eligible Inventory” and “Eligible Trade Receivables”
as set forth in the lettered clauses in the definitions thereof or Reserves or criteria deducted in computing the Appraised Value of
Eligible Inventory or the imposition of Availability Reserves. To the extent required pursuant to Section 2.01(e), the Administrative
Agent shall give the Borrowers three (3) Business Days prior written notice of the imposition of any Reserve and, upon delivery of such
notice, the Administrative Agent shall be available to discuss the proposed Inventory Reserves and the Borrowers may take such action
as may be required so that the event, condition or other matter that is the basis for the Inventory Reserve no longer exists or has been
otherwise adequately addressed by the Borrowers to the reasonable satisfaction of the Administrative Agent.
“Investment” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the
purchase or other acquisition of Equity Interests of another Person, (b) a loan, advance or capital contribution to, Guarantee or assumption of
debt of, or purchase or other acquisition of any other debt or interest in, another Person, or (c) any Acquisition. For purposes of covenant
compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the
value of such Investment.
“IRS” means the United States Internal Revenue Service.
“ISP” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International
Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance).
“Issuer Documents” means with respect to any Letter of Credit, the Letter Credit Application, and any other document, agreement and
instrument entered into by the L/C Issuer and any Borrower (or any Subsidiary) or in favor the L/C Issuer and relating to any such Letter of
Credit.
“Joinder Agreement” means an agreement, in form satisfactory to the Administrative Agent pursuant to which, among other things, a
Person becomes a party to, and bound by the terms of, this Agreement and/or the other Loan Documents in the same capacity and to the same
extent as either a Borrower or a Guarantor, as the Administrative Agent may determine.
“Landlord Lien State” means such state(s) or province(s) in which a landlord’s claim for rent may have priority over the Lien of the
Collateral Agent or the Canadian Agent, as applicable, in any of the Collateral.
“Laws” means each international, foreign, federal, state, provincial, territorial, municipal and local statute, treaty, rule, guideline,
regulation, ordinance, code and administrative or judicial precedent or authority, including the interpretation or administration thereof by any
Governmental Authority charged with the enforcement, interpretation or administration thereof, and each applicable administrative order,
directed duty, request, license, authorization and permit of, and agreement with, any Governmental Authority, in each case whether or not having
the force of law.
(39)
“L/C Advance” means, (a) with respect to each Domestic Lender, such Lender’s funding of its participation in any L/C Borrowing in
accordance with its Applicable Percentage of all Domestic Lenders, and (b) with respect to each Canadian Lender, such funding of its
participation in any L/C or Borrowing in accordance with Applicable Percentage of all Canadian Lenders.
“L/C Borrowing” means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on
the date when due or refinanced as a Committed Borrowing.
“L/C Credit Extension” means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the
increase of the amount thereof.
“L/C Issuer” means Bank of America, in its capacity as the issuer of Letters of Credit hereunder, and any up to two other Lender
Lenders as requested by the Parent and acceptable to the Administrative Agent. The L/C Issuer may, in its reasonable discretion, arrange for one
or more Letters of Credit to be issued by Affiliates or branches of the L/C Issuer, in which case the term “L/C Issuer” shall include any such
Affiliate or branch with respect to Letters of Credit issued by such Affiliate or branch.
“L/C Obligations” means, collectively, the Canadian L/C Obligations and the Domestic L/C Obligations. For purposes of computing
the amounts available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with
Section 1.06 . For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may
still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the
amount so remaining available to be drawn.
“Lease” means any agreement, whether written or oral, no matter how styled or structured, pursuant to which a Loan Party is entitled to
the use or occupancy of any real property for any period of time.
“Lender” means each Domestic Lender and each Canadian Lender and, as the context requires, includes the Swing Line Lender. Any
Lender may, in its reasonable discretion, arrange for one or more Loans to be made by Affiliates or branches of such Lender, in which case the
term “Lender” shall include any such Affiliate or branch with respect to Loans made by such Affiliate or branch.
“Lending Office” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative
Questionnaire, or such other office or offices as a Lender may from time to time notify the Parent and the Administrative Agent and the
Canadian Agent, as applicable
“Letter of Credit” means each Standby Letter of Credit and each Commercial Letter of Credit issued hereunder and shall include the
Existing Letters of Credit . Letters of Credit issued hereunder may be denominated in the same currencies as Loans may be denominated, as
elected by the Borrowers.
“Letter of Credit Application” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from
time to time in use by the L/C Issuer.
“Letter of Credit Expiration Date” means the day that is seven (7) days prior to the Maturity Date then in effect (or, if such day is not a
Business Day, the next preceding Business Day).
“Letter of Credit Fee” has the meaning specified in Section 2.03(i).
“LIBOR Borrowing” means a Borrowing comprised of LIBOR Rate Loans.
(40)
“LIBOR Rate” means
(a) for any Interest Period with respect to a LIBOR Rate Loan, the rate per annum equal to the British Bankers Association LIBOR
Rate or the successor thereto if the British Bankers Association is no longer making a LIBOR rate available (“ BBA LIBOR”), as
published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent
from time to time) at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period, for
Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available
at such time for any reason, then the “LIBOR Rate” for such Interest Period shall be the rate per annum determined by the Administrative Agent
to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the
LIBOR Rate Loan being made, continued or Converted converted by Bank of America and with a term equivalent to such Interest Period would
be offered by Bank of America’s London Branch to major banks in the London interbank eurodollar market at their request at approximately
11:00 a.m. (London time) two (2) Business Days prior to the commencement of such Interest Period . ; and
(b) for any interest calculation with respect to a Prime Rate Loan on any date, the rate per annum equal to (i) LIBOR, at
approximately 11:00 a.m., London time determined two London Banking Days prior to such date for Dollar deposits being delivered in
the London interbank market for a term of one month commencing that day or (ii) if such published rate is not available at such time
for any reason, the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on
the date of determination in same day funds in the approximate amount of the Prime Rate Loan being made or maintained and with a
term equal to one month would be offered by Bank of America’s London Branch to major banks in the London interbank Eurodollar
market at their request at the date and time of determination.
“LIBOR Rate Loan” means a Committed Loan that bears interest at a rate based on the Adjusted LIBOR Rate.
“Lien” means (a) any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or
nature whatsoever (including any conditional sale, Capital Lease Obligation, Synthetic Lease Obligation, or other title retention agreement, any
easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as
any of the foregoing) and, with respect to the Canadian Loan Parties, also includes any deemed trust or prior claim in, on or of such asset and
(b) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.
“Liquidation” means the exercise by the Agents or the Collateral Agent of those rights and remedies accorded to such Agents under the
Loan Documents and applicable Laws as a creditor of the Loan Parties with respect to the realization on the Collateral, including (after the
occurrence and during the continuation of an Event of Default) the conduct by the Loan Parties acting with the consent of the Administrative
Agent, of any public, private or “going-out-of-business”, “store closing” or other similar sale or any other disposition of the Collateral for the
purpose of liquidating the Collateral. Derivations of the word “Liquidation” (such as “Liquidate”) are used with like meaning in this Agreement.
“Liquidation Percentage” shall mean, for any Lender, a fraction, the numerator of which is the sum of such Lender’s Domestic
Commitment and Canadian Commitment on the Determination Date and the denominator of which is the Total Commitments of all Lenders on
the Determination Date.
(41)
“Loan” means a Domestic Loan and a Canadian Loan.
“Loan Account” has the meaning assigned to such term in Section 2.11(a).
“Loan Cap” means, at any time of determination, the lesser of (a) the Aggregate Total Commitments or (b) the Combined Borrowing
Base.
“Loan Documents” means this Agreement, each Note, each Issuer Document, the Fee Letter, all Borrowing Base Certificates, the
Blocked Account Agreements, the Credit Card Notifications, the Security Documents, each Facility Guaranty, the Intercreditor Agreement and
any other instrument or agreement now or hereafter executed and delivered in connection herewith, or in connection with any transaction arising
out of any Cash Management Services and Bank Products provided by any Lender or any of its Affiliates, each as amended and in effect from
time to time . ; provided that for purposes of Section 8.01, Section 9.01(a) and (b), Section 10.01 (other than clause (j)), the second
paragraph of Section 10.03, and Section 10.06, the term “Loan Documents” shall not include any instrument or agreement now or
hereafter executed and delivered in connection with any transaction arising out of any Cash Management Services and Bank Products
provided by any Lender or any of its Affiliates.
“Loan Parties” means, collectively, the Domestic Loan Parties and the Canadian Loan Parties (and for clarity includes the Foreign
Borrower). “Loan Party” means any one of such Persons.
“Management Investors” means the collective reference to the officers, directors, employees and other members of the management of
Holdings or any of its Subsidiaries, or family members or relatives thereof or trusts, partnerships or limited liability companies for the benefit of
any of the foregoing, or any of their heirs, executors, successors and legal representatives, who at any particular date shall beneficially own or
have the right to acquire, directly or indirectly, common stock of Holdings.
“Master Agreement” means any form of master agreement published by the International Swaps and Derivatives
Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement, together with any related
schedules thereto.
“Material Adverse Effect” means a material adverse effect on (a) the business, operations, property or condition (financial or otherwise)
of Holdings and its Subsidiaries taken as a whole or (b) the legality, validity, binding effect, or enforceability as to any Loan Party thereto of this
Agreement or any of the other Loan Documents or the rights or remedies of the Agents and the Lenders under the Loan Documents or with
respect to the Collateral comprising the U.S. Borrowing Base and the Canadian Borrowing Base, in each case taken as a whole.
“Material Indebtedness” means Indebtedness (other than the Obligations) of the Loan Parties in an aggregate principal amount
exceeding $20,000,000. For purposes of determining the amount of Material Indebtedness at any time, (a) the amount of the obligations in
respect of any Swap Contract at such time shall be calculated at the Swap Termination Value thereof, and (b) all amounts owing to all creditors
under any combined or syndicated credit arrangement shall be included. In all events Indebtedness under the Senior Term Loan Credit
Agreement or either Notes Indenture constitutes Material Indebtedness.
“Material Subsidiary” means, as of the end of any Fiscal Quarter, any Subsidiary of the Borrower (a) whose Consolidated EBITDA for
the period of (4) consecutive Fiscal Quarters ending on such date exceeds five percent (5%) of Consolidated EBITDA of Holdings for such
period or (b) that owns five percent (5%) of consolidated total assets of Holdings on a consolidated basis.
(42)
“Maturity Date” means November 12 , 2015 July 26, 2018 .
“Maximum Rate” has the meaning set forth in Section 10.09.
“Measurement Period” means, at any date of determination, the most recently completed twelve Fiscal Months of Holdings and its
Subsidiaries for which financial statements have been or, if a Default under Section 6.01 then exists, were required to have been, delivered.
“Moody’s” means Moody’s Investors Service, Inc. and any successor thereto.
“Multiemployer Plan” means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which a Loan Party
or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make
contributions.
“Net Proceeds” means (a) with respect to any Disposition by any Loan Party or any of its Subsidiaries, the excess, if any, of (i) the sum
of cash and cash equivalents received in connection with such transaction (including any cash or cash equivalents received by way of deferred
payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) over (ii) the sum of (A) the
principal amount of any Indebtedness that is secured by the applicable asset by a Lien permitted hereunder which is senior to the Collateral
Agent’s Lien on such asset and that is required to be repaid (or to establish an escrow for the future repayment thereof) in connection with such
transaction (other than Indebtedness under the Loan Documents), (B) the reasonable and customary out-of-pocket expenses incurred by such
Loan Party or such Subsidiary in connection with such transaction (including, without limitation, appraisals, and brokerage, legal, title and
recording or transfer tax expenses and commissions) paid by any Loan Party to third parties (other than Affiliates)), and (C) unless a Trigger
Event is then continuing, taxes paid or reasonably estimated to be payable as a result thereof ; and
(b)
with respect to the incurrence or issuance of any Indebtedness by any Loan Party or any of its Subsidiaries, the excess of
(i) the sum of the cash and cash equivalents received in connection with such transaction over (ii) the underwriting discounts and commissions,
and other reasonable and customary out-of-pocket expenses, incurred by such Loan Party or such Subsidiary in connection therewith.
“Non-Consenting Lender” has the meaning set forth in Section 10.01.
“Non-Defaulting Lender” means, at any time, each Lender that is not a Defaulting Lender at such time.
“Non-Extension Notice Date” has the meaning specified in Section 2.03(b)(iii) .
“Note” means either a Domestic Note, a Canadian Note or a Foreign Note, as the context may require.
“Notes Indentures” means, collectively, the Senior Notes Indenture and the Senior Subordinated Notes Indenture, (i) that certain
Indenture dated as of November 8, 2011 by Sally Holdings, LLC and Sally Capital Inc., as Issuers (collectively, the “Issuers”) in favor of
Wells Fargo Bank, National Association, as Trustee (the “Trustee”) pursuant to which the Issuers, issued their 6-7/8% Senior Notes due
2019 and (ii) that certain Indenture dated as of May 18, 2012 by the Issuers in favor of the Trustee, as supplemented by Supplemental
Indenture dated as of May 18, 2012 by the Issuers, the Guarantors set forth therein, and the Trustee, pursuant to which the Issuers
issued their 5.75% Senior Notes due 2022 , and any Permitted Refinancing thereof.
(43)
“NPL” means the National Priorities List under CERCLA.
“Obligations” means (a) all advances to, and debts (including principal, interest, fees, costs, and expenses), liabilities, obligations,
covenants, indemnities, and duties of, any Loan Party arising under any Loan Document or otherwise with respect to any Loan (including Loans
incurred pursuant to Section 2.15 hereof) or Letter of Credit (including payments in respect of reimbursement of disbursements, interest thereon
and obligations to provide cash collateral therefor), whether direct or indirect (including those acquired by assumption), absolute or contingent,
due or to become due, now existing or hereafter arising and including interest, fees, costs, expenses and indemnities that accrue after the
commencement by or against any Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as
the debtor in such proceeding, regardless of whether such interest, fees costs, expenses and indemnities are allowed claims in such proceeding,
and (b) any Other Liabilities ; provided that Obligations of a Loan Party shall exclude any Excluded Swap Obligations with respect to
such Loan Party . Without limiting the foregoing, for purposes of clarity, whenever used herein the term “Obligations” shall include all
Canadian Liabilities and Foreign Liabilities.
“Optional Currency” means Euros, Pounds Sterling and Canadian dollars.
“Organization Documents” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or
equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the
certificate or articles of formation or organization and operating agreement (or equivalent or comparable constitutive documents with respect to
any non-U.S. jurisdiction); (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture
or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in
connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and,
if applicable, any certificate or articles of formation or organization of such entity, (d) with respect to any unlimited liability company, the
memorandum of association and articles of association (or equivalent or comparable constitutive documents with respect to any non-U.S.
jurisdiction); and (e) in each case, all shareholder or other equity holder agreements, voting trusts and similar arrangements to which such Person
is a party or which is applicable to its Equity Interests and all other arrangements relating to the Control or management of such Person.
“Other Canadian Liabilities” means any obligation on account of: (a) any Cash Management Services furnished to any of the Canadian
Loan Parties or any of their Canadian Subsidiaries and/or (b) any transaction which arises out of any Bank Product entered into with any
Canadian Loan Party.
“Other Connection Taxes” means, with respect to any Recipient, Taxes imposed as a result of a present or former connection
between such Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed,
delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under,
engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan
Document).
“Other Domestic Liabilities” means any obligation on account of: (a) any Cash Management Services furnished to any of the Domestic
Loan Parties or any of their Domestic Subsidiaries and/or (b) any transaction which arises out of any Bank Product entered into with any
Domestic Loan Party.
“Other Liabilities” means, collectively, all Other Canadian Liabilities and all Other Domestic Liabilities.
(44)
“Other Taxes” means all present or future stamp , court or documentary taxes or any other excise or property taxes, charges ,
intangible, recording, filing or similar levies arising Taxes that arise from any payment made hereunder or under any other Loan Document
or , from the execution, delivery or , performance , enforcement of or registration of, from the receipt or perfection of a security interest
under , or otherwise with respect to, this Agreement or any other Loan Document, excluding, however, except any such amounts Taxes that
are Other Connection Taxes imposed as a result of with respect to an assignment by a Lender of its Loan or Commitment (other than an
assignment made pursuant to Section 3.06) .
“Outstanding Amount” means (i) with respect to Committed Loans and Swing Line Loans on any date, the aggregate outstanding
principal amount thereof after giving effect to any borrowings and prepayments or repayments of Committed Loans and Swing Line Loans, as
the case may be, occurring on such date; and (ii) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such
date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C
Obligations as of such date, including as a result of any reimbursements by any Borrower of Unreimbursed Amounts.
“Overadvance” means either a Canadian Overadvance or a Domestic Overadvance.
“Parallel Debt” has the meaning specified in Section 9.18.
“Parent” means Sally Holdings LLC, a Delaware limited liability company, or any successor thereto.
“Participant” has the meaning specified in Section 10.06(d).
“Patriot Act” means USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)).
“Participation Register” has the meaning provided therefor in Section 10.06(d).
‘ “Payment Conditions ’ ” means, at the time of determination with respect to any Restricted Payment, that (a) no Default or Event of
Default then exists or would arise as a result of the making of such Restricted Payment, and (b) if after giving pro forma effect to such Restricted
Payment, (x) Excess Availability for the 45 day period immediately preceding, and on the date of, such Restricted Payment was equal to or
greater than 20% of the Loan Cap, and (y) the Consolidated Fixed Charge Coverage Ratio, for the most recent Measurement Period, is equal to
or greater than 1.2:1.0. 1.1:1.0; provided that the provisions of this clause (y) shall not be applicable if, after giving pro forma effect to
such Restricted Payment, Excess Availability for the 45 day period immediately preceding, and on the date of, such Restricted Payment
was equal to or greater than 30% of the Loan Cap . If after giving pro forma effect to such Restricted Payment, Excess Availability would be
equal to or less than 50 40 % of the Loan Cap, the Parent shall furnish the Administrative Agent with prior notice of any such Restricted
Payment which is subject to the Payment Conditions, together with supporting documentation evidencing the satisfaction of the Excess
Availability requirements and the satisfaction of the required Consolidated Fixed Charge Coverage Ratio, no less than five (5) Business Days
prior to the consummation of any such Restricted Payment.
“Payment in Full” means the payment in full in cash of all Obligations (or with respect to the Canadian Borrower, all Canadian
Liabilities and with respect to the Foreign Borrower, all Foreign Liabilities), including, without limitation, with respect to amounts available to
be drawn under outstanding Letters of Credit, the cancellation of such Letters of Credit or the delivery or provision of money or backstop
irrevocable letters of credit, in form, on terms, and issued by a financial institution
(45)
reasonably acceptable to the Administrative Agent, in respect thereof in an amount equal to 105% of the L/C Obligations.
“PBGC” means the Pension Benefit Guaranty Corporation.
“PCAOB” means the Public Company Accounting Oversight Board.
“Pension Plan” means any “employee pension benefit plan” (as such term is defined in Section 3(2) of ERISA), other than a
Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by a Loan Party or any ERISA Affiliate or to which a
Loan Party or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer or other plan described in
Section 4064(a) of ERISA, has made contributions at any time during the immediately preceding five plan years.
“Permitted Acquisition” means an Acquisition in which all of the following conditions are satisfied:
(a)
No Default then exists or would arise from the consummation of such Acquisition;
(b)
If any proceeds from Credit Extensions are being utilized to consummate such Acquisition, such Acquisition shall
have been approved by the Board of Directors of the Person (or similar governing body if such Person is not a corporation) which is the
subject of such Acquisition and such Person shall not have announced that it will oppose such Acquisition or shall not have commenced
any action which alleges that such Acquisition shall violate applicable Law;
After giving effect to the Acquisition, if the Acquisition is an Acquisition of Equity Interests, a Loan Party shall
(c)
acquire and own, directly or indirectly, a majority of the Equity Interests in the Person being acquired and shall Control a majority of
any voting interests or shall otherwise Control the governance of the Person being acquired; and
(d)
The total consideration (excluding consideration in the form of Equity Interests) paid for all such Acquisitions in any
Fiscal Year (i) shall not exceed $30,000,000 in the aggregate as long as, after giving pro forma effect to such transaction or payment,
Excess Availability is equal to or greater than 15% of the Loan Cap (and if such Excess Availability is not achieved the Acquisition
shall not be permitted), but the Acquisition/Investment Payment Conditions are not satisfied, and (ii) without limitation as to amount if,
after giving pro forma effect to such transaction or payment, the Acquisition/Investment Payment Conditions are satisfied.
“Permitted Canadian Overadvance” means a Canadian Overadvance made by the Canadian Agent, in its discretion, which:
(a)
is made to maintain, protect or preserve the Collateral of the Canadian Borrower and/or the Canadian Credit Parties’
rights under the Loan Documents or which is otherwise for the benefit of the Credit Parties; or
(b)
is made to enhance the likelihood of, or maximize the amount of, repayment of any of the Canadian Liabilities; or
(46)
(c)
Document; and
is made to pay any other amount chargeable to any Canadian Loan Party hereunder or under any other Loan
(d)
together with all other Permitted Canadian Overadvances then outstanding, shall not (i) exceed at any time
$1,250,000 or (ii) unless a Liquidation is occurring, remain outstanding for more than forty-five (45) consecutive Business Days, unless
in each case, the Required Lenders otherwise agree;
provided, that the foregoing shall not (i) modify or abrogate any of the provisions of Section 2.03 regarding each Canadian Lender’s
obligations with respect to Canadian Letters of Credit, or (ii) result in any claim or liability against the Canadian Agent (regardless of
the amount of any Canadian Overadvance) for Unintentional Canadian Overadvances and such Unintentional Canadian Overadvances
shall not reduce the amount of Permitted Canadian Overadvances allowed hereunder, and provided further, that in no event shall the
Canadian Agent make a Canadian Overadvance, if after giving effect thereto, the principal amount of the Canadian Credit Extensions
would exceed the Canadian Total Commitments (as in effect prior to any termination of the Canadian Commitments pursuant to
Section 2.06 hereof).
“Permitted Cure Securities” means common equity securities or other equity securities of Holdings, Intermediate Holdco or the Parent
that do not constitute Disqualified Capital Stock and the issuance of which does not result in a Change of Control.
“Permitted Discretion” means the commercially reasonable judgment of the Administrative Agent exercised in good faith in accordance
with customary business practices for comparable asset-based lending transactions. In exercising such judgment, the Administrative Agent may
consider any factors which it reasonably determines: (a) with respect to any Collateral issues, will or reasonably could be expected to adversely
affect in any material respect the value of the Collateral, the enforceability or priority of the applicable Agent’s Liens thereon or the amount
which any Agent, the Lenders or any Issuing Lender would be likely to receive (after giving consideration to delays in payment and costs of
enforcement) in the liquidation of such Collateral, or (b) is evidence that any collateral report or financial information delivered to such Agent by
any Person on behalf of the applicable Borrower is incomplete, inaccurate or misleading in any material respect, or (c) creates or reasonably
could be expected to create a Default or Event of Default. In exercising such judgment, the Administrative Agent may also consider, without
duplication, such factors already included in or tested by the definition of Eligible Inventory or Eligible Accounts, as well as any of the
following: (i) changes after the Closing Effective Date in any material respect in demand for, pricing of, or product mix of Inventory;
(ii) changes after the Closing Effective Date in any material respect in any concentration of risk with respect to Accounts; (iii) any other factors
or circumstances that will or would reasonably be expected to have a Material Adverse Effect and (iv) any other factors arising after the Closing
Effective Date that change in any material respect the credit risk of lending to the Borrowers on the security of the Collateral.
“Permitted Domestic Overadvance” means a Domestic Overadvance made by the Administrative Agent, in its discretion, which:
is made to maintain, protect or preserve the Collateral and/or the Credit Parties’ rights under the Loan Documents or
(a)
which is otherwise for the benefit of the Credit Parties; or
(b)
is made to enhance the likelihood of, or to maximize the amount of, repayment of any Obligation; or
(47)
(c)
is made to pay any other amount chargeable to any Loan Party hereunder or any other Loan Document; and
(d)
together with all other Permitted Domestic Overadvances then outstanding, shall not (i) exceed at any time the lesser
of $20,000,000 or five percent (5%) of the Domestic Borrowing Base at any time or (ii) unless a Liquidation is occurring, remain
outstanding for more than forty-five (45) consecutive Business Days, unless in each case, the Required Lenders otherwise agree;
provided, that the foregoing shall not (i) modify or abrogate any of the provisions of Section 2.03 regarding each Domestic Lender’s
obligations with respect to Domestic Letters of Credit, or (ii) result in any claim or liability against the Administrative Agent (regardless
of the amount of any Domestic Overadvance) for Unintentional Domestic Overadvances, and such Unintentional Domestic
Overadvances” shall not reduce the amount of Permitted Domestic Overadvances allowed hereunder, and provided further, that in no
event shall the Administrative Agent make a Domestic Overadvance, if after giving effect thereto, the principal amount of the Domestic
Credit Extensions would exceed the Domestic Total Commitments (as in effect prior to any termination of the Domestic Commitments
pursuant to Section 2.06 hereof).
“Permitted Encumbrances” means:
(a)
Liens imposed by law for Taxes that are not yet due, or the nonpayment of which in the aggregate would not
reasonably be expected to have a Material Adverse Effect, or are being contested in compliance with Section 6.04 ;
carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by applicable
(b)
Laws, arising in the ordinary course of business and securing obligations that are not overdue by more than sixty (60) days or are being
contested in compliance with Section 6.04 ;
(c)
pledges and deposits made in the ordinary course of business in compliance with workers’ compensation,
unemployment insurance and other social security or similar laws or regulations, other than any Lien imposed by ERISA or other
applicable Law relating to Canadian Pension Plans (except Liens arising in respect of employee contributions withheld from pay but not
yet due to be remitted to a Canadian Pension Plan);
(d)
deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;
(e)
Liens in respect of judgments that would not constitute an Event of Default hereunder;
(f)
easements, covenants, conditions, restrictions, building code laws, zoning restrictions, rights-of-way and similar
encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations
and do not materially detract from the value of the affected property or materially interfere with the ordinary conduct of business of a
Loan Party and such other minor title defects or survey matters that are disclosed by current surveys that, in each case, do not materially
interfere with the current use of the real property;
(48)
(g)
Liens existing on the date hereof Effective Date and listed on Schedule 7.01 and any renewals, extensions or
Permitted Refinancings thereof;
(h)
Liens on fixed or capital assets acquired by any Loan Party which are permitted under Section 7.03(a) so long as
(i) such Liens and the Indebtedness secured thereby are incurred prior to or within ninety (90) days after such acquisition, (ii) the
Indebtedness secured thereby does not exceed the cost of acquisition of such fixed or capital assets and (iii) such Liens shall not extend
to any other property or assets of the Loan Parties;
(i)
Liens in favor of the Collateral Agent and the Canadian Agent;
(j)
Liens of landlords or of mortgagees of landlords arising by operation of law or pursuant to the terms of real property
leases, provided that the rental payments secured thereby are not yet due and payable ;
Liens securing or consisting of Indebtedness of the Parent and its Subsidiaries incurred pursuant to the Senior Term
(k)
Loans Documents and any Permitted Refinancings, thereof, provided that (i) such Liens do not apply to any asset other than the
Collateral that is subject to a Lien granted under a Security Document, and (ii) all such Liens shall be subject to the Intercreditor
Agreement or another intercreditor agreement that is no less favorable to the Credit Parties than the Intercreditor Agreement; Reserved;
(l)
Liens on property (i) of any Subsidiary that is not a Loan Party and (ii) that does not constitute Collateral ;
provided that, if requested by the Administrative Agent, and if such property is deemed by the Collateral Agent or the
Canadian Agent, as applicable, reasonably necessary to be utilized to realize upon, and maximize the amounts recovered on any
liquidation of, any of the Collateral included in the Combined Borrowing Base, such Liens are subject to an intercreditor
agreement between the applicable Agent and the holder of such Lien so as to permit the Collateral Agent or the Canadian
Agent, as applicable, access to and use of such property for a reasonable period of time to collect upon, effect a liquidation of, or
otherwise exercise rights with respect to, the Collateral, all on such terms and conditions reasonably acceptable to the
Administrative Agent in its Permitted Discretion ;
(m)
Liens on Intellectual Property; provided that such Liens result from the granting of licenses in the ordinary course of
business to any Person to use such Intellectual Property or such foreign patents, patent applications, trademarks, trademark applications,
trade names, copyrights, technology, know-how or processes, as the case may be and , if requested by the Administrative Agent, and
if such property is deemed by the Collateral Agent or the Canadian Agent, as applicable, reasonably necessary to be utilized to
realize upon, and maximize the amounts recovered on any liquidation of, any of the Collateral included in the Combined
Borrowing Base, such Liens are subject to the Agents’ rights with respect to such Intellectual Property an intercreditor agreement
between the applicable Agent and the holder of such Lien so as to permit the Collateral Agent or the Canadian Agent, as
applicable, access to and use of such property for a reasonable period of time to collect upon, effect a liquidation of, or
otherwise exercise rights with respect to, the Collateral, all on such terms and conditions reasonably acceptable to the
Administrative Agent in its Permitted Discretion ;
(49)
(n)
the rights reserved to or vested in Governmental Authorities by statutory provisions or the terms of leases, licenses
and franchises, grants or permits, in each case, which affect any land and which allow such Governmental Authorities to terminate the
leases, licenses, franchises, grants or permits or to require annual or other periodic payments as a condition to the continuance thereof;
(o)
Liens on property subject to Sale and Leaseback Transactions and general intangibles related thereto; provided that,
if requested by the Administrative Agent, such Liens are subject to an intercreditor agreement between the Administrative
Agent and the holder of such Lien so as to permit the Collateral Agent or the Canadian Agent, as applicable, access to and use
of such property for a reasonable period of time to collect upon, effect a liquidation of, or otherwise exercise rights with respect
to, the Collateral, all on such terms and conditions reasonably acceptable to the Administrative Agent in its Permitted
Discretion;
any encumbrance or restriction (including put and call agreements) with respect to the Equity Interests of any joint
(p)
venture or similar arrangement pursuant to the joint venture or similar agreement with respect to such joint venture or similar
arrangement, provided that no such encumbrance or restriction affects in any way the ability of the Parent or any of its Subsidiaries to
comply with their obligations under the Loan Documents;
(q)
Possessory Liens in favor of brokers and dealers arising in connection with the acquisition or disposition of
Investments owned as of the date hereof and Permitted Investments, provided that such liens (a) attach only to such Investments and
(b) secure only obligations incurred in the ordinary course and arising in connection with the acquisition or disposition of such
Investments and not any obligation in connection with margin financing;
(r)
Liens arising solely by virtue of any statutory or common law provisions relating to banker’s liens, liens in favor of
securities intermediaries, rights of setoff or similar rights and remedies as to deposit accounts or securities accounts or other funds
maintained with depository institutions or securities intermediaries;
(s)
Liens arising from precautionary UCC or PPSA filings regarding “true” operating leases or, to the extent permitted
under the Loan Documents, the consignment of goods to a Loan Party;
(t)
voluntary Liens on property (other than property of the type included in the Combined Borrowing Base) in existence
at the time such property is acquired pursuant to a Permitted Acquisition or on such property of a Subsidiary of a Loan Party in
existence at the time such Subsidiary is acquired pursuant to a Permitted Acquisition; provided , that such Liens are not incurred in
connection with or in anticipation of such Permitted Acquisition and do not attach to any other assets of any Loan Party or any
Subsidiary;
Liens in favor of customs and revenues authorities imposed by applicable Laws arising in the ordinary course of
(u)
business in connection with the importation of goods and securing obligations (i) that are not overdue by more than thirty (30) days, or
(ii)(A) that are being contested in good faith by appropriate proceedings, (B) the applicable Loan Party or Subsidiary has set aside on its
books adequate reserves with respect thereto in accordance with GAAP and (C) such contest effectively suspends collection of the
contested obligation and enforcement of any Lien securing such obligation;
(v)
Liens in favor of Loan Parties; and
(50)
(w)
Liens securing Indebtedness permitted under Section 7.03(b) and (c).
“Permitted Holders” means (i) any of the CD&R Investors; (ii) any of the Management Investors , CD&R, and their respective
Affiliates; (iii) any investment fund or vehicle managed, sponsored or advised by CD&R or any Affiliate thereof, and any Affiliate of or
successor to any such investment fund or vehicle; (iv) any limited or general partners of, or other investors in, any CD&R Investor or any
Affiliate thereof, or any such investment fund or vehicle; and ( v ii ) any Person acting in the capacity of an underwriter in connection with a
public or private offering of Equity Interests of Holdings. In addition, any “person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) whose status as a “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) constitutes or results in a
Change of Control in respect of which a Change of Control Offer is made in accordance with the requirements of either Notes Indenture,
together with its Affiliates, shall thereafter constitute Permitted Holders.
“Permitted Investments” means each of the following:
readily marketable obligations issued or directly and fully guaranteed or insured by the United States of America or,
(a)
with respect to the Canadian Loan Parties, Canada (or by any agency or instrumentality of the United States of America or Canada, as
applicable) having maturities of not more than 360 days from the date of acquisition thereof; provided that the full faith and credit of the
United States of America or Canada, as applicable, is pledged in support thereof;
commercial paper issued by any Person organized under the laws of any state of the United States of America or
(b)
Canada or any province thereof and rated, at the time of acquisition thereof, at least “Prime-1” (or the then equivalent grade) by
Moody’s or at least “A-1” (or the then equivalent grade) by S&P, in each case with maturities of not more than 180 days from the date
of acquisition thereof;
(c)
time deposits with, or insured certificates of deposit or bankers’ acceptances of, any commercial bank that (i) (A) is a
Lender or (B) is organized under the laws of the United States of America, any state thereof or the District of Columbia (or with respect
to the Canadian Loan Parties, Canada or any province or territory thereof) or is the principal banking subsidiary of a bank holding
company organized under the laws of the United States of America, any state thereof or the District of Columbia, and is a member of
the Federal Reserve System, (ii) issues (or the parent of which issues) commercial paper rated as described in clause (b) of this
definition and (iii) has combined capital and surplus of at least $1,000,000,000, in each case with maturities of not more than 180 days
from the date of acquisition thereof;
(d)
fully collateralized repurchase agreements with a term of not more than thirty (30) days for securities described in
clause (a) above (without regard to the limitation on maturity contained in such clause) and entered into with a financial institution
satisfying the criteria described in clause (c) above or with any primary dealer and having a market value at the time that such
repurchase agreement is entered into of not less than 100% of the repurchase obligation of such counterparty entity with whom such
repurchase agreement has been entered into;
(e)
Investments, classified in accordance with GAAP as current assets of the Loan Parties, in any money market fund,
mutual fund, or other investment companies that are registered under the Investment Company Act of 1940, as amended, which are
administered by financial institutions that have the highest rating obtainable from either Moody’s or S&P, and
(51)
which invest solely in one or more of the types of securities described in clauses (a) through (d) above;
(f)
Investments existing on the Closing Effective Date, and set forth on Schedule 7.02, but not any increase in the
amount thereof or any other modification of the terms thereof;
(g)
(i) Investments by any Loan Party and their respective Subsidiaries in their respective direct and indirect Subsidiaries
outstanding on the Closing Effective Date, (ii) additional Investments by any Loan Party and its Subsidiaries in Loan Parties,
(iii) additional Investments by Subsidiaries of the Loan Parties that are not Loan Parties in other Subsidiaries that are not Loan Parties
and (iv) so long as no Event of Default has occurred and is continuing or would result from such Investment, additional Investments by
the Loan Parties in wholly-owned Subsidiaries that are not Loan Parties;
(h)
Investments consisting of extensions of credit in the nature of accounts receivable or notes receivable arising from
the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from
financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss;
(i)
Guarantees of Indebtedness permitted under Section 7.03;
(j)
so long as no Default or Event of Default has occurred and is continuing or would result from such
Investment, Investments by any Loan Party in Swap Contracts permitted hereunder;
(k)
Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts
and disputes with, customers and suppliers, in each case in the ordinary course of business;
(l)
advances to officers, directors and employees of the Loan Parties and Subsidiaries in the ordinary course of business
in an amount consistent with past practice for travel, entertainment, relocation and analogous ordinary business purposes;
(m)
Investments constituting Permitted Acquisitions;
(n)
other Investments not specifically set forth above not to exceed $2,500,000 in the aggregate in any Fiscal Year;
Other Investments not specifically set forth above, in any Fiscal Year (i) shall not exceed $30,000,000 in the
(o)
aggregate as long as, after giving pro forma effect to such Investment, Excess Availability is equal to or greater than 15% of the Loan
Cap (and if such Excess Availability is not achieved the Investment shall not be permitted), but the Acquisition/Investment Payment
Conditions are not satisfied, and (ii) without limitation as to amount if, after giving pro forma effect to such transaction or payment, the
Acquisition/Investment Payment Conditions are satisfied; and
(p)
Investments by Foreign Subsidiaries in cash equivalents customarily purchased by companies in the European Union
as part of their cash management policies and having a credit quality substantially equivalent to those set forth in clauses (a) through
(e) of this definition, and otherwise consistent with past practice of such Foreign Subsidiaries;
(52)
provided , however , that notwithstanding the foregoing, (i) after the occurrence and during the continuance of a Trigger Event, no such
Investments specified in clauses (a) through (e) and clauses (n) and (o) shall be permitted to be made unless either (A) no Loans are then
outstanding, or (B) the Investment is a temporary Investment pending expiration of an Interest Period for a LIBOR Rate Loan, the proceeds of
which Investment will be applied to the Obligations after the expiration of such Interest Period.
“Permitted Pro Forma Adjustments” as applied to any Person or business unit acquired or disposed of on or after the Closing Effective
Date means any adjustment to the actual results of operations of such Person or business unit (a) that are permitted to be recognized in pro forma
financial statements prepared in accordance with Regulation S-X of the Securities Act of 1933 or (b) that otherwise reflect verifiable and
adequately documented severance payments and reductions in, among other items, officer and employee compensation, insurance expenses,
interest expense, rental expense, and other overhead expense, and other quantifiable expenses which are not anticipated to be incurred on an
ongoing basis following consummation of such acquisitions or dispositions, in each case, with respect to this clause (b) only, as approved by the
Administrative Agent in its Permitted Discretion.
“Permitted Refinancing” means, with respect to any Person, any Indebtedness issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund (collectively, to “ Refinance ”), the Indebtedness being Refinanced (or previous
refinancings thereof constituting a Permitted Refinancing); provided , that (a) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so Refinanced (plus unpaid
accrued interest and premiums thereon and underwriting discounts, defeasance costs, fees, commissions and expenses), (b) the weighted average
life to maturity of such Permitted Refinancing is greater than or equal to the weighted average life to maturity of the Indebtedness being
Refinanced, (c) if the Indebtedness being Refinanced is subordinated in right of payment to the Obligations under this Agreement, such
Permitted Refinancing shall either be (i) unsecured or (ii) subordinated in right of payment to such Obligations on terms at least as favorable to
the Credit Parties as those contained in the documentation governing the Indebtedness being Refinanced, (d) the interest rate applicable to any
such Permitted Refinancing shall not exceed the then applicable market interest rate (as determined in good faith by the Board of Directors of
Holdings), (e) if requested by the Administrative Agent, if such Permitted Refinancing includes security consisting of (i) any of the Collateral
included in the Combined Borrowing Base, or (ii) any real or personal properties (including, without limitation, licensees or transferees
of Intellectual Property) which the Collateral Agent or the Canadian Agent as applicable, reasonably deems necessary to be utilized to
realize upon, and maximize the amounts recovered on any liquidation of, any of the Collateral included in the Combined Borrowing Base,
the Person providing such Permitted Refinancing shall have entered into an intercreditor agreement with the Agents on applicable Agent so as
to permit the Collateral Agent or the Canadian Agent, as applicable, access to and use of such property for a reasonable period of time
to collect upon, effect a liquidation of, or otherwise exercise rights with respect to, the Collateral, all on such terms and conditions
reasonably satisfactory acceptable to the Administrative Agent ; and provided further, that if such refinancing is a Permitted Refinancing of the
Senior Term Facility, the Administrative Agent agrees to execute an intercreditor agreement with respect thereto substantially in the form of the
Intercreditor Agreement in its Permitted Discretion , and (f) at the time thereof, no Default or Event of Default shall have occurred and be
continuing.
“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership,
limited partnership, Governmental Authority or other entity.
“Plan” means, collectively, each Domestic Pension Plan and each Canadian Pension Plan.
“Platform” has the meaning specified in Section 6.02.
(53)
“PPSA” means the Personal Property Security Act of Ontario (or any successor statute) or similar legislation of any other Canadian
jurisdiction, including, without limitation, the Civil Code of Quebec , the laws of which are required by such legislation to be applied in
connection with the issue, perfection, enforcement, opposability, priority, validity or effect of security interests or other applicable Liens.
“Pounds Sterling” means pounds in lawful currency of the United Kingdom.
“Prepayment Event” means:
(a)
Any Disposition (including pursuant to a sale and leaseback transaction) of any Collateral of a Loan Party included in
the Combined Borrowing Base ( excluding sales of Inventory in the ordinary course of business ) , unless the proceeds therefrom are
required to be paid to the holder of a Lien on such Collateral having priority over the Lien of the Collateral Agent or Canadian Agent,
as applicable;
If a Trigger Event then exists or would arise by reason of such Disposition, any Disposition (including pursuant to a
(b)
sale and leaseback transaction) of any property or asset of a Loan Party (including, without limitation, Collateral) outside of the
ordinary course of business, unless the proceeds therefrom are required to be paid to the holder of a Lien on such property or asset;
(c)
Any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or
similar proceeding of (and payments in lieu thereof), Collateral of a Loan Party included in the Combined Borrowing Base, unless
(i) the proceeds therefrom are required to be paid to the holder of a Lien on such Collateral having priority over the Lien of the
Collateral Agent or Canadian Agent, as applicable, or (ii) unless as long as a Trigger Event has not occurred and is not continuing, the
proceeds therefrom are utilized for purposes of replacing or repairing the Collateral in respect of which such proceeds, awards or
payments were received, or are otherwise used to purchase assets useful in the business of the Loan Parties, within 180 days of the
occurrence of the damage to or loss of the Collateral being repaired or replaced; or
(d)
If a Trigger Event then exists or would arise by reason of such damage or taking, any casualty or other insured
damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of (and payments in lieu thereof),
any property or asset of a Loan Party (including, without limitation, Collateral), unless the proceeds therefrom are required to be paid to
the holder of a Lien on such Collateral having priority over the Lien of the Collateral Agent or Canadian Agent, as applicable.
“Prime Rate Loan” means a Canadian Prime Rate Loan, a US Index Rate Loan, or a Domestic Prime Rate Loan, as the context may
require.
“Principal Obligations” means the Obligations owing to the Lenders (other than each Loan Party’s Parallel Debt).
“Professional Market Party” means a professional market party ( professionele marktpartij ) within the meaning of the Dutch FSA and
any regulation promulgated thereunder, as amended from time to time.
“Public Lender” has the meaning specified in Section 6.02 .
“Qualified ECP Guarantor” means, at any time, each Loan Party with total assets exceeding $10,000,000 or that qualifies at
such time as an “eligible contract participant” under the Commodity
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Exchange Act and can cause another Person to qualify as an “eligible contract participant” at such time under Section 1a(18)(A)(v)
(II) of the Commodity Exchange Act.
“Real Estate” means all Leases and all land, together with the buildings, structures, parking areas, and other improvements thereon, now
or hereafter owned or leased by any Loan Party, including all easements, rights-of-way, and similar rights relating thereto and all leases,
tenancies, and occupancies thereof.
“Receivables Advance Rate” means (i) 80% if the Accounts Receivable Reporting Requirement is not then in effect; and (ii) 85% if
either (x) the Accounts Receivable Reporting Requirement is then in effect or (y) the Borrowers elect at their option to provide the detailed
accounts receivables reporting as required by Section 6.02(c) as if the Account Receivable Reporting Requirement was in effect at such time.
“Receivables Reserves” means such Reserves as may be established from time to time by the Administrative Agent in the
Administrative Agent’s Permitted Discretion with respect to the determination of the collectability in the ordinary course of Eligible Trade
Receivables.
“Recipient” means (a) the Administrative Agent, (b) any Lender or (c) any L/C Issuer, as applicable.
“Register” has the meaning specified in Section 10.06(c).
“Registered Public Accounting Firm” has the meaning specified by the Securities Laws and shall be independent of the Parent and its
Subsidiaries as prescribed by the Securities Laws.
“Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents and
advisors of such Person and of such Person’s Affiliates.
“Reportable Event” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30 day notice period
has been waived.
“Reports” has the meaning provided in Section 9.12(b).
“Request for Credit Extension” means (a) with respect to a Borrowing, Conversion or continuation of Committed Loans, a Committed
Loan Notice, (b) with respect to an L/C Credit Extension, a Letter of Credit Application, and (c) with respect to a Swing Line Loan, a Swing
Line Loan Notice.
“Required Lenders” means, as of any date of determination, Lenders holding more than 50% of Applicable Percentage of all Lenders of
the Aggregate Total Commitments or, if the commitment of each Lender to make Loans and the obligation of the L/C Issuer to make L/C Credit
Extensions have been terminated pursuant to Section 8.02, Lenders holding in the aggregate more than 50% of the Total Outstandings (with the
aggregate amount of each Lender’s risk participation and funded participation in L/C Obligations and Swing Line Loans being deemed “held” by
such Lender for purposes of this definition); provided that the Commitment of, and the portion of the Total Outstandings held or deemed held
by, any Defaulting Lender or Deteriorating Lender shall be excluded for purposes of making a determination of Required Lenders.
“Reserves” means all (if any) Inventory Reserves, Availability Reserves and Receivables Reserves. Borrowing Base Certificates shall
include detailed reporting of ineligible Accounts if the Accounts Receivable Reporting Requirement is then in effect. Borrowing Base
Certificates shall include
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a deemed ineligible Accounts amount of 20% of reported Accounts (as set forth in the definition of Eligible Trade Receivables) and a deemed
Dilution Reserve of 8.1% of reported Accounts (in each case, without detailed reporting of ineligible Accounts) if the Accounts Receivable
Reporting Requirement is not in effect; provided, however, that the Borrowers may, at their election at any time, provide detailed reporting of
Accounts (and report actual ineligibility and dilution for purposes of determining the applicable Reserves and Borrowing Base) even if the
Accounts Receivable Reporting Requirement is not then in effect.
“Responsible Officer” means the chief executive officer, president, chief financial officer, treasurer or assistant treasurer of a Loan
Party or any of the other individuals designated in writing to the Administrative Agent by an existing Responsible Officer of a Loan Party as an
authorized signatory of any certificate or other document to be delivered hereunder. Any document delivered hereunder that is signed by a
Responsible Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other
action on the part of such Loan Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party.
“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any capital
stock or other Equity Interest of any Person or any of its Subsidiaries, or any payment (whether in cash, securities or other property), including
any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of
any such capital stock or other Equity Interest, or on account of any return of capital to such Person’s stockholders, partners or members (or the
equivalent of any thereof), or any option, warrant or other right to acquire any such dividend or other distribution or payment. Without limiting
the foregoing, “Restricted Payments” with respect to any Person shall also include all payments made by such Person with any proceeds of a
dissolution or liquidation of such Person.
“RP Availability Condition” means, at any time of determination with respect to any specified transaction or payment, that, (a) no
Default or Event of Default then exists or would arise as a result of entering into the transaction or making such payment, and (b) after giving pro
forma effect thereto, Excess Availability for the 45 day period immediately preceding, and on the date of, such transaction or payment was equal
to or greater than 20 15 % of the Loan Cap. If after giving pro forma effect to such transaction or payment, Excess Availability would be equal
to or less than 50 40 % of the Loan Cap, the Parent shall furnish the Administrative Agent with prior notice of any such transaction or payment
which is subject to the RP Availability Condition, together with supporting documentation evidencing the satisfaction of the Excess Availability
requirements, no less than five (5) Business Days prior to the consummation of any such transaction or payment.
“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. and any successor thereto.
“Sarbanes-Oxley” means the Sarbanes-Oxley Act of 2002.
“SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
“Secured Funded Indebtedness” means Consolidated Funded Indebtedness that is secured by Liens on the property or assets of the
Borrowers and the Loan Parties (other than property or assets held in a defeasance or similar trust or arrangement for the benefit of the
Indebtedness secured thereby).
“Secured Leverage Ratio” means, as of any date of determination, the ratio of (a) Secured Funded Indebtedness to (b) Consolidated
EBITDA, in each case of Holdings and its Subsidiaries for the most
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recently completed Measurement Period, all as determined on a Consolidated basis in accordance with GAAP.
“Securities Laws” means, collectively, the Securities Act of 1933, the Securities Exchange Act of 1934, Sarbanes-Oxley, and the
applicable accounting and auditing principles, rules, standards and practices promulgated, approved or incorporated by the SEC or the PCAOB;
and all applicable securities laws in each province and territory of Canada and the respective regulations, rules regulations, blanket orders and
blanket rulings under such laws together with applicable published policy statements and notices of the securities regulator of each such province
and territory.
“Security Agreement” means the Security Agreement dated as of the Closing Date among the Domestic Loan Parties and the Collateral
Agent.
“Security Documents” means the Security Agreement, the Canadian Security Documents, the Dutch Security Documents Pledge of
Intragroup Loan Receivables , the Blocked Account Agreements, the Credit Card Notifications, and each other security agreement or other
instrument or document executed and delivered by or on behalf of any Loan Party to the Collateral Agent or the Canadian Agent pursuant to this
Agreement or any other Loan Document granting a Lien to secure any of the Obligations or the Canadian Liabilities or the Foreign Liabilities, as
applicable.
“Senior Notes” means 9.25% Senior Notes due 2014 of the Parent issued on November 16, 2006, as the same may be exchanged for
substantially similar unsecured senior notes that have been registered under the Securities Act, and as the same or such substantially similar
notes may be amended, supplemented, waived or otherwise modified from time to time in accordance with the provisions of this Agreement.
“Senior Notes Indenture” means the Indenture dated as of November 16, 2006, under which the Senior Notes are issued, as the same
may be amended, supplemented, waived or otherwise modified from time to time, in accordance with the provisions of this Agreement.
“Senior Subordinated Notes” means 10.5% Senior Subordinated Notes due 2016 of the Parent issued on November 16, 2006, as the
same may be exchanged for substantially similar unsecured senior notes or unsecured senior subordinated notes that have been registered under
the Securities Act, and as the same or such substantially similar notes may be amended, supplemented, waived or otherwise modified from time
to time in accordance with the provisions of this Agreement.
“Senior Subordinated Notes Indenture” means the Indenture dated as of November 16, 2006, under which the Senior Subordinated
Notes are issued, as the same may be amended, supplemented, waived or otherwise modified from time to time, in accordance with the
provisions of this Agreement.
“Senior Term Facility” means the senior secured term loan facility entered into by the Parent and Merrill Lynch Capital Corporation , as
administrative agent and collateral agent, dated as of November 16, 2006, as the same may be amended, supplemented, waived or otherwise
modified from time to time in accordance with the provisions of this Agreement and any Permitted Refinancings thereof.
“Senior Term Loan Documents” means the “Loan Documents” as defined in the Senior Term Loan Credit Agreement, as the same may
be amended, supplemented, waived or otherwise modified from time to time in accordance with the provisions of this Agreement
“Senior Term Loans” means the senior secured term loans of the Parent in the aggregate principal amount of $1,070,000,000 made
under the Senior Term Loan Credit Agreement, as the same may be
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amended, supplemented, waived or otherwise modified from time to time in accordance with the provisions of this Agreement and any Permitted
Refinancings thereof.
“Senior Term Loan Credit Agreement” means that certain credit agreement among the Parent, the several banks and other financial
institutions from time to time parties thereto and Merrill Lynch Capital Corporation , as administrative agent and collateral agent, dated as of
November 16, 2006, as the same may be amended, supplemented, waived or otherwise modified from time to time in accordance with the
provisions of this Agreement and any Permitted Refinancings thereof.
“Settlement Date” has the meaning provided in Section 2.14(a).
“Shareholders’ Equity” means, as of any date of determination, consolidated shareholders’ equity of Holdings and its Subsidiaries as of
that date determined in accordance with GAAP.
“Shrink” means Inventory which has been lost, misplaced, stolen, or is otherwise unaccounted for.
“Solvent” and “Solvency” means, with respect to any Person on a particular date, that on such date (a) at fair valuation, all of the
properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair
saleable value of the properties and assets of such Person is not less than the amount that would be required to pay the probable liability of such
Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and
other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend
to, and does not believe that it will, incur debts beyond such Person’s ability to pay as such debts mature, (e) such Person is not engaged in a
business or a transaction, and is not about to engage in a business or transaction, for which such Person’s properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged, and (f) such
Person is not “insolvent” within the meaning of Section 101(32) of the Bankruptcy Code and, in the case of any Canadian Loan Party, is not an
“insolvent person” within the meaning of such term in the Bankruptcy and Insolvency Act (Canada), as applicable. The amount of all guarantees
or other contingent liabilities at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, can
reasonably be expected to become an actual or matured liability.
“Specified Equity Contribution” means any cash equity contribution made to Holdings, Intermediate Holdings or Parent in exchange for
Permitted Cure Securities; provided (a)(i) such cash equity contribution and (ii) the contribution of any proceeds therefrom to
Holdings, Intermediate Holdings or Parent occur (x) after the Closing Effective Date and (y) on or prior to the date that is 10 days after the date
on which the financial statements are required to be delivered for a fiscal quarter (or year); (b) the Parent identifies such equity contribution as a
“Specified Equity Contribution”; (c) in each four fiscal quarter period, there shall exist a period of at least two consecutive quarters in respect of
which no Specified Equity Contribution shall have been made, (d) the amount of any Specified Equity Contribution included in the calculation
of Consolidated EBITDA hereunder shall be limited to the amount required to effect compliance with subsection 7.13 hereof, and (e) the
Specified Equity Contribution shall not be included for purposes of any calculation under this Agreement other than for the calculation of
Consolidated EBITDA for purposes of compliance with Section 7.13 only.
“Specified Loan Party” means any Loan Party that is not then an “eligible contract participant” under the Commodity
Exchange Act (determined prior to giving effect to Section 10.26).
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“Spot Rate” means the rate determined by the Administrative Agent to be the rate quoted as the spot rate for purchase by the
Administrative Agent of such Optional Currency with Dollars through its principal foreign exchange trading office at approximately 11:00 a.m.
on the date two (2) Business Days prior to the date of such determination; provided that the Administrative Agent may obtain such spot rate from
another financial institution designated by it.
“Standby Letter of Credit” means any Letter of Credit that is not a Commercial Letter of Credit and that (a) is used in lieu or in support
of performance guaranties or performance, surety or similar bonds, (b) is used in lieu or in support of stay or appeal bonds, (c) supports the
payment of insurance premiums for reasonably necessary casualty insurance carried by any of the Loan Parties, or (d) supports payment or
performance for identified purchases or exchanges of products or services.
“Stated Amount” means at any time the maximum amount for which a Letter of Credit may be honored.
“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of
which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental
reserves) expressed as a decimal established by the FRB to which the Administrative Agent is subject with respect to the Adjusted LIBOR Rate,
for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall
include those imposed pursuant to such Regulation D. LIBOR Rate Loans shall be deemed to constitute eurocurrency funding and to be subject
to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any
Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in any reserve percentage.
“Store” means any retail store (which may include any real property, fixtures, equipment, inventory and other property related thereto)
operated, or to be operated, by any Loan Party.
“Subordinated Indebtedness” means Indebtedness which is expressly subordinated in right of payment to the prior Payment in Full of
the Obligations and termination of the Aggregate Total Commitments and which is in form and on terms approved in writing by the
Administrative Agent.
“Subsidiary” of a Person means a corporation, partnership, joint venture, limited liability company, unlimited liability company or other
business entity of which a majority of the shares of Equity Interests having ordinary voting power for the election of directors or other governing
body are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more
intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a
Subsidiary or Subsidiaries of a Loan Party.
“Substantial Liquidation” means either (a) the Liquidation of substantially all of the Collateral (other than Collateral from the Foreign
Borrower), or (b) the sale or other disposition of substantially all of the Collateral (other than Collateral from the Foreign Borrower) by the Loan
Parties.
“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions,
commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index
swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange
transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency
options, spot contracts, or any other similar
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transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such
transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which
are subject to the terms and conditions of, or governed by, any form of published by the International Swaps and Derivatives Association, Inc.,
any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related
schedules, a “Master Agreement”) , Master Agreement including any such obligations or liabilities under any such Master Agreement.
“Swap Obligations” means with respect to any Loan Party any obligation to pay or perform under any agreement, contract or
transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally
enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out
and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in
clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market
or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of
a Lender).
“Swing Line” means the revolving credit facility made available by the Swing Line Lender pursuant to Section 2.04.
“Swing Line Borrowing” means a borrowing of a Swing Line Loan pursuant to Section 2.04.
“Swing Line Lender” means Bank of America, in its capacity as provider of Swing Line Loans to the Domestic Borrowers (and to the
extent based on Domestic Availability, the Foreign Borrower), and Bank of America-Canada Branch, in its capacity as provider of Swing Line
Loans to the Canadian Borrower (and to the extent based on Canadian Availability, the Foreign Borrower), or any successor swing line lender
hereunder.
“Swing Line Loan” has the meaning specified in Section 2.04(a), and shall include all such Loans made by the Swing Line Lender to
the Domestic Borrowers, the Canadian Borrower or the Foreign Borrower.
“Swing Line Loan Notice” means a notice of a Swing Line Borrowing pursuant to Section 2.04(b), which, if in writing, shall be
substantially in the form of Exhibit B-1 (Domestic Swing Line Loan Notice) or Exhibit B-2 (Canadian Swing Line Loan Notice), as applicable.
“Swing Line Note” means the Domestic Swing Line Note and the Canadian Swing Line Note, as the context may require.
“Synthetic Lease Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax
retention lease, or (b) an agreement for the use or possession of property (including sale and leaseback transactions), in each case, creating
obligations that do not appear on the balance sheet of such Person but which, upon the application of any Debtor Relief Laws to such Person,
would be characterized as the indebtedness of such Person (without regard to accounting treatment).
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“Target Amount” means with respect to any DDA, an amount which, when aggregated with all other Target Amounts remaining on
deposit in all DDAs at any one time, does not exceed $7,500,000 (such aggregate amount to be determined no less frequently than on a monthly
basis).
“Tax Sharing Agreement” means the Tax Sharing Agreement among Holdings and the Parent dated as of November 16, 2006, as the
same may be amended, supplemented, waived or otherwise modified from time to time.
“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including back up withholding) ,
assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable
thereto.
“Term Agent” means Merrill Lynch Capital Corporation, the agent for term lenders under the Term Loan Agreement.
“Termination Date” means the earliest to occur of (i) the Maturity Date, (ii) the date on which the maturity of the Obligations is
accelerated (or deemed accelerated) and the Commitments are irrevocably terminated (or deemed terminated) in accordance with Article VIII, or
(iii) the termination of the Aggregate Total Commitments in accordance with the provisions of Section 2.06 hereof.
“Term Loan Agreement” means that certain credit agreement among the Parent, the several banks and other financial institutions from
time to time parties thereto and Merrill Lynch Capital Corporation , as administrative agent and collateral agent, dated as of November 16, 2006
as amended and in effect, and any Permitted Refinancing thereof .
“Total Outstandings” means the aggregate of all Canadian Total Outstandings and all Domestic Total Outstandings and, without
duplication, all Foreign Liabilities.
“Trading with the Enemy Act” has the meaning set forth in Section 10.18.
“Trigger Event” means either (i) the occurrence and continuance of any Event of Default, or (ii) the failure of the Borrowers to maintain
Excess Availability of at least the greater of (i) $ 40,000,000 50,000,000 , or (ii) fifteen twelve and one-half percent ( 15 12.5 %) of the Loan
Cap. For purposes of this Agreement, the occurrence of a Trigger Event shall be deemed continuing, (i) so long as such Event of Default has not
been waived, and/or (ii) if the Trigger Event arises as a result of the Borrowers’ failure to achieve Excess Availability as required hereunder,
until the date Excess Availability shall have been not less than the greater of (i) $ 40,000,000 50,000,000 or (ii) fifteen twelve and one-half
percent ( 15 12.5 %) of the Loan Cap for forty-five (45) consecutive days; provided that for the purposes of Section 6.12 a Trigger Event may be
discontinued only three (3) times during the term of this Agreement notwithstanding that the Event of Default has been waived or that
Availability shall have been not less than the amounts required above for forty-five (45) consecutive days. The termination of a Trigger Event as
provided herein shall in no way limit, waive or delay the occurrence of a subsequent Trigger Event in the event that the conditions set forth in
this definition again arise.
“Type” means, with respect to a Committed Loan, its character as a Prime Rate Loan, a LIBOR Rate Loan, a Euribar Rate Loan or a
BA Equivalent Loan.
“UCC” or “Uniform Commercial Code” means the Uniform Commercial Code as in effect from time to time in the State of New York;
provided, however, that if a term is defined in Article 9 of the Uniform Commercial Code differently than in another Article thereof, the term
shall have the meaning set forth in Article 9; provided further that, if by reason of mandatory provisions of law, perfection, or the
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effect of perfection or non-perfection, of a security interest in any Collateral or the availability of any remedy hereunder is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, “Uniform Commercial Code” means the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or
non-perfection or availability of such remedy, as the case may be.
“UFCA “ has the meaning specified in Section 10.22(d).
“UFTA” has the meaning specified in Section 10.22(d).
“Unfunded Pension Liability” means the excess of a Domestic Pension Plan’s benefit liabilities under Section 4001(a)(16) of ERISA,
over the current value of that Domestic Pension Plan’s assets, determined in accordance with the assumptions used for funding the Domestic
Pension Plan pursuant to Section 412 of the Code for the applicable plan year.
“Unintentional Canadian Overadvance” means a Canadian Overadvance which, to the Agents’ knowledge, did not constitute a
Canadian Overadvance when made but which has become a Canadian Overadvance resulting from changed circumstances beyond the control of
the Credit Parties, including, without limitation, a reduction in the Appraised Value of property or assets included in the Borrowing Base or
misrepresentation by the Canadian Loan Parties.
“Unintentional Domestic Overadvance” means a Domestic Overadvance which, to the Administrative Agent’s knowledge, did not
constitute a Domestic Overadvance when made but which has become a Domestic Overadvance resulting from changed circumstances beyond
the control of the Credit Parties, including, without limitation, a reduction in the Appraised Value of property or assets included in the
Borrowing Base or misrepresentation by the Loan Parties.
“United States” and “U.S.” mean the United States of America.
“USA PATRIOT Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001.
“Unreimbursed Amount” has the meaning specified in Section 2.03(c)(i).
“US Index Rate” means, for any day, a floating rate equal to the annual rate of interest determined by the Canadian Agent which is
equal to the greatest of (a) the annual rate of interest announced from time to time by Bank of America-Canada Branch , as being its reference
rate in effect on such date (or if such date is not a Business Day, on the Business Day immediately preceding such date) for determining interest
rates on Dollar denominated commercial loans made by it in Canada, in each case regardless of whether such bank actually charges such rate of
interest in connection with extensions of credit in Dollars to debtors, (b) the Federal Funds Rate for such day plus one-half of one percent
(0.50%) or (c) the LIBOR Rate for a thirty (30) day interest period as determined on such day, plus 1.0%. Each change in any interest rate
provided for in the Agreement based upon the US Index Rate shall take effect at the time of such change in the US Index Rate.
“US Index Rate Loan” means a Loan or portion thereof made to the Canadian Borrower or the Foreign Borrower (to the extent based on
Canadian Availability) denominated in US Dollars bearing interest at a rate based on the US Index Rate.
“U.S. Person” means any Person that is a “United States Person” as defined in Section 7701(a)(30) of the Code.
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“U.S. Prime Rate” means, for any day, a fluctuating rate per annum equal to the highest of (a) the rate of interest in effect for such day
as publicly announced from time to time by Bank of America as its “prime rate”, (b) the Federal Funds Rate for such day plus one-half of one
percent (0.50%) or (c) the LIBOR Rate for a 30 day interest period as determined on such day, plus 1.0%. The “prime rate” is a rate set by Bank
of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and
is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate
announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.
“U.S. Tax Compliance Certificate” has the meaning specified in Section 3.01(e)(ii)(B)(III).
“Voting Stock” means Equity Interests entitled to vote generally in the election of directors (or Persons performing similar functions).
Other Interpretive Provisions. With reference to this Agreement and each other Loan Document, unless otherwise specified
1.02
herein or in such other Loan Document:
(a)
The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “ include ,” “
includes ” and “ including ” shall be deemed to be followed by the phrase “without limitation.” The word “ will ” shall be construed to
have the same meaning and effect as the word “ shall .” Unless the context requires otherwise, (i) any definition of or reference to any
agreement, instrument or other document (including any Organization Document) shall be construed as referring to such agreement,
instrument or other document as from time to time amended, restated, supplemented or otherwise modified (subject to any restrictions
on such amendments, restatements, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference
herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “ herein ,” “ hereof ” and “
hereunder ,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its
entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules
shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references
appear, (v) any reference to any law shall include all statutory and regulatory rules, regulations, orders and provisions consolidating,
amending replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such
law or regulation as amended, modified or supplemented from time to time, and (vi) the words “ asset ” and “ property ” shall be
construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash,
securities, accounts and contract rights.
(b)
In the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from
and including ;” the words “ to ” and “ until ” each mean “ to but excluding ;” and the word “ through ” means “ to and including .”
(c)
Section headings herein and in the other Loan Documents are included for convenience of reference only and shall
not affect the interpretation of this Agreement or any other Loan Document.
(d)
Any other undefined term contained in any of the Loan Documents shall, unless the context indicates otherwise, have
the meaning provided for such term in the Uniform
(63)
Commercial Code or the PPSA, as the context may require, to the extent the same are used or defined therein
1.03
Accounting Terms
(a)
Generally . All accounting terms not specifically or completely defined herein shall be construed in conformity with,
and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement
shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent
with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein.
(b)
Changes in GAAP . If at any time any change in GAAP would affect the computation of any financial ratio or
requirement set forth in any Loan Document, and either the Parent or the Administrative Agent shall so request, the Administrative
Agent, the Lenders and the Parent shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof
in light of such change in GAAP; provided that , until so amended, (i) such ratio or requirement shall continue to be computed in
accordance with GAAP prior to such change therein and (ii) the Parent shall provide to the Administrative Agent and the Lenders
financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a
reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.
(c)
Notwithstanding the foregoing, any obligations of a Person under a lease (whether existing now or entered into in the
future) that is not (or would not be) a Capital Lease Obligation under GAAP as in effect on the Closing Effective Date, shall not be
treated as a Capital Lease Obligation solely as a result of the adoption of changes in GAAP outlined by the Financial Accounting
Standards Board in its press release dated March 19, 2009 subsequent to the Effective Date .
(d)
For purposes of making all financial calculations to determine compliance with this Credit Agreement, all
components of such calculations shall be adjusted to include or exclude, as the case may be, without duplication, such components of
such calculations attributable to any business or assets that have been acquired or disposed of by the Borrowers or any of their
Subsidiaries, including through Permitted Acquisitions, after the first day of the applicable period of determination and prior to the end
of such period, as determined in good faith by the Borrowers utilizing Permitted Pro Forma Adjustments, and such financial calculation
will be determined based on the most recent period for which Financial Statements were required to be delivered pursuant to
Section 6.01, with such adjustments calculated as if the applicable acquisitions or dispositions had been consummated on the first day
of such period.
1.04
Rounding. Any financial ratios required to be maintained by the Loan Parties pursuant to this Agreement shall be calculated
by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such
ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
1.05
Times of Day. Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight
or standard, as applicable).
(64)
1.06
Letter of Credit Amounts. Unless otherwise specified, all references herein to the amount of a Letter of Credit at any time
shall be deemed to be the Stated Amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of
Credit that, by its terms of any Issuer Documents related thereto, provides for one or more automatic increases in the Stated Amount thereof, the
amount of such Letter of Credit shall be deemed to be the maximum Stated Amount of such Letter of Credit after giving effect to all such
increases, whether or not such maximum Stated Amount is in effect at such time.
1.07
Currency Equivalents Generally . Any amount specified in this Agreement (other than in Articles II, IX and X) or any of
the other Loan Documents to be in Dollars shall also include the Equivalent Amount in any currency other than Dollars.
1.08
Québec Matters . For purposes of any assets, liabilities, Collateral or entities located in the Province of Québec and for all
other purposes pursuant to which the interpretation or construction of this Agreement may be subject to the laws of the Province of Québec or a
court or tribunal exercising jurisdiction in the Province of Québec, (a) “personal property” shall include “movable property”, (b) “real property”
or “real estate” shall include “immovable property”, (c) “tangible property” shall include “corporeal property”, (d) “intangible property” shall
include “incorporeal property”, (e) “security interest”, “mortgage” and “security” shall include a “hypothec”, “right of retention”, “prior claim”
and a resolutory clause, (f) all references to filing, perfection, priority, remedies, registering or recording under the UCC or a PPSA shall include
publication under the Civil Code of Québec, (g) all references to “perfection” of or “perfected” security or security interest shall include a
reference to an “opposable” or “set up” hypothec, security or security interest as against third parties, (h) any “right of offset”, “right of setoff” or
similar expression shall include a “right of compensation”, (i) “goods” shall include “corporeal movable property” other than chattel paper,
documents of title, instruments, money and securities, (j) an “agent” shall include a “mandatary”, (k) “construction security” shall include “legal
hypothecs”, (l) “joint and several” shall include “solidary”, (m) “gross negligence or willful misconduct” shall be deemed to be “intentional or
gross fault”, (n) “beneficial ownership” shall include “ownership on behalf of another as mandatary”; (o) “easement” shall include “servitude”,
(p) “priority” shall include “prior claim”, (q) “survey” shall include “certificate of location and plan”, (r) “state” shall include “province”,
(s) “fee simple title” shall include “absolute ownership”, and (t) “accounts” shall include “claims”.
1.09
Dutch Matters
In this Agreement, where it relates to a Dutch entity, a reference to:
(a)
a necessary action to authorize, where applicable, includes without limitation: (A) any action required to comply with
the Dutch Works Council Act ( Wet op de ondernemingsraden ); and (B) obtaining unconditional positive advice ( advies )
from each competent works council;
a winding-up, administration or dissolution includes a Dutch entity being: (A) declared bankrupt ( failliet verklaard );
(b)
and (B) dissolved ( ontbonden );
(c)
a moratorium includes surseance van betaling and granted a moratorium includes surseance verleend ;
(d)
a trustee in bankruptcy includes a curator ;
(e)
an administrator includes a bewindvoerder ;
(65)
(f)
a receiver or an administrative receiver does not include a curator or bewindvoerder ;
(g)
a nationalization includes a nationalisering ; and
(h)
an attachment includes a beslag .
ARTICLE II
THE COMMITMENTS AND CREDIT EXTENSIONS
2.01
Committed Loans; Reserves . (a) Subject to the terms and conditions set forth herein, each Domestic Lender severally
agrees to make Domestic Committed Loans to the Domestic Borrowers and the Foreign Borrower (subject to the provisions of subsection
(c) below), from time to time, on any Business Day during the Availability Period, in an aggregate principal amount not to exceed at any time
outstanding the lesser of (x) the amount of the Domestic Commitment of such Domestic Lender, or (y) the Applicable Percentage of the
Domestic Borrowing Base for such Domestic Lender; subject in each case to the following limitations:
after giving effect to any Domestic Committed Borrowing, the Domestic Total Outstandings shall not
(i)
exceed the Domestic Loan Cap,
(ii)
after giving effect to any Domestic Committed Borrowing, the aggregate Outstanding Amount of the
Domestic Committed Loans of any Domestic Lender, plus the Applicable Percentage of the Outstanding Amount of all Domestic L/C
Obligations for such Domestic Lender, plus such Domestic Lender’s Applicable Percentage of the Outstanding Amount of all Swing
Line Loans made to the Domestic Borrowers shall not exceed the Domestic Commitment of such Domestic Lender, and
(iii)
of Credit Sublimit.
the Outstanding Amount of all Domestic L/C Obligations shall not at any time exceed the Domestic Letter
Within the limits of the Domestic Commitment for each Domestic Lender, and subject to the other terms and conditions hereof, the Domestic
Borrowers (and the Foreign Borrower subject to the limitations provided herein) may borrow under this Section 2.01 , prepay under
Section 2.05 , and reborrow under this Section 2.01 .
(b)
Subject to the terms and conditions set forth herein, each Canadian Lender severally agrees to make Canadian
Committed Loans to the Canadian Borrower and the Foreign Borrower (subject to the provisions of subsection (c) below), from time to time, on
any Business Day during the Availability Period, in an aggregate principal amount not to exceed at any time outstanding the lesser of (x) the
amount of the Canadian Commitment of such Canadian Lender, or (y) the Applicable Percentage of the Canadian Borrowing Base for such
Canadian Lender; subject in each case to the following limitations:
after giving effect to any Canadian Committed Borrowing, the Total Canadian Outstandings shall not
(i)
exceed the Canadian Loan Cap,
(ii)
after giving effect to any Canadian Committed Borrowing, the aggregate Outstanding Amount of the
Canadian Committed Loans of any Canadian Lender, plus the Applicable Percentage of the Outstanding Amount of all Canadian L/C
Obligations for such Canadian Lender, plus such Canadian Lender’s Applicable Percentage of the Outstanding
(66)
Amount of all Swing Line Loans made to the Canadian Borrower, shall not exceed the Canadian Commitment of such Canadian
Lender, and
(iii)
of Credit Sublimit.
the Outstanding Amount of all Canadian L/C Obligations shall not at any time exceed the Canadian Letter
Within the limits of the Canadian Commitment for each Canadian Lender, and subject to the other terms and conditions hereof, the
Canadian Borrower (and the Foreign Borrower subject to the limitations provided herein) may borrow under this Section 2.01 , prepay under
Section 2.05 , and reborrow under this Section 2.01 .
(c)
Subject to the terms and conditions set forth herein, the Foreign Borrower may directly obtain Domestic Loans and
Canadian Loans from time to time only if and to the extent that the following conditions are satisfied:
the Foreign Borrower must have utilized all then remaining Distribution Availability (or the Domestic
(i)
Borrowers shall have borrowed all such remaining Distribution Availability, made an Investment in the amount of such remaining
Distribution Availability in Distribution and Distribution shall have made an Investment in the amount of such remaining Distribution
Availability in the Foreign Borrower); and
(ii)
after full utilization pursuant to subsection (i), above, the Foreign Borrower must have utilized all then
remaining Canadian Availability (or the Canadian Borrower shall have borrowed all then remaining Canadian Availability and made an
Investment in the amount of such remaining Canadian Availability in the Foreign Borrower);
(iii)
after giving effect to the proposed direct Borrowing by the Foreign Borrower, Excess Availability shall be
greater than 60% of the Domestic Loan Cap (excluding the Distribution Borrowing Base); and
(iv)
all other conditions precedent to the obtaining of Credit Extensions by the Borrowers shall have been
satisfied.
(d)
The following are The Inventory Reserves and Availability Reserves as of the Closing Effective Date : are set forth
in the Borrowing Base Certificate delivered on the Effective Date.
(i) Shrink (an Inventory Reserve). In an amount to the accrual therefor in the Loan Parties’ general ledger.
(ii) Other/Shows/Administrative Reserve (an Inventory Reserve). In an amount equal to 100% of the amount reflected
therefor in the Loan Parties’ general ledger.
(iii) Dilution Reserve (an Availability Reserve). In an amount equal to 8.1% of the Eligible Trade Receivables.
(iv) Rent Reserve (an Availability Reserve). In an amount equal to three months rent for all leased distribution centers
and all stores located in any jurisdiction in which a landlord’s lien may have priority over the Lien of the Collateral Agent or the
Canadian Agent
(67)
(v) Gift Certificates and Gift Cards (an Availability Reserve). In an amount equal to 100% of all outstanding gift
certificates and gift cards issued by or on behalf of the Loan Parties.
(vi) Beauty Club (an Availability Reserve). In an amount equal to 100% of the amount reflected therefor in the Loan
Parties’ general ledger.
(vii) GST/PST Reserve (an Availability Reserve). As to the Canadian Borrowing Base only, in an amount equal to all
accrued taxes due to any Governmental Authority.
(viii) WEPPA Reserve (an Availability Reserve). As to the Canadian Borrowing Base only, in an amount equal to all
accrued payroll and payroll related items protected by the Wage Earner Protection Program Act (Canada).
Subject to the restrictions otherwise set forth in this Agreement, the Administrative Agent shall have the right, at any
(e)
time and from time to time after the Closing Effective Date in its Permitted Discretion to establish, modify or eliminate Reserves upon three
(3) Business Days prior notice to the Borrowers, (during which period the Administrative Agent shall be available to discuss any such proposed
Reserve with the Borrowers; provided that no such prior notice shall be required for (1) changes to any Reserves resulting solely by virtue of
mathematical calculations of the amount of the Reserve in accordance with the methodology of calculation previously utilized (such as, but not
limited to, Rent and Customer Credit Liabilities), or (2) changes to Reserves or establishment of additional Reserves if a Material Adverse Effect
has occurred or it would be reasonably likely that a Material Adverse Effect to the Lenders would occur were such Reserve not changed or
established prior to the expiration of such two three ( 2 3 ) Business Day period, or (3) any changes to Reserves during the continuance of any
Event of Default.
2.02
Borrowings, Conversions and Continuations of Committed Loans .
(a)
Interest Rate Elections.
(i)
Domestic Committed Loans made to the Domestic Borrowers or to the Foreign Borrower shall be either
Domestic Prime Rate Loans or LIBOR Rate Loans, as the Parent, on behalf of the Domestic Borrowers or the Foreign
Borrower, may request subject to and in accordance with this Section 2.02; provided that all Domestic Committed Loans made
in Euros shall solely be Euribor Rate Loans and all Domestic Loans made in Sterling shall be LIBOR Rate Loans. All Swing
Line Loans made to the Domestic Borrowers or the Foreign Borrower shall be only made in Dollars and shall be only
Domestic Prime Rate Loans.
Canadian Committed Loans made to the Canadian Borrower or the Foreign Borrower shall be either
(ii)
Canadian Prime Rate Loans or BA Equivalent Loans (if made in CD$) or LIBOR Rate Loans or US Index Rate Loans (if in
Dollars) as the Canadian Borrower or the Foreign Borrower may request subject to and in accordance with this Section 2.02 ;
provided that provided that all Canadian Committed Loans made in Euros shall solely be Euribor Rate Loans and all Canadian
Committed Loans made in Sterling shall be LIBOR Rate Loans. All Swing Line Loans made to the Canadian Borrower or the
Foreign Borrower shall be made only in CD$ or Dollars and shall be only Canadian Prime Rate Loans or U.S. Index Rate
Loans, as applicable.
(68)
(iii)
Subject to the other provisions of this Section 2.02 , Committed Borrowings of more than one Type may be
incurred at the same time.
(b)
Each Committed Borrowing, each conversion of a Committed Loan from one Type to another, and each continuation
of Loans shall be made upon the irrevocable notice of the Parent on behalf of the Domestic Borrowers, by the Canadian Borrower or by
Foreign Borrower, as applicable, to the Administrative Agent or the Canadian Agent, as applicable, which may be given by telephone.
Each such notice must be received by the Administrative Agent or the Canadian Agent not later than 11:00 a.m. (i) three (3) Business
Days prior to the requested date of any Committed Borrowing of or continuation of Euribor Rate Loans, LIBOR Rate Loans or BA
Equivalent Loans or of any conversion of any such Loans to Loans of a different Type, (ii) four (4) Business Days prior to the requested
date of any Committed Borrowing to be made in an Optional Currency of, conversion to, or continuation of Euribor Rate Loans,
LIBOR Rate Loans or BA Equivalent Loans in an Optional Currency or of any conversion of any such Loans to Loans of a different
Type, and (iii) on the requested date of any Committed Borrowing of any of Canadian Prime Rate Loans, Domestic Prime Rate Loans
or US Index Rate Loans. Each telephonic notice pursuant to this Section 2.02(b) must be confirmed promptly by delivery to the
Administrative Agent or the Canadian Agent, as applicable, of a written Committed Loan Notice, appropriately completed and signed
by a Responsible Officer of the Parent, the Canadian Borrower or the Foreign Borrower, as applicable. Each Committed Borrowing of,
conversion to or continuation of LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans shall be in a principal amount of
$1,000,000 or a whole multiple of $1,000,000 in excess thereof (or the Equivalent Amount thereof). Except as provided in Sections
2.03(c) and 2.04(c) , each Committed Borrowing of or conversion to Canadian Prime Rate Loans , U.S. Index Rate Loans, or Domestic
Prime Rate Loans, as applicable, shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof or the
Equivalent Amount thereof). Each Committed Loan Notice (whether telephonic or written) shall specify (i) whether the request is for a
Committed Borrowing, a conversion of Committed Loans from one Type to the other, or a continuation of LIBOR Rate Loans, BA
Equivalent Loans, or Euribor Rate Loans, (ii) the requested date of the Committed Borrowing, conversion or continuation, as the case
may be (which shall be a Business Day), (iii) the principal amount of Committed Loans to be borrowed, converted or continued, (iv) the
Type of Committed Loans to be borrowed or to which existing Committed Loans are to be converted, (v) whether such Committed
Loan is to be made in Dollars, Canadian Dollars or another Optional Currency, and (vi) if applicable, the duration of the Interest Period
with respect thereto, provided that any request for Optional Currency shall comply with the provisions of Section 2.02(b) hereof. If
(x) the request fails to specify a Type of Committed Loan in a Committed Loan Notice or the currency in which such Committed Loan
is to be made or if the Parent, the Canadian Borrower, or the Foreign Borrower, as the case may be, fails to give a timely notice of a
conversion or continuation of a LIBOR Rate Loan, Euribor Rate Loan, or a BA Equivalent Loan, then the applicable Committed Loans
shall be made as, or converted to, Domestic Prime Rate Loans made in Dollars or Canadian Prime Rate Loans made in CD$, as
applicable. Any such automatic conversion to Prime Rate Loans shall be effective as of the last day of the Interest Period then in effect
with respect to the applicable LIBOR Rate Loans, Euribor Rate Loan or BA Equivalent Loans, or (y) fails to specify an Interest Period
for a LIBOR Rate Loan, Euribor Rate Loan, or a BA Equivalent Loan, it will be deemed to have specified an Interest Period of one
month. Notwithstanding anything to the contrary herein, a Swing Line Loan may not be converted to a LIBOR Rate Loan, Euribor Rate
Loan or a BA Equivalent Loan.
(c)
Following receipt of a Committed Loan Notice, the Agents shall promptly notify each Domestic Lender or Canadian
Lender, as the case may be, of the amount of its Applicable
(69)
Percentage of the applicable Committed Loans, and if no timely notice of a conversion or continuation is provided by the Parent, on
behalf of the Domestic Borrower or by the Canadian Borrower or by the Foreign Borrower, the Agents shall notify each Lender of the
details of any automatic conversion to Prime Rate Loans described in Section 2.02(b) . Each Domestic Lender and each Canadian
Lender shall make the amount of its applicable Committed Loan available to the Administrative Agent or the Canadian Agent, as the
case may be, in immediately available funds at the applicable Agent’s Office not later than 1:00 p.m. on the Business Day specified in
the applicable Committed Loan Notice. Upon satisfaction of the applicable conditions set forth in Section 4.02 (and, if such Committed
Borrowing is the initial Credit Extension, Section 4.01 ), the applicable Agent shall use reasonable efforts to make all funds so received
available to the applicable Borrowers in like funds by no later than 4:00 p.m. (and, if such Borrowing is the initial Credit Extension,
4:00 p.m.) on the day of receipt by the applicable Agent, either by (i) crediting either the account of the Parent, the Canadian Borrower
or the Foreign Borrower, as applicable, on the books of Bank of America or Bank of America-Canada Branch, as applicable, with the
amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably
acceptable to) the applicable Agent by the Parent, the Canadian Borrower or by the Foreign Borrower; provided , however , that (A) if,
on the date a Committed Loan Notice with respect to a Canadian Committed Borrowing is given by the Canadian Borrower or the
Foreign Borrower, as applicable, there are Canadian L/C Borrowings outstanding, then the proceeds of such Canadian Committed
Borrowing, first , shall be applied to the payment in full of any such Canadian L/C Borrowings, and second , shall be made available to
the Canadian Borrower or the Foreign Borrower as provided above; or (B) if, on the date a Committed Loan Notice with respect to a
Domestic Committed Borrowing is given by the Parent on behalf of the Domestic Borrowers or the Foreign Borrower, there are
Domestic L/C Borrowings outstanding, then the proceeds of such Domestic Committed Borrowing, first , shall be applied to the
payment in full of any such Domestic L/C Borrowings, and second , shall be made available to the Domestic Borrowers or the Foreign
Borrower as provided above.
(d)
In the event that any Borrower fails to pay any interest, fee, service charge, Credit Party Expenses, or other payment
to which any Lender or any Agent is entitled from the such Borrower pursuant hereto when due, or at any time after the occurrence and
during the continuance of a Trigger Event, the applicable Agent, without the request of any Loan Party, may advance such interest, fee,
service charge, Credit Party Expenses, or other payment to which any Lender or any Agent is entitled from the applicable Borrower
pursuant hereto or any other Loan Document and may charge the same to the Loan Account with respect to the Domestic Credit
Extensions or Canadian Credit Extensions, as applicable, notwithstanding that a Domestic Overadvance or a Canadian Overadvance
may result thereby. The Agents shall advise the Parent of any such advance or charge by the Administrative Agent promptly after the
making thereof, and the Canadian Agent shall advise the Canadian Borrower of any such advance or charge by the Canadian Agent
promptly after the making thereof. Such action on the part of the Administrative Agent or the Canadian Agent shall not constitute a
waiver of the applicable Credit Party’s rights and the applicable Borrowers’ obligations under Section 2.05(c) . Any amount which is
added to the principal balance of the applicable Loan Account as provided in this Section 2.02(c) shall be deemed to be a Domestic
Prime Rate Loan or a Canadian Prime Rate Loan, as applicable.
Except as otherwise provided herein, a LIBOR Rate Loan, a Euribor Rate Loan or a BA Equivalent Loan may be
(e)
continued or converted only on the last day of an Interest Period for such Loan. During the existence of an Event of Default, no Loans
may be requested as, converted to or continued as LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans without the Consent
of the Required Lenders.
(70)
(f)
The applicable Agent shall promptly notify the Parent, the Canadian Borrower, the Foreign Borrower and the
applicable Lenders of the interest rate applicable to any Interest Period for Euribor Rate Loans, BA Equivalent Loans, or LIBOR Rate
Loans upon determination of such interest rate. At any time that Prime Rate Loans are outstanding, the applicable Agent shall promptly
notify the Parent, the Canadian Borrower, the Foreign Borrower and the applicable Lenders of any change in the U.S. Prime Rate, US
Index Rate or Canadian Prime Rate promptly following the public announcement of such change.
After giving effect to all Committed Borrowings, all conversions of Committed Loans from one Type to another in
(g)
accordance with the terms hereof, and all continuations of Committed Loans as the same Type, there shall not be more than five
(5) Interest Periods in effect with respect to Domestic Committed Loans and not be more than five (5) Interest Periods in effect with
respect to Canadian Committed Loans.
None of the Agents, the Lenders, or the L/C Issuer shall have any obligation to make any Loan or to provide any
(h)
Letter of Credit if an Overadvance would result. The Administrative Agent may, in its discretion, make Permitted Domestic
Overadvances without the consent of any Lender or any L/C Issuer and each Domestic Lender shall be bound thereby. The Canadian
Agent may, in its discretion, make Permitted Canadian Overadvances without the consent of any Lender, or any L/C Issuer and each
Canadian Lender shall be bound thereby. Any Permitted Overadvance may constitute a Swing Line Loan and shall bear interest at the
U.S. Prime Rate or the Canadian Prime Rate, as applicable. All Permitted Overadvance are for the account of the applicable Borrowers
and shall be repaid on demand. The making of any such Permitted Overadvance on any one occasion shall not obligate any Agent or
any Lender to make or permit any Permitted Overadvance on any other occasion or to permit such Permitted Overadvances to remain
outstanding. The making by any Agent of a Permitted Overadvance shall not modify or abrogate any of the provisions of Section 2.03
regarding the Lenders’ obligations to purchase participations with respect to Letters of Credit or of Section 2.04 regarding the Lenders’
obligations to purchase participations with respect to Swing Line Loans. Neither the Administrative Agent nor the Canadian Agent
shall have any liability for, and no Loan Party or Credit Party shall have the right to, or shall, bring any claim of any kind whatsoever
against the Administrative Agent or the Canadian Agent with respect to Unintentional Overadvances regardless of the amount of any
such Overadvance(s).
2.03
Letters of Credit .
(a)
The Letter of Credit Commitment .
Subject to the terms and conditions set forth herein, (A) each L/C Issuer agrees, in reliance upon the agreements of the Lenders set forth
in this Section 2.03 , (1) from time to time on any Business Day during the period from the Closing Date until the Letter of Credit Expiration
Date, to issue Letters of Credit for the account of any Borrower (provided that any Canadian Letter of Credit may only be for the benefit of any
Canadian Loan Party or the Foreign Borrower), and to amend or extend Letters of Credit previously issued by it, in accordance with Section 2.03
(b) below, and (2) to honor drawings under the Letters of Credit; (B) each Domestic Lender severally agrees to participate in Domestic Letters
of Credit and any drawings thereunder; provided that, after giving effect to any L/C Credit Extension with respect to any Domestic Letter of
Credit, the provisions of Section 2.01(a) shall not have been breached, and (C) each Canadian Lender severally agrees to participate in Canadian
Letters of Credit and any drawings thereunder; provided that, after giving effect to any Canadian L/C Credit Extension, the provisions of
Section 2.01(a) shall not have been breached. Each request by a Borrower for the issuance or amendment of a Letter of Credit shall be deemed
to be a representation by all Borrowers that the L/C Credit Extension
(71)
so requested complies with the conditions set forth in the proviso to the preceding sentence. Within the foregoing limits, and subject to the terms
and conditions hereof, each Borrower’s ability to obtain Letters of Credit shall be fully revolving, and accordingly such Borrower may, during
the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed. Any
L/C Issuer (other than Bank of America or any of its branches or Affiliates) shall notify the applicable Agent in writing on each Business Day of
all Letters of Credit issued on the prior Business Day by such L/C Issuer, provided that (i) until the applicable Agent advises any such L/C Issuer
that the provisions of Section 4.02 are not satisfied, or (ii) the aggregate amount of the Letters of Credit issued in any such week exceeds such
amount as shall be agreed by the Agents and the L/C Issuer, such L/C Issuer shall be required to so notify the Agents in writing only once each
week of the Letters of Credit issued by such L/C Issuer during the immediately preceding week as well as the daily amounts outstanding for the
prior week, such notice to be furnished on such day of the week as the Agents and such L/C Issuer may agree. All Existing Letters of Credit shall
be deemed to have been issued pursuant hereto, and from and after the Closing Date shall be subject to and governed by the terms and conditions
hereof.
(i)
The L/C Issuers shall not issue any Letter of Credit, if:
(A)
subject to Section 2.03(b)(iii) , the expiry date of such requested Standby Letter of Credit would
occur more than twelve months after the date of issuance or last extension, unless the Required Lenders have approved such expiry
date; or
(B)
subject to Section 2.03(b)(iii) , the expiry date of such requested Commercial Letter of Credit
would occur more than 120 days after the date of issuance or last extension, unless the Required Lenders have approved such expiry
date; or
(C)
the expiry date of such requested Letter of Credit would occur after the Letter of Credit Expiration
Date, unless either such Letter of Credit is Cash Collateralized on or prior to the date of issuance of such
Letter of Credit or all the Lenders have approved such expiry date.
(ii)
The L/C Issuers shall not be required to issue any Letter of Credit without the prior consent of the Agents if:
(A)
any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms
purport to enjoin or restrain such L/C Issuer from issuing such Letter of Credit, or any Law applicable to such L/C Issuer or any request
or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over such L/C Issuer shall
prohibit, or request that such L/C Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or
shall impose upon such L/C Issuer with respect to such Letter of Credit any restriction, reserve or capital requirement (for which such
L/C Issuer is not otherwise compensated hereunder) not in effect on the Closing Effective Date, or shall impose upon such L/C Issuer
any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which such L/C Issuer in good faith deems
material to it;
the issuance of such Letter of Credit would violate one or more policies of such L/C Issuer
(B)
applicable to letters of credit generally;
(C)
after any drawing thereunder; or
such Letter of Credit contains any provisions for automatic reinstatement of the Stated Amount
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(D)
any Lender is at such that time a Defaulting Lender or Deteriorating Lender hereunder , unless
such the L/C Issuer has entered into arrangements, including the delivery of Cash Collateral, satisfactory arrangements to the L/C
Issuer (in its reasonable discretion) with the applicable Borrowers or such Lender to eliminate such the L/C Issuer’s risk with respect
to such Lender. actual or potential Fronting Exposure (after giving effect to Section 2.16(a)(iv)) with respect to the Defaulting
Lender arising from either (x) the Letter of Credit then proposed to be issued or (y) that Letter of Credit and all other L/C
Obligations as to which the L/C Issuer has actual or potential Fronting Exposure, as it may elect in its sole discretion.
(iii)
The L/C Issuers shall not amend any Letter of Credit if the L/C Issuers would not be permitted at such time
to issue such Letter of Credit in its amended form under the terms hereof or if the beneficiary of such Letter of Credit does not accept the
proposed amendment to such Letter of Credit.
The L/C Issuers shall act on behalf of the applicable Lenders with respect to any Letters of Credit issued by
(iv)
it and the documents associated therewith, and the L/C Issuers shall have all of the benefits and immunities (A) provided to the Administrative
Agent and the Canadian Agent in Article IX with respect to any acts taken or omissions suffered by the L/C Issuers in connection with Letters of
Credit issued by it or proposed to be issued by it and Issuer Documents pertaining to such Letters of Credit as fully as if the terms
“Administrative Agent” and “Canadian Agent” as used in Article IX included the L/C Issuers with respect to such acts or omissions, and (B) as
additionally provided herein with respect to the L/C Issuers.
(b)
Procedures for Issuance and Amendment of Letters of Credit; Auto-Extension Letters of Credit .
Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Parent on
(i)
behalf of the Domestic Borrowers, the Canadian Borrower, or the Foreign Borrower, as applicable, delivered to the L/C Issuer (with a copy to
the Administrative Agent and, if applicable, the Canadian Agent) in the form of a Letter of Credit Application, appropriately completed and
signed by a Responsible Officer of the Parent, the Canadian Borrower, or the Foreign Borrower, as applicable. Such Letter of Credit Application
must be received by the L/C Issuer and the Administrative Agent and, if applicable, the Canadian Agent, not later than 11:00 a.m. at least two
(2) Business Days (or such later date and time as the Administrative Agent, or the Canadian Agent, as applicable, and the L/C Issuer may agree
in a particular instance in their sole discretion) prior to the proposed issuance date or date of amendment, as the case may be. In the case of a
request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail reasonably satisfactory to
the L/C Issuer: (A) whether such Letter of Credit is to be a Domestic Letter of Credit or a Canadian Letter of Credit, and the proposed issuance
date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and
address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of
any certificate to be presented by such beneficiary in case of any drawing thereunder; (G) the identity of the Borrower for the account of which
such Letter of Credit is requested to be issued; and (H) such other matters as the L/C Issuer may reasonably require. In the case of a request for
an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail reasonably satisfactory to
the L/C Issuer: (A) the Letter of Credit to be amended; (B) the proposed date of amendment thereof (which shall be a Business Day); (C) the
nature of the proposed amendment; and (D) such other matters as the L/C Issuer may require. Additionally, the applicable Borrower shall
furnish to the L/C Issuer and the Administrative Agent and, if applicable, the Canadian Agent, such other documents and information pertaining
to such requested Letter of Credit
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issuance or amendment, including any Issuer Documents, as the L/C Issuer, the Administrative Agent or the Canadian Agent may require.
(ii)
Promptly after receipt of any Letter of Credit Application, the L/C Issuer will confirm with the
Administrative Agent and, if applicable, the Canadian Agent (by telephone or in writing) that the Administrative Agent and, if applicable, the
Canadian Agent has received a copy of such Letter of Credit Application from the Parent, the Canadian Borrower, or the Foreign Borrower, as
applicable, and, if not, the L/C Issuer will provide the Administrative Agent and, if applicable, the Canadian Agent, with a copy thereof. Unless
the L/C Issuer has received written notice from any Lender, the Administrative Agent, the Canadian Agent or any Loan Party, at least one
(1) Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions
contained in Article IV shall not then be satisfied or unless the L/C Issuer would not be permitted, or would have no obligation, at such
time to issue such Letter of Credit under the terms hereof (by reason of the provisions of Section 2.03(a)(ii) or otherwise) , then, subject to
the terms and conditions hereof, the L/C Issuer shall, on the requested date, issue a Letter of Credit for the account of the applicable Borrower or
enter into the applicable amendment, as the case may be, in each case in accordance with the L/C Issuer’s usual and customary business
practices. Immediately upon the issuance or amendment of each Letter of Credit, each Domestic Lender or each Canadian Lender, as applicable,
shall be deemed to (without any further action), and hereby irrevocably and unconditionally severally agrees to, purchase from the L/C Issuer,
without recourse or warranty, a risk participation in such Letter of Credit in an amount equal to the product of such Domestic Lender’s or
Canadian Lender’s Applicable Percentage, as applicable times the Stated Amount of such Letter of Credit. Upon any change in the Domestic
Commitments or the Canadian Commitments under this Agreement, it is hereby agreed that with respect to all L/C Obligations, there shall be an
automatic adjustment to the participations hereby created to reflect any new Applicable Percentages of the assigning and assignee Domestic
Lenders or Canadian Lenders, as the case may be.
(iii)
If the Parent on behalf of the Domestic Borrowers, the Canadian Borrower, or the Foreign Borrower, as
applicable, so requests in any applicable Letter of Credit Application, the L/C Issuer may, in its sole and absolute discretion, agree to issue a
Standby Letter of Credit that has automatic extension provisions (each, an “ Auto-Extension Letter of Credit ”); provided that any such AutoExtension Letter of Credit must permit the L/C Issuer to prevent any such extension at least once in each twelve-month period (commencing
with the date of issuance of such Standby Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the “ NonExtension Notice Date ”) in each such twelve-month period to be agreed upon at the time such Standby Letter of Credit is issued. Unless
otherwise directed by the L/C Issuer, the Parent, the Canadian Borrower, or the Foreign Borrower, as applicable, shall not be required to make a
specific request to the L/C Issuer for any such extension. Once an Auto-Extension Letter of Credit has been issued, the Lenders shall be deemed
to have authorized (but may not require) the L/C Issuer to permit the extension of such Standby Letter of Credit at any time to an expiry date not
later than the Letter of Credit Expiration Date; provided , however , that the L/C Issuer shall not permit any such extension if (A) the L/C Issuer
has determined that it would not be permitted, or would have no obligation, at such time to issue such Standby Letter of Credit in its revised
form (as extended) under the terms hereof (by reason of the provisions of clauses (ii) or (iii) of Section 2.03(a) or otherwise), or (B) it has
received notice (which may be by telephone or in writing) on or before the day that is five (5) Business Days before the Non-Extension Notice
Date (1) from the Administrative Agent that the Required Lenders have elected not to permit such extension or (2) from the Administrative
Agent, the Canadian Agent, or any Lender that one or more of the applicable conditions specified in Section 4.02 is not then satisfied, and in
each such case directing the L/C Issuer not to permit such extension.
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(iv)
Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising
bank with respect thereto or to the beneficiary thereof, the L/C Issuer will also deliver to the Parent and the Administrative Agent and, if
applicable, the Canadian Agent, a true and complete copy of such Letter of Credit or amendment.
(c)
Drawings and Reimbursements; Funding of Participations .
Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of
(i)
Credit, the L/C Issuer shall notify the Parent, the Canadian Borrower, or the Foreign Borrower, as applicable, and the Administrative Agent and,
if applicable, the Canadian Agent, thereof; provided , however , that any failure to give or delay in giving such notice shall not relieve the
applicable Borrower of its obligation to reimburse the L/C Issuer and the applicable Lenders with respect to any such payment. Not later than
11:00 a.m. on the first (1 st ) Business Day after the date of any payment by the L/C Issuer under a Letter of Credit (each such date, an “ Honor
Date ”), the applicable Borrower shall reimburse the L/C Issuer through the Administrative Agent or the Canadian Agent, as applicable, in an
aggregate principal amount equal to the amount of such drawing. If such Borrower fails to so reimburse the L/C Issuer by such time, the
Administrative Agent or the Canadian Agent, as applicable, shall promptly notify each Domestic Lender or each Canadian Lender, as applicable,
of the Honor Date, the amount of the unreimbursed drawing (the “ Unreimbursed Amount ”), and the amount of such Domestic Lender’s or
Canadian Lender’s Applicable Percentage thereof, as applicable. In such event, the Domestic Borrowers, the Canadian Borrower, or the Foreign
Borrower, as applicable, shall be deemed to have requested a Committed Borrowing of Domestic Prime Rate Loans or Canadian Prime Rate
Loans, as applicable, to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and
multiples specified in Section 2.02 for the principal amount of Prime Rate Loans, but subject to the amount of the unutilized portion of the
Domestic Total Commitments or the Canadian Total Commitments, as applicable, and the conditions set forth in Section 4.02 (other than the
delivery of a Committed Loan Notice). Any notice given by the L/C Issuer, the Administrative Agent or the Canadian Agent pursuant to this
Section 2.03(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation
shall not affect the conclusiveness or binding effect of such notice.
(ii)
Each Domestic Lender or Canadian Lender, as the case may be, shall upon any notice delivered pursuant to
Section 2.03(c)(i) make funds available to the Administrative Agent or the Canadian Agent, as applicable, for the account of the L/C Issuer at
the Administrative Agent’s Office or the Canadian Agent’s Office, as applicable, in an amount equal to its Applicable Percentage of the
Unreimbursed Amount not later than 1:00 p.m. on the Business Day specified in such notice by the Administrative Agent or the Canadian Agent,
as applicable, whereupon, subject to the provisions of Section 2.03(c)(iii) , each Lender that so makes funds available shall be deemed to have
made a Domestic Prime Rate Loan to the Domestic Borrowers (or the Foreign Borrower if based on Domestic Availability), or a Canadian Prime
Rate Loan to the Canadian Borrower (or the Foreign Borrower if based on Canadian Availability), as applicable, in such amount. The
Administrative Agent or the Canadian Agent, as applicable, shall remit the funds so received to the L/C Issuer.
With respect to any Unreimbursed Amount that is not fully refinanced by a Committed Borrowing of Prime
(iii)
Rate Loans because the conditions set forth in Section 4.02 cannot be satisfied or for any other reason, the Domestic Borrowers, the Canadian
Borrower, or the Foreign Borrower, as applicable, shall be deemed to have incurred from the L/C Issuer an L/C Borrowing in the amount of the
Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall
bear interest at the Default Rate. In such event, each Lender’s payment to the Administrative Agent for the account of the L/C Issuer pursuant to
Section 2.03(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall
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constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.03 .
(iv)
Until each applicable Lender funds its Committed Loan or L/C Advance pursuant to this Section 2.03(c) to
reimburse the L/C Issuer for any amount drawn under any Letter of Credit, interest in respect of such Domestic Lender’s or Canadian Lender’s
Applicable Percentage, as applicable, of such amount shall be solely for the account of the L/C Issuer.
(v)
Each Lender’s obligation to make Committed Loans or L/C Advances to reimburse the L/C Issuer for
amounts drawn under Letters of Credit, as contemplated by this Section 2.03(c) , shall be absolute and unconditional and shall not be affected by
any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the L/C
Issuer, any Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other
occurrence, event or condition, whether or not similar to any of the foregoing; provided , however , that each Lender’s obligation to make
Committed Loans pursuant to this Section 2.03(c) is subject to the conditions set forth in Section 4.02 (other than delivery of a Committed Loan
Notice). No such making of an L/C Advance shall relieve or otherwise impair the obligation of the Borrowers to reimburse the L/C Issuer for
the amount of any payment made by the L/C Issuer under any Letter of Credit, together with interest as provided herein.
(vi)
If any Lender fails to make available to the Administrative Agent or the Canadian Agent, as applicable, for
the account of the L/C Issuer any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.03(c) by the
time specified in Section 2.03(c)(ii) , the L/C Issuer shall be entitled to recover from such Lender (acting through the Administrative Agent or
the Canadian Agent, as applicable), on demand, such amount with interest thereon for the period from the date such payment is required to the
date on which such payment is immediately available to the L/C Issuer at a rate per annum equal to the greater of (A) the Federal Funds Rate,
with respect to the Administrative Agent or payments due to the Canadian Agent in Dollars, and the Bank of Canada Overnight Rate with
respect to payments due to the Canadian Agent in Canadian Dollars or any Optional Currency, and (B) a rate determined by the L/C Issuer in
accordance with banking industry rules on interbank compensation plus any administrative, processing or similar fees customarily charged by
the L/C Issuer in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall
constitute such Lender’s Committed Loan included in the relevant Committed Borrowing or L/C Advance in respect of the relevant L/C
Borrowing, as the case may be. A certificate of the L/C Issuer submitted to any Lender (through the Administrative Agent or the Canadian
Agent, as applicable) with respect to any amounts owing under this clause (vi) shall be conclusive absent manifest error.
(d)
Repayment of Participations .
(i)
At any time after the L/C Issuer has made a payment under any Letter of Credit and has received from any
Lender such Lender’s L/C Advance in respect of such payment in accordance with Section 2.03(c) , if the Administrative Agent or the Canadian
Agent, as applicable, receives for the account of the L/C Issuer any payment in respect of the related Unreimbursed Amount or interest thereon
(whether directly from the applicable Borrowers or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent
or the Canadian Agent, as applicable), the Administrative Agent or the Canadian Agent, as applicable, will distribute to the applicable Domestic
Lender or Canadian Lender its Applicable Percentage thereof (appropriately adjusted, in the case of interest payments, to reflect the period of
time during which such Lender’s L/C Advance was outstanding) in the same funds as those received by the Administrative Agent or the
Canadian Agent, as applicable.
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(ii)
If any payment received by the Administrative Agent or the Canadian Agent, as applicable, for the account
of the L/C Issuer pursuant to Section 2.03(c)(i) is required to be returned under any of the circumstances described in Section 10.05 (including
pursuant to any settlement entered into by the L/C Issuer in its discretion), each Domestic Lender or Canadian Lender, as applicable, shall pay to
the Administrative Agent or the Canadian Agent, as applicable, for the account of the L/C Issuer its Applicable Percentage thereof on demand of
the Administrative Agent or the Canadian Agent, as applicable, plus interest thereon from the date of such demand to the date such amount is
returned by such Lender, at a rate per annum equal to the Federal Funds Rate, with respect to the Administrative Agent or payments due to the
Canadian Agent in Dollars, and the Bank of Canada Overnight Rate with respect to payments due to the Canadian Agent in Canadian Dollars or
other Optional Currency, from time to time in effect. The obligations of the Lenders under this clause shall survive the Payment in Full of the
Obligations and the termination of this Agreement.
(e)
Obligations Absolute . The obligation of each Borrower to reimburse the L/C Issuer for each drawing under each
Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with
the terms of this Agreement under all circumstances, including the following:
(i)
any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Loan Document;
(ii)
the existence of any claim, counterclaim, setoff, defense or other right that any Borrower or any Subsidiary
may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any
such transferee may be acting), the L/C Issuer or any other Person, whether in connection with this Agreement, the transactions contemplated
hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction;
(iii)
any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the
transmission or otherwise of any document required in order to make a drawing under such Letter of Credit;
any payment by the L/C Issuer under such Letter of Credit against presentation of a draft or certificate that
(iv)
does not strictly comply with the terms of such Letter of Credit; or any payment made by the L/C Issuer under such Letter of Credit to any
Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other
representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any
proceeding under any Debtor Relief Law;
(v)
any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including
any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Borrower or any of their respective
Subsidiaries; or
(vi)
the fact that any Event of Default shall have occurred and be continuing.
The Parent, the Canadian Borrower, or the Foreign Borrower, as applicable, shall promptly examine a copy of each Domestic Letter of
Credit or each Canadian Letter of Credit, as applicable, and each amendment thereto that is delivered to such Person and, in the event of any
claim of noncompliance with the Parent’s, the Canadian Borrower’s, or the Foreign Borrower’s, as applicable, instructions or other irregularity,
the Parent, the Canadian Borrower, or the Foreign Borrower, as applicable, will promptly
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notify the L/C Issuer. The Borrowers shall be conclusively deemed to have waived any such claim against the L/C Issuer and its correspondents
unless such notice is given as aforesaid.
(f)
Role of L/C Issuer . Each Lender and the Borrowers agree that, in paying any drawing under a Letter of Credit, the
L/C Issuer shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by
the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or
delivering any such document. None of the L/C Issuer, the Administrative Agent, the Canadian Agent, any of their respective Related Parties
nor any correspondent, participant or assignee of the L/C Issuer shall be liable to any Lender for (i) any action taken or omitted in connection
herewith at the request or with the approval of the Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence
of gross negligence or willful misconduct; (iii) any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or
other communication under or relating to any Letter of Credit or any error in interpretation of technical terms; or (iv) the due execution,
effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Issuer Document. The Borrowers
hereby assume all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided ,
however , that this assumption is not intended to, and shall not, preclude the Borrowers’ pursuing such rights and remedies as it may have
against the beneficiary or transferee at law or under any other agreement. None of the L/C Issuer, the Administrative Agent, the Canadian
Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable or responsible for
any of the matters described in clauses (i) through (v) of Section 2.03(e) ; provided , however , that anything in such clauses to the contrary
notwithstanding, the Borrowers may have a claim against the L/C Issuer, and the L/C Issuer may be liable to the Borrowers, to the extent, but
only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrowers which the Borrowers prove were
caused by the L/C Issuer’s willful misconduct or gross negligence or the L/C Issuer’s willful failure to pay under any Letter of Credit after the
presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In
furtherance and not in limitation of the foregoing, the L/C Issuer may accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or information to the contrary (or the L/C Issuer may refuse to accept and make
payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit), and the L/C Issuer shall
not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit
or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. The L/C
Issuer may send a Letter of Credit or conduct any communication to or from the beneficiary via the Society for Worldwide Interbank
Financial Telecommunication (“SWIFT”) message or overnight courier, or any other commercially reasonable means of communicating
with a beneficiary.
(g)
Cash Collateral . Upon the written request of the Administrative Agent or the Canadian Agent, as applicable, (or if
an Event of Default is continuing, the applicable L/C Issuer) if, as of the Letter of Credit Expiration Date, any L/C Obligation (other than L/C
Borrowings) for any reason remains outstanding, then , the Domestic Borrowers shall, in each case, promptly Cash Collateralize the then
Outstanding Amount of all Domestic L/C Obligations (other than Domestic L/C Borrowings) and the Canadian Borrower shall, in each case,
promptly Cash Collateralize the then Outstanding Amount of all Canadian L/C Obligations (other than Canadian L/C Borrowings). Sections
2.05 and 8.02(c) set forth certain additional requirements to deliver Cash Collateral hereunder. For purposes of this Section 2.03 , Section 2.05
and Section 8.02(c) , “ Cash Collateralize ” means to pledge and deposit into the applicable Cash Collateral Account or deliver to the
Administrative Agent or the Canadian Agent, as applicable, for the benefit of the L/C Issuer and the Domestic Lenders or the Canadian Lenders,
as applicable, as collateral for the Domestic L/C Obligations or the Canadian L/C Obligations, as applicable, cash or
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deposit account balances in an amount equal to one hundred five percent (105%) of the Outstanding Amount of all Domestic L/C Obligations
(other than Domestic L/C Borrowings) or the Canadian L/C Obligations (other than Canadian L/C Borrowings), as applicable, pursuant to
documentation in form and substance reasonably satisfactory to the Administrative Agent or the Canadian Agent, as applicable, and the L/C
Issuer (which documents are hereby consented to by the Lenders). Derivatives of such term have corresponding meanings. The Domestic
Borrowers hereby grant to the Administrative Agent (for the benefit of itself and the other Credit Parties) a security interest in, and Lien on, all
such cash, deposit accounts and all balances in the Cash Collateral Account established by the Domestic Loan Parties and all proceeds of the
foregoing to secure the Secured Obligations (as defined in the Security Agreement) of the Domestic Loan Parties. The Canadian Loan Parties
hereby grant to the Canadian Agent a security interest in, and Lien on, all such cash, deposit accounts and all balances in the Cash Collateral
Account established by the Canadian Loan Parties and all proceeds of the foregoing to secure the Canadian Liabilities. Cash Collateral shall be
maintained in Cash Collateral Accounts at Bank of America or Bank of America-Canada Branch, as applicable. If at any time the
Administrative Agent reasonably determines that any funds held by it as Cash Collateral are subject to any right or claim of any Person other
than the Administrative Agent (for the benefit of itself and the other Domestic Credit Parties) or that the total amount of such funds is less than
105% of the aggregate Outstanding Amount of all Domestic L/C Obligations (other than Domestic L/C Borrowings), the Domestic Borrowers
will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional funds to be deposited as Cash
Collateral, an amount equal to the excess of (x) such aggregate Outstanding Amount of all Domestic L/C Obligations (other than Domestic L/C
Borrowings) over (y) the total amount of funds, if any, then held by the Administrative Agent as Cash Collateral that the Administrative Agent
reasonably determines to be free and clear of any such right and claim. If at any time the Canadian Agent reasonably determines that any funds
held by it as Cash Collateral are subject to any right or claim of any Person other than the Canadian Agent (for the benefit of itself and the other
Canadian Credit Parties) or that the total amount of such funds is less than 105% of the aggregate Outstanding Amount of all Canadian L/C
Obligations (other than Canadian L/C Borrowings), the Canadian Borrower will, forthwith upon demand by the Canadian Agent, pay to the
Canadian Agent, as additional funds to be deposited as Cash Collateral, an amount equal to the excess of (x) such aggregate Outstanding
Amount of all Canadian L/C Obligations (other than Canadian L/C Borrowings) over (y) the total amount of funds, if any, then held by the
Canadian Agent as Cash Collateral that the Canadian Agent reasonably determines to be free and clear of any such right and claim. Upon the
drawing of any Letter of Credit for which funds are on deposit as Cash Collateral, such funds shall be applied, to the extent permitted under
applicable Laws, to reimburse the L/C Issuer and, to the extent not so applied, shall thereafter be applied to satisfy other Obligations in the
manner specified in Section 2.05 and Section 8.03 .
(h)
Applicability of ISP and UCP . Unless otherwise expressly agreed by the L/C Issuer and the Parent or the Canadian
Borrower, as applicable, when a Letter of Credit is issued (including any such agreement applicable to an Existing Letter of Credit), (i) the
rules of the ISP shall apply to each Standby Letter of Credit, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits, as
most recently published by the International Chamber of Commerce at the time of issuance shall apply to each Commercial Letter of Credit.
Notwithstanding the foregoing, the L/C Issuer shall not be responsible to the Borrowers for, and the L/C Issuer’s rights and remedies
against the Borrowers shall not be impaired by, any action or inaction of the L/C Issuer required or permitted under any law, order, or
practice that is required or permitted to be applied to any Letter of Credit or this Agreement, including the Law or any order of a
jurisdiction where the L/C Issuer or the beneficiary is located, the practice stated in the ISP or UCP, as applicable, or in the decisions,
opinions, practice statements, or official commentary of the ICC Banking Commission, the Bankers Association for Finance and Trade International Financial Services Association (BAFT-IFSA), or the Institute of International Banking Law & Practice, whether or not
any Letter of Credit chooses such law or practice.
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(i)
Letter of Credit Fees . The Domestic Borrowers shall pay to the Administrative Agent for the account of the
Domestic Lenders, the Canadian Borrower and the Foreign Borrower shall pay to the Canadian Agent, for the account of the Canadian Lenders,
as applicable, each in accordance with its Applicable Percentage, a Letter of Credit fee (the “ Letter of Credit Fee ”) for (i) in the case of the
Letter of Credit Fee payable by the Domestic Borrowers, each Domestic Letter of Credit equal to the Applicable Rate multiplied by the daily
Stated Amount under each such Domestic Letter of Credit (whether or not such maximum amount is then in effect under such Domestic Letter of
Credit) and (ii) in the case of the Letter of Credit Fee payable by the Canadian Borrower, each Canadian Letter of Credit equal to the Applicable
Rate multiplied by the daily Stated Amount under each such Canadian Letter of Credit (whether or not such maximum amount is then in effect
under such Canadian Letter of Credit). For purposes of computing the daily amount available to be drawn under any Letter of Credit, the
amount of the Letter of Credit shall be determined in accordance with Section 1.06 . Letter of Credit Fees shall be (i) due and payable on the
first calendar day of each April, July, October and January, commencing with the first such date to occur after the issuance of such Letter of
Credit, on the Letter of Credit Expiration Date and thereafter on demand, and (ii) computed on a quarterly basis in arrears. If there is any change
in the Applicable Rate during any quarter, the daily amount available to be drawn under each Letter of Credit shall be computed and multiplied
by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. Notwithstanding anything to the
contrary contained herein, while any Event of Default exists, Administrative Agent may, and upon the request of the Required Lenders shall,
notify the Parent that all Letter of Credit Fees shall accrue at the Default Rate and thereafter such Letter of Credit Fees shall accrue at the Default
Rate to the fullest extent permitted by applicable Law so long as such Event of Default is continuing.
(j)
Fronting Fee and Documentary and Processing Charges Payable to L/C Issuer . The Domestic Borrowers, the
Canadian Borrower and the Foreign Borrower, as applicable, shall pay directly to the L/C Issuer for its own account a fronting fee (the “
Fronting Fee ”) at a rate equal to 0.125% per annum, computed on the daily amount available to be drawn under each Letter of Credit and
payable on a quarterly basis in arrears. Such Fronting Fees shall be due and payable on the last Business Day of each calendar quarter,
commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on
demand. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of the Letter of Credit shall
be determined in accordance with Section 1.06 . In addition, the Domestic Borrowers, the Canadian Borrower and the Foreign Borrower, as
applicable, shall pay directly to the L/C Issuer for its own account the customary issuance, presentation, amendment and other processing fees,
and other standard costs and charges, of the L/C Issuer relating to Letters of Credit as from time to time in effect. Such customary fees and
standard costs and charges are due and payable on demand and are nonrefundable.
(k)
Conflict with Issuer Documents . In the event of any conflict between the terms hereof and the terms of any Issuer
Document, the terms hereof shall control.
2.04
Swing Line Loans .
(a)
The Swing Line . Subject to the terms and conditions set forth herein, the Swing Line Lender agrees, in reliance
upon the agreements of the other Lenders set forth in this Section 2.04 , to from time to time on any Business Day during the Availability Period,
make loans (each such loan, a “ Swing Line Loan ”) (i) to the Domestic Borrowers or the Foreign Borrower (subject to the provisions of
Section 2.01(c)) in an aggregate principal amount not to exceed at any time outstanding the amount of the Domestic Swing Line Sublimit,
notwithstanding the fact that the Outstanding Amount of such Swing Line Loans made to the Domestic Borrowers and the Foreign Borrower,
when aggregated with the Applicable Percentage of the Outstanding Amount of Domestic Committed Loans and Domestic L/C Obligations of
the Lender acting as Swing Line Lender, may exceed the amount of such Lender’s Applicable Percentage;
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provided , however , that after giving effect to any Swing Line Loan made to the Domestic Borrowers and the Foreign Borrower, the provisions
of Section 2.01(a) shall not have been breached; and (ii) to the Canadian Borrower or the Foreign Borrower (subject to the provisions of
Section 2.01(c)) in an aggregate principal amount not to exceed at any time outstanding the amount of the Canadian Swing Line Sublimit,
notwithstanding the fact that the Outstanding Amount of such Swing Line Loans made to the Canadian Borrower and the Foreign Borrower,
when aggregated with the Applicable Percentage of the Outstanding Amount of Canadian Committed Loans and Canadian L/C Obligations of
the Lender acting as Swing Line Lender, may exceed the amount of such Lender’s Applicable Percentage; provided , however , that after giving
effect to any Swing Line Loan made to the Canadian Borrower and the Foreign Borrower, the provisions of Section 2.01(b) shall not have been
breached , and further provided that the Swing Line Lender shall not be obligated to make any Swing Line Loan if it shall determine
(which determination shall be conclusive and binding absent manifest error) that it has, or by such Credit Extension may have, Fronting
Exposure) . No Borrower shall use the proceeds of any Swing Line Loan to refinance any outstanding Swing Line Loan , and the Swing Line
Lender shall not be obligated to make any Swing Line Loan at any time when any Lender is at such time a Defaulting Lender or Deteriorating
Lender hereunder, unless the Swing Line Lender has entered into satisfactory arrangements with the applicable Borrower or such Lender to
eliminate the Swing Line Lender’s risk with respect to such Lender . Within the foregoing limits, and subject to the other terms and conditions
hereof, the Borrowers may borrow under this Section 2.04 , prepay under Section 2.05 , and reborrow under this Section 2.04 . Each Swing Line
Loan shall bear interest only at a rate based on the U.S. Prime Rate , the Canadian Prime Rate or the U.S. Index Rate, as applicable.
Immediately upon the making of a Swing Line Loan to the Domestic Borrowers and the Foreign Borrower, each Domestic Lender shall be
deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Swing Line Lender a risk participation in such Swing Line
Loan in an amount equal to the product of such Lender’s Applicable Percentage times the amount of such Swing Line Loan made to the
Domestic Borrowers and the Foreign Borrower (based on Domestic Availability). Immediately upon the making of a Swing Line Loan to the
Canadian Borrower, each Canadian Lender and the Foreign Borrower shall be deemed to, and hereby irrevocably and unconditionally agrees to,
purchase from the Swing Line Lender a risk participation in such Swing Line Loan in an amount equal to the product of such Lender’s
Applicable Percentage times the amount of such Swing Line Loan made to the Canadian Borrower and the Foreign Borrower (based on
Canadian Availability). The Swing Line Lender shall have all of the benefits and immunities (A) provided to the Administrative Agent and the
Canadian Agent in Article IX with respect to any acts taken or omissions suffered by the Swing Line Lender in connection with Swing Line
Loans made by it or proposed to be made by it as if the term “Administrative Agent” and “Canadian Agent” as used in Article IX included the
Swing Line Lender with respect to such acts or omissions, and (B) as additionally provided herein with respect to the Swing Line Lender.
Swing Line Borrowing Procedures . Each Swing Line Borrowing shall be made upon the irrevocable notice of the
(b)
Parent on behalf of the Domestic Borrowers, the Foreign Borrower or the Canadian Borrower, as applicable, to the Swing Line Lender and the
Administrative Agent or the Canadian Agent, as applicable, which may be given by telephone. Each such notice must be received by the Swing
Line Lender and the Administrative Agent or the Canadian Agent, as applicable, not later than 1:00 p.m. on the requested borrowing date, and
shall specify (i) the amount to be borrowed, which shall be a minimum of $100,000 or the Equivalent Amount thereof, and (ii) the requested
borrowing date, which shall be a Business Day. Each such telephonic notice must be confirmed promptly by delivery to the Swing Line Lender
and the Administrative Agent or the Canadian Agent, as applicable, of a written Swing Line Loan Notice, appropriately completed and signed by
a Responsible Officer of the Parent, the Canadian Borrower, or the Foreign Borrower, as applicable. Promptly after receipt by the Swing Line
Lender of any telephonic Swing Line Loan Notice, the Swing Line Lender will confirm with the Administrative Agent or the Canadian Agent, as
applicable (by telephone or in writing) that the Administrative Agent or the Canadian Agent, as applicable, has also received such Swing Line
Loan
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Notice and, if not, the Swing Line Lender will notify the Administrative Agent or the Canadian Agent, as applicable (by telephone or in writing)
of the contents thereof. Unless the Swing Line Lender has received notice (by telephone or in writing) from the Administrative Agent or the
Canadian Agent at the request of the Required Lenders prior to 2:00 p.m. on the date of the proposed Swing Line Borrowing (A) directing the
Swing Line Lender not to make such Swing Line Loan as a result of the limitations set forth in the proviso in clause (i) or clause (ii) to the first
sentence of Section 2.04(a) , or (B) that one or more of the applicable conditions specified in Article IV is not then satisfied, then, subject to the
terms and conditions hereof, the Swing Line Lender may, in its discretion, not later than 3:00 p.m. on the borrowing date specified in such Swing
Line Loan Notice, make the amount of its Swing Line Loan available to the Domestic Borrowers, the Canadian Borrower or the Foreign
Borrower, as applicable, at its office by crediting the account of such Borrower or such other account as directed by the applicable Borrower, as
applicable, on the books of the Swing Line Lender in immediately available funds.
(c)
Refinancing of Swing Line Loans .
(i)
The Swing Line Lender, at any time in its sole and absolute discretion, may request, on behalf of the
Domestic Borrowers, the Canadian Borrower or the Foreign Borrower, as applicable (which hereby irrevocably authorize the Swing Line Lender
to so request on their behalf), that each Domestic Lender or each Canadian Lender, as applicable, make a Prime Rate Loan in an amount equal to
such Domestic Lender’s or Canadian Lender’s Applicable Percentage, as the case may be, of the amount of Swing Line Loans then outstanding
to the Domestic Borrowers or the Canadian Borrower or the Foreign Borrower, as applicable; provided that the Swing Line Lender shall settle
the Swing Line Loans with the Lenders weekly in accordance with Section 2.14(a) . Such request shall be made in writing (which written
request shall be deemed to be a Committed Loan Notice for purposes hereof) and in accordance with the requirements of Section 2.02 , without
regard to the minimum and multiples specified therein for the principal amount of Prime Rate Loans, but subject to the unutilized portion of the
Domestic Total Commitments or the Canadian Total Commitments, as applicable, and the conditions set forth in Section 4.02 . The Swing Line
Lender shall furnish the Parent, the Canadian Borrower or the Foreign Borrower, as applicable, with a copy of the applicable Committed Loan
Notice promptly after delivering such notice to the Administrative Agent or the Canadian Agent, as applicable. Each Domestic Lender or each
Canadian Lender, as applicable, shall make an amount equal to its Applicable Percentage of the amount specified in such Committed Loan
Notice available to the Administrative Agent or the Canadian Agent, as applicable, in immediately available funds for the account of the Swing
Line Lender at the Administrative Agent’s Office or the Canadian Agent’s Office, as applicable, not later than
1:00 p.m. on the day specified in such Committed Loan Notice, whereupon, subject to Section 2.04(c)(ii) , each Domestic Lender or each
Canadian Lender, as applicable, that so makes funds available shall be deemed to have made a Domestic Prime Rate Loan to the Domestic
Borrowers or a Canadian Prime Rate Loan or U.S. Index Rate Loan, as applicable, to the Canadian Borrower, as applicable, in such amount.
The Administrative Agent or the Canadian Agent, as applicable, shall remit the funds so received to the Swing Line Lender.
(ii)
If for any reason any Swing Line Loan cannot be refinanced by such a Committed Borrowing in accordance
with Section 2.04(c)(i) , the request for Prime Rate Loans submitted by the Swing Line Lender as set forth herein shall be deemed to be a request
by the Swing Line Lender that each of the applicable Lenders fund its risk participation in the relevant Swing Line Loan and each such Lender’s
payment to the Administrative Agent or the Canadian Agent, as applicable, for the account of the Swing Line Lender pursuant to Section 2.04(c)
(i) shall be deemed payment in respect of such participation.
If any Lender fails to make available to the Administrative Agent or the Canadian Agent, as applicable, for
(iii)
the account of the Swing Line Lender any amount required to be paid
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by such Lender pursuant to the foregoing provisions of this Section 2.04(c) by the time specified in Section 2.04(c)(i) , the Swing Line Lender
shall be entitled to recover from such Lender (acting through the Administrative Agent or the Canadian Agent, as applicable), on demand, such
amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available
to the Swing Line Lender at a rate per annum equal to the greater of (A) the Federal Funds Rate, with respect to the Administrative Agent or
payments due to the Canadian Agent in Dollars, and the Bank of Canada Overnight Rate with respect to payments due to the Canadian Agent in
Canadian Dollars, and (B) a rate determined by the Swing Line Lender in accordance with banking industry rules on interbank compensation
plus any administrative, processing or similar fees customarily charged by the Swing Line Lender in connection with the foregoing. If such
Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Committed Loan included in the
relevant Committed Borrowing or funded participation in the relevant Swing Line Loan, as the case may be. A certificate of the Swing Line
Lender submitted to any Lender (through the Administrative Agent or the Canadian Agent, as applicable) with respect to any amounts owing
under this clause (iii) shall be conclusive absent manifest error.
(iv)
Each Lender’s obligation to make Committed Loans or to purchase and fund risk participations in Swing
Line Loans pursuant to this Section 2.04(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any
setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrowers or any other
Person for any reason whatsoever, (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or
not similar to any of the foregoing; provided , however , that each Lender’s obligation to make Committed Loans pursuant to this Section 2.04(c)
is subject to the conditions set forth in Section 4.02 . No such funding of risk participations shall relieve or otherwise impair the obligation of
any Borrower to repay Swing Line Loans, together with interest as provided herein.
(d)
Repayment of Participations .
(i)
At any time after any Lender has purchased and funded a risk participation in a Swing Line Loan, if the
Swing Line Lender or the Administrative Agent on behalf of the Swing Line Lender receives any payment on account of such Swing Line
Loan, the Swing Line Lender will distribute such payment to the Administrative Agent and the Administrative Agent shall distribute such
payment to the applicable Domestic Lender or Canadian Lender, its Applicable Percentage of such payment (appropriately adjusted, in the case
of interest payments, to reflect the period of time during which such Lender’s risk participation was funded) in the same funds as those received
by the Swing Line Lender.
(ii)
If any payment received by the Swing Line Lender or the Administrative Agent on behalf of the Swing
Line Lender in respect of principal or interest on any Swing Line Loan made to a Domestic Borrower is required to be returned by the Swing
Line Lender under any of the circumstances described in Section 10.05 (including pursuant to any settlement entered into by the Swing Line
Lender in its discretion), each Domestic Lender shall pay to the Swing Line Lender its Applicable Percentage thereof on demand of the
Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned, at a rate per annum equal to the
Federal Funds Rate. The Administrative Agent will make such demand upon the request of the Swing Line Lender. The obligations of the
Domestic Lenders under this clause shall survive the Payment in Full of the Obligations and the termination of this Agreement.
(iii)
If any payment received by the Swing Line Lender in respect of principal or interest on any Swing Line
Loan made to the Canadian Borrower is required to be returned by the
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Swing Line Lender under any of the circumstances described in Section 10.05 (including pursuant to any settlement entered into by the Swing
Line Lender in its discretion), each Canadian Lender shall pay to the Swing Line Lender its Applicable Percentage thereof on demand of the
Canadian Agent, plus interest thereon from the date of such demand to the date such amount is returned, at a rate per annum equal to the Bank of
Canada Overnight Rate with respect to payments due to the Canadian Agent in Canadian Dollars and the Federal Funds Rate with respect to
payments due to the Canadian Agent in Dollars. The Canadian Agent will make such demand upon the request of the Swing Line Lender. The
obligations of the Canadian Lenders under this clause shall survive the Payment in Full of the Canadian Liabilities and the termination of this
Agreement.
(e)
Interest for Account of Swing Line Lender . The Swing Line Lender shall be responsible for invoicing the
Borrowers for interest on the Swing Line Loans. Until each Lender funds its Prime Rate Loan or risk participation pursuant to this Section 2.04
to refinance such Domestic Lender’s or Canadian Lender’s Applicable Percentage, as applicable, of any Swing Line Loan, interest in respect of
such Applicable Percentage shall be solely for the account of the Swing Line Lender.
Payments Directly to Swing Line Lender . The Borrowers shall make all payments of principal and interest in
(f)
respect of the Swing Line Loans directly to the Swing Line Lender at the office specified by the Swing Line Lender in writing to the Parent.
2.05
Prepayments .
The Borrowers may, upon irrevocable notice from the Parent to the Administrative Agent (except as set forth below)
(a)
(with respect to Committed Loans made to Domestic Borrowers or the Foreign Borrower based on Domestic Availability) or from the Canadian
Borrower to the Canadian Agent (with respect to Committed Loans made to the Canadian Borrower or the Foreign Borrower based on Canadian
Availability), at any time or from time to time voluntarily prepay Committed Loans in whole or in part without premium or penalty; provided
that (i) such notice must be received by the Administrative Agent or the Canadian Agent, as applicable, not later than 11:00 a.m. (A) three
Business Days prior to any date of prepayment of LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans and (B) on the date of
prepayment of Prime Rate Loans; (ii) any voluntary prepayment of LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans shall be in
a principal amount of $1,000,000 or a whole multiple of $500,000 in excess thereof (or the Equivalent Amount thereof); and (iii) any voluntary
prepayment of Prime Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof (or the Equivalent
Amount thereof) or, in each case, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and
amount of such prepayment and the Type(s) of Loans to be prepaid and, if LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans, the
Interest Period(s) of such Loans. The Administrative Agent or the Canadian Agent, as applicable, will promptly notify each Domestic Lender or
Canadian Lender, as applicable, of its receipt of each such notice, and of the amount of such Domestic Lender’s or Canadian Lender’s
Applicable Percentage of such prepayment. If such notice is given by the Parent or the Canadian Borrower, the applicable Borrowers shall make
such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a
LIBOR Rate Loan , Euribor Rate Loan or a BA Equivalent Loan shall be accompanied by all accrued interest on the amount prepaid, together
with any additional amounts required pursuant to Section 3.05 . Each such prepayment shall be applied to the Committed Loans of the Domestic
Lenders or Canadian Lenders, as the case may be, in accordance with their respective Applicable Percentages. Notwithstanding anything to the
contrary contained herein, the Parent may rescind any notice of prepayment provided pursuant to this Section 2.05(a) if such prepayment was to
have been made with the proceeds of a refinancing of all part of the Committed Loans hereunder or from the proceeds of an asset sale, which
refinancing or asset sale shall not have been consummated or shall otherwise have been delayed.
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(b)
The Borrowers may, upon irrevocable notice to the Swing Line Lender (except as set forth below)(with a copy to the
Administrative Agent or the Canadian Agent, as applicable), at any time or from time to time, voluntarily prepay Swing Line Loans in whole or
in part without premium or penalty; provided that (i) such notice must be received by the Swing Line Lender and the Administrative Agent or
the Canadian Agent, as applicable, not later than 1:00 p.m. on the date of the prepayment, and (ii) any such prepayment shall be in a minimum
principal amount of $100,000 or the Equivalent Amount thereof, as applicable, or, if less, the entire principal amount thereof then outstanding.
Each such notice shall specify the date and amount of such prepayment. If such notice is given, the applicable Borrowers, as applicable, shall
make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Notwithstanding
anything to the contrary contained herein, the Borrowers may rescind any notice of prepayment provided pursuant to this Section 2.05(b) if such
prepayment was to have been made with the proceeds of a refinancing of all part of the Swing Line Loans hereunder or from the proceeds of an
asset sale, which refinancing or asset sale shall not have been consummated or shall otherwise have been delayed.
If for any reason the Domestic Total Outstandings at any time exceed the Domestic Loan Cap as then in effect, the
(c)
Domestic Borrowers, and the Foreign Borrower to the extent the Foreign Borrower has directly obtained Domestic Loans, shall immediately
prepay Domestic Committed Loans, Swing Line Loans made to the Domestic Borrowers, and Foreign Borrower, and Domestic L/C Borrowings
and/or Cash Collateralize the Domestic L/C Obligations (other than Domestic L/C Borrowings) in an aggregate amount equal to such excess;
provided , however , that the Domestic Borrowers and the Foreign Borrower shall not be required to Cash Collateralize the Domestic L/C
Obligations pursuant to this Section 2.05(c) unless after the prepayment in full of the Domestic Loans the Domestic Total Outstandings exceed
the lesser of the Domestic Total Commitments or the Domestic Borrowing Base, each as then in effect.
If for any reason the Total Canadian Outstandings at any time exceed the Canadian Loan Cap as then in effect, the
(d)
Canadian Borrower, and the Foreign Borrower to the extent the Foreign Borrower has directly obtained Canadian Loans, shall immediately
prepay Canadian Committed Loans, Swing Line Loans made to the Canadian Borrower, and Foreign Borrower, and Canadian L/C Borrowings
and/or Cash Collateralize the Canadian L/C Obligations (other than Canadian L/C Borrowings) in an aggregate amount equal to such excess;
provided , however , that the Canadian Borrower and the Foreign Borrower shall not be required to Cash Collateralize the Canadian L/C
Obligations pursuant to this Section 2.05(d) unless after the prepayment in full of the Canadian Loans the Total Canadian Outstandings exceed
the lesser of the Canadian Total Commitments or the Canadian Borrowing Base, each as then in effect.
The Borrowers shall prepay the Loans in accordance with the provisions of Section 6.12 hereof but without any
(e)
permanent reduction in the respective Commitments.
(f)
The Domestic Borrowers shall prepay the Domestic Loans, and the Canadian Borrower shall prepay the Canadian
Loans, in an amount equal to the Net Proceeds in excess of $20,000,000 in any Fiscal Year received on account of a Prepayment Event (and if a
Trigger Event is continuing, the provisions of clause (e) above shall govern). Nothing in this Section 2.05(f) shall be construed to constitute any
Agent’s or any Lender’s consent to any Prepayment Event that is not permitted by other provisions of this Agreement or the other Loan
Documents but, in either event, without any permanent reduction in the respective Commitments.
(g)
Prepayments made on account of the Obligations first , shall be applied ratably to the Domestic L/C Borrowings and
the Swing Line Loans made to the Domestic Borrowers and the Foreign Borrower (to the extent based on Domestic Availability), second , shall
be applied ratably to the
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outstanding Domestic Committed Loans, and third , the amount remaining, if any, after the prepayment in full of all such Domestic L/C
Borrowings, Swing Line Loans and Domestic Committed Loans outstanding at such time may be retained by (or shall be returned to) the
Domestic Borrowers for use in a manner not prohibited by this Agreement; provided that if a Default or Event of Default then exists, such Net
Proceeds shall be applied in accordance with the provisions of Section 8.03 hereof.
(h)
Prepayments made on account of the Canadian Liabilities first , shall be applied ratably to the Canadian L/C
Borrowings and the Swing Line Loans made to the Canadian Borrower and the Foreign Borrower (to the extent based on Canadian Availability),
second , shall be applied ratably to the outstanding Canadian Committed Loans, and third the amount remaining, if any, after the prepayment in
full of all such Canadian L/C Borrowings, Swing Line Loans made to the Canadian Borrower and Canadian Committed Loans outstanding at
such time may be retained by (or shall be returned to) the Canadian Borrower for use in a manner not prohibited by this Agreement provided that
if a Default or Event of Default then exists, such Net Proceeds shall be applied in accordance with the provisions of Section 8.03 hereof.
In the case of Loans and Letters of Credit denominated in Optional Currencies, the Administrative Agent shall with
(i)
the delivery of each Borrowing Base Certificate, and may, at its discretion, at other times, recalculate the aggregate exposure under such Loans
and Letters of Credit denominated in Optional Currencies at any time to account for fluctuations in exchange rates affecting the Optional
Currencies in which any such non-U.S. dollar loans and Letters of Credit are denominated. The Borrowers shall promptly make payments in
accordance with the provisions of Section 2.05(c) and (d) hereof, to the extent necessary as a result of any such recalculation.
2.06
Termination or Reduction of Commitments.
The Domestic Borrowers may, upon irrevocable notice from the Parent to the Administrative Agent (except as set
(a)
forth below), terminate the Domestic Total Commitments, the Domestic Letter of Credit Sublimit or the Domestic Swing Line Sublimit or from
time to time permanently reduce in part the Domestic Total Commitments, the Domestic Letter of Credit Sublimit or the Domestic Swing Line
Sublimit; provided that (i) any such notice shall be received by the Administrative Agent not later than 11:00 a.m. three (3) Business Days prior
to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $10,000,000 or any whole multiple of
$1,000,000 in excess thereof and (iii) the Domestic Borrowers shall not reduce (A) the Domestic Total Commitments if, after giving effect
thereto and to any concurrent prepayments hereunder, the Domestic Total Outstandings would exceed the Domestic Total Commitments, (B) the
Domestic Letter of Credit Sublimit if, after giving effect thereto, the Outstanding Amount of Domestic L/C Obligations (other than Domestic
L/C Borrowings) not fully Cash Collateralized hereunder would exceed the Domestic Letter of Credit Sublimit, and (C) the Domestic Swing
Line Sublimit if, after giving effect thereto, and to any concurrent payments hereunder, the Outstanding Amount of Swing Line Loans made to
the Domestic Borrowers hereunder would exceed the Domestic Swing Line Sublimit. Notwithstanding anything to the contrary contained
herein, the Domestic Borrowers may rescind any notice of reduction or termination of the Domestic Commitments provided pursuant to this
Section 2.06(a) , if such termination or reduction was to have been made with the proceeds of a refinancing of all part of the Committed Loans
hereunder or from the proceeds of an asset sale, which refinancing or asset sale shall not have been consummated or shall otherwise have been
delayed.
(b)
The Canadian Borrower may, upon irrevocable notice from the Canadian Borrower to the Canadian Agent (except as
set forth below), terminate the Canadian Total Commitments, the Canadian Letter of Credit Sublimit or the Canadian Swing Line Sublimit or
from time to time permanently reduce in part the Canadian Total Commitments, the Canadian Letter of Credit Sublimit or
(86)
the Canadian Swing Line Sublimit; provided that (i) any such notice shall be received by the Canadian Agent not later than 11:00 a.m. (Toronto
time) three (3) Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of
$2,000,000 or any whole multiple of $1,000,000 in excess thereof and (iii) the Canadian Borrower shall not reduce (A) the Canadian Total
Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the Total Canadian Outstandings would exceed the
Canadian Total Commitments, (B) the Canadian Letter of Credit Sublimit if, after giving effect thereto, the Outstanding Amount of Canadian
L/C Obligations (other than Canadian L/C Borrowings) not fully Cash Collateralized hereunder would exceed the Canadian Letter of Credit
Sublimit, and (C) the Canadian Swing Line Sublimit if, after giving effect thereto, and to any concurrent payments hereunder, the Outstanding
Amount of Swing Line Loans made to the Canadian Borrower hereunder would exceed the Canadian Swing Line Sublimit. Notwithstanding
anything to the contrary contained herein, the Canadian Borrower may rescind any notice of reduction or termination of the Canadian
Commitments provided pursuant to this Section 2.06(b) , if such termination or reduction was to have been made with the proceeds of a
refinancing of all part of the Committed Loans hereunder or from the proceeds of an asset sale, which refinancing or asset sale shall not have
been consummated or shall otherwise have been delayed.
If, after giving effect to any reduction of the Domestic Total Commitments, the Domestic Letter of Credit Sublimit or
(c)
the Domestic Swing Line Sublimit exceeds the amount of the Domestic Total Commitments, such Domestic Letter of Credit Sublimit or
Domestic Swing Line Sublimit shall be automatically reduced by the amount of such excess.
(d)
If, after giving effect to any reduction of the Canadian Total Commitments, the Canadian Letter of Credit Sublimit or
the Canadian Swing Line Sublimit exceeds the amount of the Canadian Total Commitments, such Canadian Letter of Credit Sublimit or
Canadian Swing Line Sublimit shall be automatically reduced by the amount of such excess.
(e)
The Canadian Total Commitments, the Canadian Letter of Credit Sublimit or the Canadian Swing Line Sublimit
shall be automatically terminated without any further action of any Loan Party or any Credit Party upon the termination of the Domestic
Commitments pursuant to Section 2.06(a) hereof.
(f)
The Administrative Agent or the Canadian Agent, as applicable, will promptly notify the Domestic Lenders or the
Canadian Lenders, as applicable, of any termination or reduction made pursuant to this Section 2.06 . Upon any reduction of the Domestic Total
Commitments, the Domestic Commitment of each Domestic Lender shall be reduced by such Domestic Lender’s Applicable Percentage of such
reduction amount. Upon any reduction of the Canadian Total Commitments, the Canadian Commitment of each Canadian Lender shall be
reduced by such Canadian Lender’s Applicable Percentage of such reduction amount. All fees (including, without limitation, Commitment Fees
and Letter of Credit Fees) and interest in respect of the Aggregate Total Commitments accrued until the effective date of any termination of the
Aggregate Total Commitments shall be paid on the effective date of such termination.
2.07
Repayment of Loans.
(a)
The Domestic Borrowers shall repay to the Administrative Agent, for the account of the Domestic Lenders on the
Termination Date the aggregate principal amount of Obligations outstanding on such date.
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(b)
The Canadian Borrower shall repay to the Canadian Agent, for the account of the Canadian Lenders, on the
Termination Date the aggregate principal amount of Canadian Liabilities outstanding on such date.
(c)
The Foreign Borrower shall repay to the Administrative Agent and the Canadian Agent, as applicable, on the
Termination Date the aggregate principal amount of Foreign Liabilities outstanding on such date.
2.08
Interest.
(a)
Subject to the provisions of Section 2.08(b) below, (i) each LIBOR Rate Loan shall bear interest on the outstanding
principal amount thereof for each Interest Period at a rate per annum equal to the Adjusted LIBOR Rate for such Interest Period plus the
Applicable Margin; (ii) each BA Equivalent Loan shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate
per annum equal to the BA Rate for such Interest Period plus the Applicable Margin; (iii) each Domestic Prime Rate Loan shall bear interest on
the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the U.S. Prime Rate plus the
Applicable Margin; (iv) each Canadian Prime Rate Loan shall bear interest on the outstanding principal amount thereof from the applicable
borrowing date at a rate per annum equal to the Canadian Prime Rate plus the Applicable Margin; (v) each US Index Rate Loan shall bear
interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the US Index Rate plus the
Applicable Margin; (vi) each Euribor Rate Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing
date at a rate per annum equal to the Euribor Rate plus the Applicable Margin; (vii) each Swing Line Loan made to the Domestic Borrowers or
the Foreign Borrower (to the extent based on Domestic Availability) shall bear interest on the outstanding principal amount thereof from the
applicable borrowing date at a rate per annum equal to the U.S. Prime Rate plus the Applicable Margin; and (viii) each Swing Line Loan made to
the Canadian Borrower or the Foreign Borrower (to the extent based on Canadian Availability) shall bear interest on the outstanding principal
amount thereof from the applicable borrowing date at a rate per annum equal to the Canadian Prime Rate plus the Applicable Margin.
(b)
(i)
If any amount payable under any Loan Document is not paid when due (after giving effect to any
applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating
interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(ii)
If any other Event of Default exists, then the Administrative Agent may, and upon the request of the
Required Lenders shall, notify the Parent that all outstanding Obligations shall thereafter bear interest at a fluctuating interest rate per annum at
all times equal to the Default Rate and thereafter such Loans and L/C Obligations shall bear interest at the Default Rate to the fullest extent
permitted by applicable Laws for so long as such or any other Event of Default is continuing.
(iii)
Accrued and unpaid interest on past due amounts (including interest on past due interest to the fullest extent
permitted by applicable Laws) shall be due and payable upon demand.
(c)
Except as provided in Section 2.08(b)(iii), interest on each Loan shall be due and payable in arrears on each Interest
Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance
with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.
(88)
2.09
Fees. In addition to certain fees described in subsections (i) and (j) of Section 2.03 :
(a)
Commitment Fee . The Borrowers shall pay to the Administrative Agent, for the account of each Lender (other than
a Defaulting Lender) in accordance with its Applicable Percentage, a commitment fee (the “ Commitment Fee ”) equal to 0.50 0.25 % multiplied
by the actual daily amount by which the Aggregate Total Commitments exceed the Total Outstandings (excluding the principal amount of Swing
Line Loans made to the Borrowers). The commitment fee shall accrue at all times during the Availability Period, including at any time during
which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the first calendar day of each
April, July, October and January, commencing with the first such date to occur after the Closing Effective Date, and on the last day of the
Availability Period. The commitment fee shall be calculated quarterly in arrears.
(b)
Other Fees . The Borrowers shall pay to the Agents and the Arrangers for their own respective accounts fees in the
amounts and at the times specified in the Fee Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason
whatsoever.
2.10
Computation of Interest and Fees.
(a)
All computations of interest for Prime Rate Loans and BA Equivalent Loans shall be made on the basis of a year of
365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day
year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year).
Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on
which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall, subject to Section 2.12
(a) , bear interest for one day. Each determination by the Administrative Agent or the Canadian Agent, as applicable, of an interest rate or fee
hereunder shall be conclusive and binding for all purposes, absent manifest error.
(b)
For the purposes of this Agreement and the Interest Act (Canada) and disclosure thereunder, whenever any interest or
any fee to be paid hereunder or in connection herewith is to be calculated on the basis of a 360-day or any other period of time that is less than a
calendar year, the yearly rate of interest to which the rate used in such calculation is equivalent is the rate so used multiplied by the actual
number of days in the calendar year in which the same is to be ascertained and divided by three hundred and sixty (360) or the number of days in
such period, as applicable.
(c)
If any provision of this Agreement or of any of the other Loan Documents would obligate a Loan Party to make any
payment of interest or other amount payable to any of the Administrative Agent, the Canadian Agent or any Lender under this Agreement or any
other Loan Document in an amount or calculated at a rate which would be prohibited by law or would result in a receipt by any of the
Administrative Agent, the Canadian Agent or any Lender of interest at a criminal rate (as such terms are construed under the Criminal Code
(Canada)) then, notwithstanding such provisions, such amount or rate shall be deemed to have been adjusted with retroactive effect to the
maximum amount or rate of interest, as the case may be, as would not be so prohibited by law or so result in a receipt by the Administrative
Agent, the Canadian Agent or any Lender of interest at a criminal rate, such adjustment to be effected, to the extent necessary, as follows:
(1) firstly, by reducing the amount or rate of interest required to be paid to the Administrative Agent, the Canadian Agent or any Lender under
this subsection 4.1, and (2) thereafter, by reducing any fees, commissions, premiums and other amounts required to be paid to the Administrative
Agent, the Canadian Agent or any Lender which would constitute “interest” for purposes of Section 347 of the Criminal Code (Canada).
Notwithstanding the foregoing, and after giving effect to all adjustments contemplated thereby, if the Administrative Agent,
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the Canadian Agent or any Lender shall have received an amount in excess of the maximum permitted by that Section of the Criminal Code
(Canada), the Loan Parties shall be entitled, by notice in writing to the applicable Administrative Agent, Canadian Agent or Lender, to obtain
reimbursement from such party in an amount equal to such excess and, pending such reimbursement, such amount shall be deemed to be an
amount payable by the applicable Administrative Agent, Canadian Agent or Lender to the Canadian Borrower. Any amount or rate of interest
referred to in this subsection 4.1(c) shall be determined in accordance with generally accepted actuarial practices and principles as an effective
annual rate of interest over the term that the applicable loan remains outstanding with the assumption that any charges, fees or expenses that fall
within the meaning of “interest” (as defined in the Criminal Code (Canada)) shall be included in the calculation of such effective rate and, in the
event of a dispute, a certificate of a Fellow of the Canadian Institute of Actuaries appointed by the Canadian Agent shall be conclusive for the
purposes of such determination.
(d)
All calculations of interest payable by the Loan Parties under this Agreement or any other Loan Document are to be
made on the basis of the nominal interest rate described herein and therein and not on the basis of effective yearly rates or on any other basis
which gives effect to the principle of deemed reinvestment of interest which principle does not apply to any interest calculated under this
Agreement or any Loan Document. The parties hereto acknowledge that there is a material difference between the stated nominal interest rates
and the effective yearly rates of interest and that they are capable of making the calculations required to determine such effective yearly rates of
interest.
2.11
Evidence of Debt.
The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by
(a)
the Administrative Agent (with respect to Domestic Credit Extensions) and the Canadian Agent (with respect to Canadian Credit Extensions)
(each, the “ Loan Account ”) in the ordinary course of business. In addition, each Lender may record in such Lender’s internal records, an
appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such
Loan, and each payment of interest, fees and other amounts due in connection with the Obligations due to such Lender. The accounts or records
maintained by the Administrative Agent, the Canadian Agent and each Lender shall be conclusive absent manifest error of the amount of the
Credit Extensions made by the Lenders to the Borrowers and the interest and payments thereon. Any failure to so record or any error in doing so
shall not, however, limit or otherwise affect the obligation of the Borrowers hereunder to pay any amount owing with respect to the Obligations.
In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative
Agent or the Canadian Agent, as applicable, in respect of such matters, the accounts and records of the Administrative Agent or the Canadian
Agent, as applicable, shall control in the absence of manifest error. Upon the request of any Domestic Lender made through the Administrative
Agent (who shall notify the Domestic Borrowers and the Foreign Borrower, if applicable), or any Canadian Lender through the Canadian Agent
(who shall notify the Canadian Borrower and the Foreign Borrower, if applicable), the applicable Borrowers shall execute and deliver to such
Lender (through the Administrative Agent or the Canadian Agent, as applicable) a Note, which shall evidence such Lender’s Loans in addition to
such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity
of its Loans and payments with respect thereto. Any failure to so attach or endorse, or any error in doing so, shall not, however, limit or
otherwise affect the obligation of the Borrowers hereunder to pay any amount owing with respect to the Obligations or the Canadian Liabilities,
or the Foreign Liabilities, as applicable. Upon receipt of an affidavit and indemnity of a Lender as to the loss, theft, destruction or mutilation of
such Lender’s Note and upon cancellation of such Note, the applicable Borrowers will issue, in lieu thereof, a replacement Note in favor of such
Lender, in the same principal amount thereof and otherwise of like tenor (subject to adjustment in the case of any assignments of such Lender’s
Commitments).
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(b)
In addition to the accounts and records referred to in Section 2.11(a) , each Lender and the Administrative Agent or,
as applicable, the Canadian Agent, shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by
such Lender of participations in Letters of Credit and Swing Line Loans. In the event of any conflict between the accounts and records
maintained by the Administrative Agent or the Canadian Agent and the accounts and records of any Lender in respect of such matters, the
accounts and records of the Administrative Agent or the Canadian Agent, as applicable, shall control in the absence of manifest error.
2.12
Payments Generally; Administrative Agent’s Clawback .
(a)
General . All payments to be made by the Borrowers shall be made without condition or deduction for any
counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrowers hereunder shall be
made, as applicable, to the Administrative Agent, for the account of the respective Domestic Lenders to which such payment is owed, at the
Administrative Agent’s Office in Dollars and to the Canadian Agent, for the account of the respective Canadian Lenders to which such payment
is owed, at the Canadian Agent’s Office, in each case, in immediately available funds not later than 2:00 p.m. on the date specified herein. The
Administrative Agent or the Canadian Agent, as applicable, will promptly distribute to each Domestic Lender or Canadian Lender, as applicable,
its Applicable Percentage (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such
Lender’s Lending Office in accordance with the provisions of Section 2.14 . All payments received by the Administrative Agent or the
Canadian Agent after 2:00 p.m. shall, at the option of the Administrative Agent or the Canadian Agent, as applicable, be deemed received on the
next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment (other than with respect to payment of
a LIBOR Rate Loan or a BA Equivalent Loan or a Euribor Rate Loan) to be made by the Borrowers shall come due on a day other than a
Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or
fees, as the case may be.
(b)
Currency . Loan shall be funded and payments shall be made in respect of Optional Currencies in the applicable
Optional Currency. Letters of Credit denominated in an Optional Currency shall be reimbursed by the applicable Borrower in that Optional
Currency. All obligations of the Lenders with respect to Letters of Credit will be immediately due and payable in Dollars, provided that the
amount of any amounts denominated in an Optional Currency will be redenominated into Dollars.
(i)
Funding by Lenders; Presumption by Administrative Agent . Unless the Administrative Agent or the
(c)
Canadian Agent, as applicable, shall have received notice from a Lender prior to (A) the proposed date of any Committed Borrowing of LIBOR
Rate Loans or BA Equivalent Loans, as applicable (or in the case of any Committed Borrowing of Prime Rate Loans, prior to 1:00 p.m. on the
date of such Committed Borrowing) or (B) the date that such Lender’s participation in a Letter of Credit or Swing Line Loan is required
to be funded that such Lender will not make available to the Administrative Agent or the Canadian Agent, as applicable, such Lender’s share of
such Committed Borrowing or participation , the Administrative Agent or the Canadian Agent, as applicable, may assume that such Lender has
made such share available on such date in accordance with Section 2.02 (or in the case of a Committed Borrowing of Prime Rate Loans, that
such Lender has made such share available in accordance with and at the time required by Section 2.02 ) , Section 2.03 or Section 2.04, as
applicable, and may, in reliance upon such assumption, make available to the applicable Borrowers , the L/C Issuer or the Swing Line
Lender, as applicable, a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Committed
Borrowing available to the Administrative Agent or the Canadian Agent, as applicable, then the applicable Lender and the Domestic Borrowers
or the Foreign Borrower, as applicable, severally agree with respect to Domestic Committed Loans, and the Canadian Borrower or the Foreign
Borrower, as applicable, severally agrees with respect to Canadian Committed
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Loans, to pay to the Administrative Agent or the Canadian Agent, as applicable, forthwith on demand such corresponding amount in
immediately available funds with interest thereon, for each day from and including the date such amount is made available to such Borrowers to
but excluding the date of payment to the Administrative Agent or the Canadian Agent, as applicable, at (A) in the case of a payment to be made
by a Domestic Lender, the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation plus any administrative processing or similar fees customarily charged by the Administrative Agent in
connection with the foregoing, (B) in the case of a payment to be made by a Canadian Lender, the greater of the Bank of Canada Overnight Rate
with respect to payments due to the Canadian Agent in Canadian Dollars and the Federal Funds Rate with respect to payments due to the
Canadian Agent in Dollars, and a rate determined by the Canadian Agent in accordance with banking industry rules on interbank compensation
plus any administrative processing or similar fees customarily charged by the Canadian Agent in connection with the foregoing, (C) in the case
of a payment to be made by the Domestic Borrowers or the Foreign Borrower, as applicable, the interest rate applicable to Domestic Prime Rate
Loans and (D) in the case of a payment to be made by the Canadian Borrower or the Foreign Borrower, as applicable, the interest rate applicable
to Canadian Prime Rate Loans. If the applicable Borrowers and such Lender shall pay such interest to the Administrative Agent or the Canadian
Agent, as applicable, for the same or an overlapping period, the Administrative Agent or the Canadian Agent, as applicable, shall promptly remit
to such Borrowers the amount of such interest paid by such Borrowers for such period. If such Lender pays its share of the applicable
Committed Borrowing or participation to the Administrative Agent or the Canadian Agent, as applicable, then the amount so paid shall
constitute such Lender’s Committed Loan included in such Committed Borrowing or participation in such Letter of Credit or Swing Line
Loan . Any payment by the Borrowers shall be without prejudice to any claim the Borrowers may have against a Lender that shall have failed to
make such payment to the Administrative Agent or the Canadian Agent, as applicable.
(ii)
Payments by Borrowers; Presumptions by Administrative Agent and Canadian Agent . Unless the
Administrative Agent or the Canadian Agent, as applicable, shall have received notice from the Parent or the Canadian Borrower or the Foreign
Borrower, as applicable, as applicable, prior to the time at which any payment is due to the Administrative Agent or the Canadian Agent, as
applicable, for the account of the Lenders or the L/C Issuer hereunder that the Borrowers will not make such payment, the Administrative Agent
or the Canadian Agent, as applicable, may assume that the Borrowers have made such payment on such date in
accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the L/C Issuer, as the case may be, the amount due.
In such event, if the Borrowers have not in fact made such payment, then each of the Lenders or the L/C Issuer, as the case may be, severally
agrees to repay to the Administrative Agent or the Canadian Agent, as applicable, forthwith on demand the amount so distributed to such Lender
or the L/C Issuer, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it
to but excluding the date of payment to, as applicable, the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined
by the Administrative Agent in accordance with banking industry rules on interbank compensation, or the Canadian Agent, the greater of the
Bank of Canada Overnight Rate with respect to payments due to the Canadian Agent in Canadian Dollars and the Federal Funds Rate with
respect to payments due to the Canadian Agent in Dollars, and a rate determined by the Canadian Agent in accordance with banking rules on
interbank compensation.
A notice of the Administrative Agent or the Canadian Agent, as applicable, to any Lender or the Parent with respect to any amount
owing under this Section 2.12(c) shall be conclusive, absent manifest error.
(d)
Failure to Satisfy Conditions Precedent . If any Lender makes available to the Administrative Agent or the Canadian
Agent, as applicable, funds for any Loan to be made by such
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Lender as provided in the foregoing provisions of this Article II , and such funds are not made available to the Borrowers by the Administrative
Agent or the Canadian Agent, as applicable, because the conditions to the applicable Credit Extension set forth in Article IV are not satisfied or
waived in accordance with the terms hereof (subject to the provisions of the last paragraph of Section 4.02 hereof), the Administrative Agent or
the Canadian Agent, as applicable, shall promptly return such funds (in like funds as received from such Lender) to such Lender, without
interest.
(e)
Obligations of Lenders Several . The obligations of the Lenders hereunder to make Committed Loans, to fund
participations in Letters of Credit and Swing Line Loans and to make payments hereunder are several and not joint. The failure of any Lender to
make any Committed Loan, to fund any such participation or to make any payment hereunder on any date required hereunder shall not relieve
any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to
so make its Committed Loan, to purchase its participation or to make its payment hereunder.
(f)
Funding Source . Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any
particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any
particular place or manner.
2.13
Sharing of Payments by Lenders . If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain
payment in respect of any principal of or interest on principal of or interest on any of the Committed Loans made by it, or the participations in
L/C Obligations or in Swing Line Loans held by it resulting in such Lender’s receiving payment of a proportion of the aggregate amount of such
Committed Loans or participations and accrued interest thereon greater than its pro rata share thereof as provided herein, then the Lender
receiving such greater proportion shall (a) if a Domestic Lender, notify the Administrative Agent of such fact, and if a Canadian Lender, notify
the Canadian Agent of such fact, and (b) purchase (for cash at face value) participations in the Committed Loans and subparticipations in L/C
Obligations and Swing Line Loans of the other applicable Lenders, or make such other adjustments as shall be equitable, so that the benefit of all
such payments shall be shared by the Lenders ratably, provided that:
(a)
if any such participations or subparticipations are purchased and all or any portion of the payment giving rise thereto
is recovered, such participations or subparticipations shall be rescinded and the purchase price restored to the extent of such recovery, without
interest; and
(b)
the provisions of this Section shall not be construed to apply to (x) any payment made by any Loan Party pursuant to
and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting
Lender) or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Committed Loans
or subparticipations in L/C Obligations or Swing Line Loans to any assignee or participant, other than to the Borrowers or any Subsidiary
thereof (as to which the provisions of this Section shall apply).
Each Loan Party consents to the foregoing and agrees, to the extent it may effectively do so under applicable Law, that any Lender
acquiring a participation pursuant to the foregoing arrangements may exercise against such Loan Party rights of setoff and counterclaim with
respect to such participation as fully as if such Lender were a direct creditor of such Loan Party in the amount of such participation.
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2.14
Settlement Amongst Lenders.
(a)
The amount of each Lender’s Applicable Percentage of outstanding Loans (including outstanding Swing Line Loans)
shall be computed weekly (or more frequently in the Administrative Agent’s discretion) and shall be adjusted upward or downward based on all
Loans (including Swing Line Loans) and repayments of Loans (including Swing Line Loans) received by the Administrative Agent (with respect
to Domestic Loans) or the Canadian Agent (with respect to Canadian Loans) as of 3:00 p.m. on the first Business Day (such date, the “
Settlement Date ”) following the end of the period specified by the Administrative Agent or the Canadian Agent, as applicable.
(b)
The Administrative Agent shall deliver to each of the Domestic Lenders and the Canadian Agent shall deliver to the
Canadian Lenders, promptly after a Settlement Date a summary statement of the amount of outstanding Committed Loans and Swing Line Loans
for the period and the amount of repayments received for the period. As reflected on the summary statement, (i) the Administrative Agent or the
Canadian Agent, as applicable, shall transfer to each Domestic Lender or Canadian Lender, as applicable, its Applicable Percentage of
repayments, and (ii) each Lender shall transfer to the Administrative Agent or the Canadian Agent, as applicable (as provided below) or the
Administrative Agent or the Canadian Agent, as applicable, shall transfer to each Lender, such amounts as are necessary to insure that, after
giving effect to all such transfers, the amount of Committed Loans made by each Lender shall be equal to such Lender’s Applicable Percentage
of all Committed Loans outstanding as of such Settlement Date. If the summary statement requires transfers to be made to the Administrative
Agent or the Canadian Agent, as applicable, by the Lenders and is received prior to 1:00 p.m. on a Business Day, such transfers shall be made in
immediately available funds no later than 3:00 p.m. that day; and, if received after 1:00 p.m., then no later than 3:00 p.m. on the next Business
Day. The obligation of each Lender to transfer such funds is irrevocable, unconditional and without recourse to or warranty by the
Administrative Agent or the Canadian Agent, as applicable. If and to the extent any Domestic Lender shall not have so made its transfer to the
Administrative Agent, such Domestic Lender agrees to pay to the Administrative Agent forthwith on demand such amount, together with interest
thereon, for each day from such date until the date such amount is paid to the Administrative Agent equal to the greater of the Federal Funds
Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation plus any
administrative, processing, or similar fees customarily charged by the Administrative Agent in connection with the foregoing. If and to the
extent any Canadian Lender shall not have so made its transfer to the Canadian Agent, such Canadian Lender agrees to pay to the Canadian
Agent forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the
Canadian Agent equal to the greater of the greater of the Bank of Canada Overnight Rate with respect to payments due to the Canadian Agent in
Canadian Dollars and the Federal Funds Rate with respect to payments due to the Canadian Agent in Dollars, and a rate determined by the
Canadian Agent in accordance with banking industry rules on interbank compensation plus any administrative processing or similar fees
customarily charged by the Canadian Agent in connection with the foregoing.
2.15
Increase in Commitments .
(a)
Request for Increase . Provided no Default then exists or would arise therefrom, upon notice to the Administrative
Agent (which shall promptly notify the Lenders), the Parent may request (i) an increase in the Domestic Total Commitments in an aggregate
amount not exceeding $200,000,000 in the aggregate for all such increases, and (ii) an increase in the Canadian Total Commitments by an
amount not to exceed $25,000,000, either in conjunction with an increase in the Domestic Total Commitments or as an increase in the Canadian
Total Commitments only (each such increase, a “ Commitment Increase ”); provided that any such request for a Commitment Increase shall be in
a minimum amount of $25,000,000 (or, in the case of the Canadian Facility, $10,000,000). At the time of sending such request for a
Commitment Increase, the Parent (in consultation with the Administrative Agent) shall specify the time period within which each applicable
Lender is requested to respond (which
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shall in no event be less than ten (10) Business Days from the date of delivery of such notice to the Lenders).
(b)
Lender Elections to Increase . Each Lender shall notify the Administrative Agent within such time period whether or
not it agrees to increase its applicable Commitment and, if so, whether by an amount equal to, greater than, or less than its Applicable Percentage
of such requested Commitment Increase (each Lender agreeing to increase its Commitment, an “ Existing Increasing Lender ”). Any Lender not
responding within such time period shall be deemed to have declined to increase its Commitment.
(c)
Notification by Administrative Agent; Additional Commitment Lenders . The Administrative Agent shall notify the
Parent and each applicable Lender of the Lenders’ responses to each request made hereunder for a Commitment Increase. To achieve the full
amount of a requested Commitment Increase, to the extent that the existing applicable Lenders decline to increase their Commitments, or decline
to increase their Commitments to the amount requested by the Parent, the Parent may, at its option, obtain other Persons which shall be Eligible
Assignees to issue Commitments in the amount of the requested Commitment Increase or request the Administrative Agent or any of its
Affiliates to, and the Administrative Agent and such Affiliates shall, use its reasonable efforts to arrange for other Eligible Assignees to become
a Domestic Lender or Canadian Lender, as applicable, hereunder and to issue commitments in an amount equal to the amount of the increase in
the Domestic Total Commitments and Canadian Total Commitments requested by the Parent and not accepted by the existing applicable Lenders
(and the Parent may also invite additional Eligible Assignees to become Lenders) (each such Eligible Assignee issuing a commitment and
becoming a Lender, an “ Additional Commitment Lender ”), provided , however , that without the consent of the Administrative Agent, at no
time shall the Commitment of any Additional Commitment Lender be less than $10,000,000.
Effective Date and Allocations . If the Domestic Total Commitments or the Canadian Total Commitments are
(d)
increased in accordance with this Section 2.15 , the Administrative Agent, in consultation with the Parent, shall determine the effective date (the
“ Increase Effective Date ”) and the final allocation of such Commitment Increase. The Administrative Agent shall promptly notify the Parent
and the Lenders of the final allocation of such Commitment Increase and the Increase Effective Date and on the Increase Effective Date (i) the
Domestic Total Commitments and Canadian Total Commitments, if applicable, and the Aggregate Total Commitments under, and for all
purposes of, this Agreement shall be increased by the aggregate amount of such Commitment Increase, and (ii) Schedule 2.01 shall be deemed
modified, without further action, to reflect the revised Commitments and Applicable Percentages of the Lenders.
Conditions to Effectiveness of Increase . As a condition precedent to such increase, (i) the Parent shall deliver to the
(e)
Administrative Agent a certificate of each Loan Party dated as of the Increase Effective Date (in sufficient copies for each Lender) signed by a
Responsible Officer of such Loan Party (A) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such
increase, and (B) in the case of the Borrowers, certifying that, before and after giving effect to such increase, (1) the representations and
warranties contained in Article V and the other Loan Documents are true and correct on and as of the Increase Effective Date, except to the
extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date,
and except that for purposes of this Section 2.15 , the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be
deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 , (ii) the Borrowers, the
Administrative Agent, and any Additional Commitment Lender shall have executed and delivered a joinder to the Loan Documents in such form
as the Administrative Agent shall reasonably require; (iii) the Borrowers shall have paid such fees and other compensation to the Additional
Commitment Lenders and
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to any existing Lender increasing its Commitment as the Parent and such Additional Commitment Lenders shall agree; (iv) if the Parent has
requested the Administrative Agent or any of its Affiliates to seek additional Lenders pursuant to Section 2.15(c), the Borrowers shall have paid
such arrangement fees to the Administrative Agent and such Affiliates as the Parent and the Administrative Agent may agree; (v) the Borrowers
shall deliver to the Administrative Agent and the Lenders an opinion or opinions, in form and substance reasonably satisfactory to the
Administrative Agent, from counsel to the Borrowers reasonably satisfactory to the Administrative Agent and dated such date; (vi) the
Borrowers and the Additional Commitment Lender shall have delivered such other instruments, documents and agreements evidencing the
Commitment Increase as the Administrative Agent may reasonably have requested; and (vii) no Default exists. The Borrowers shall prepay any
Committed Loans outstanding on the Increase Effective Date (and pay any additional amounts required pursuant to Section 3.05 ) to the extent
necessary to keep the outstanding Committed Loans ratable with any revised Applicable Percentages arising from any nonratable increase in the
Commitments under this Section.
No Obligation to Engage Administrative Agent . The Parent shall not be obligated to engage the Administrative
(f)
Agent or any of its Affiliates to arrange any Commitment Increase, however, in no event shall any other person be so engaged by any Loan
Party.
(g)
2.16
Conflicting Provisions . This Section 2.15 shall supersede any provisions in Sections 2.13 or 10.01 to the contrary.
Defaulting Lenders.
Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes
(a)
a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable
Law:
(i)
Waivers and Amendments. Such Defaulting Lender’s right to approve or disapprove any
amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in the definition of
“Required Lenders” and Section 10.01.
(ii)
Defaulting Lender Waterfall. Any payment of principal, interest, fees or other amounts received by
the Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity,
pursuant to Article VIII or otherwise) or received by the Administrative Agent from a Defaulting Lender pursuant to
Section 10.08 shall be applied at such time or times as may be determined by the Administrative Agent as follows: first,
to the payment of any amounts owing by such Defaulting Lender to the Administrative Agent hereunder; second, to the
payment on a pro rata basis of any amounts owing by such Defaulting Lender to the L/C Issuer or Swing Line Lender
hereunder; third, to Cash Collateralize the L/C Issuer’s Fronting Exposure with respect to such Defaulting Lender;
fourth, as the Parent may request (so long as no Default or Event of Default exists), to the funding of any Loan in
respect of which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as
determined by the Administrative Agent; fifth, if so determined by the Administrative Agent and the Parent, to be held
in a deposit account and released pro rata in order to (x) satisfy such Defaulting Lender’s potential future funding
obligations with respect to Loans under this Agreement and (y) Cash Collateralize the L/C Issuer’s future Fronting
Exposure with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement;
sixth, to the payment of any amounts owing to the Lenders, the L/C Issuer or Swing Line Lender as a result of any
judgment of a court of competent jurisdiction obtained by any Lender, the L/C Issuer or the Swing Line Lender
(96)
against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this Agreement;
seventh, so long as no Default or Event of Default exists, to the payment of any amounts owing to the Borrowers as a
result of any judgment of a court of competent jurisdiction obtained by the Borrowers against such Defaulting Lender
as a result of such Defaulting Lender’s breach of its obligations under this Agreement; and eighth, to such Defaulting
Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of
the principal amount of any Loans or L/C Borrowings in respect of which such Defaulting Lender has not fully funded
its appropriate share, and (y) such Loans were made or the related Letters of Credit were issued at a time when the
conditions set forth in Section 4.02 were satisfied or waived, such payment shall be applied solely to pay the Loans of,
and L/C Obligations owed to, all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of
any Loans of, or L/C Obligations owed to, such Defaulting Lender until such time as all Loans and funded and
unfunded participations in L/C Obligations and Swing Line Loans are held by the Lenders pro rata in accordance with
their Applicable Percentages hereunder without giving effect to Section 2.16(a)(iv). Any payments, prepayments or
other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting
Lender or to post Cash Collateral pursuant to this Section 2.16(a)(ii) shall be deemed paid to and redirected by such
Defaulting Lender, and each Lender irrevocably consents hereto.
(iii)
Certain Fees.
No Defaulting Lender shall be entitled to receive any fee payable under Section 2.09 for any
(A)
period during which that Lender is a Defaulting Lender (and the Borrowers shall not be required to pay any such fee that
otherwise would have been required to have been paid to that Defaulting Lender).
(B)
Each Defaulting Lender shall be entitled to receive Letter of Credit Fees for any period
during which that Lender is a Defaulting Lender only to the extent allocable to its Applicable Percentage of the stated amount
of Letters of Credit for which it has provided Cash Collateral pursuant to Section 2.03(g).
(C)
With respect to any fee payable under Section 2.09 or any Letter of Credit Fee not required
to be paid to any Defaulting Lender pursuant to clause (A) or (B) above, the Borrowers shall (x) pay to each Non-Defaulting
Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender’s
participation in L/C Obligations or Swing Line Loans that has been reallocated to such Non-Defaulting Lender pursuant to
clause (iv) below, (y) pay to the L/C Issuer and Swing Line Lender, as applicable, the amount of any such fee otherwise payable
to such Defaulting Lender to the extent allocable to such L/C Issuer’s or Swing Line Lender’s Fronting Exposure to such
Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.
(iv)
Reallocation of Applicable Percentages to Reduce Fronting Exposure. All or any part of such
Defaulting Lender’s participation in L/C Obligations and Swing Line Loans shall be reallocated among the NonDefaulting Lenders in accordance with their respective Applicable Percentages (calculated without regard to such
Defaulting Lender’s Commitment) but only to the extent that (x) the conditions set forth in Section 4.02 are satisfied at
the time of such reallocation (and, unless the Borrowers shall have otherwise notified the Administrative Agent at such
time, the Borrowers shall be deemed to have represented and warranted that such conditions are satisfied at such
time), and (y)
(97)
such reallocation does not cause the aggregate Outstanding Amount of Obligations or Canadian Liabilities of any NonDefaulting Lender to exceed such Non-Defaulting Lender’s Domestic Commitment or Canadian Commitment, as
applicable. No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against
a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a NonDefaulting Lender as a result of such Non-Defaulting Lender’s increased exposure following such reallocation.
Cash Collateral, Repayment of Swing Line Loans. If the reallocation described in clause (a)(iv) above
(v)
cannot, or can only partially, be effected, the Borrowers shall, without prejudice to any right or remedy available to
them hereunder or under applicable Law, (x) first, prepay Swing Line Loans in an amount equal to the Swing Line
Lenders’ Fronting Exposure and (y) second, Cash Collateralize the L/C Issuers’ Fronting Exposure in accordance with
the procedures set forth in Section 2.03(g).
Defaulting Lender Cure. If the Parent, the Administrative Agent, the Swing Line Lender and the L/C Issuer
(b)
agree in writing that a Lender is no longer a Defaulting Lender, the Administrative Agent will so notify the parties hereto,
whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include
arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase at par that portion of
outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary
to cause the Committed Loans and funded and unfunded participations in Letters of Credit and Swing Line Loans to be held on
a pro rata basis by the Lenders in accordance with their Applicable Percentages (without giving effect to Section 2.16(a)(iv)),
whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with
respect to fees accrued or payments made by or on behalf of the Borrowers while that Lender was a Defaulting Lender; and
provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from
Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s
having been a Defaulting Lender.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY;
APPOINTMENT OF PARENT
3.01
Taxes .
(a)
Payments Free of Taxes . ; Obligation to Withhold; Payments on Account of Taxes. For purposes of this
Section 3.01, the term “applicable Laws” includes FATCA.
(i)
Any and all payments by or on account of any obligation of the Loan Parties hereunder or under any other
any Loan Party under any Loan Document shall be made free and clear of and without reduction or withholding for any
Indemnified Taxes or Other Taxes, provided that if the Loan Parties shall be required by Law to deduct any Indemnified Taxes
(including any Other Taxes) from such payments, then (i) without deduction or withholding for any Taxes, except as
required by applicable Laws. If any applicable Laws (as determined in the good faith discretion of the Agent) require
the deduction or withholding of any Tax from any such payment by the Agent or a Loan Party, then the Agent or such
Loan Party shall be entitled to make such deduction or withholding, upon the basis of the information and
documentation to be delivered pursuant to subsection (e) below.
(98)
(ii)
If any Loan Party or the Agent shall be required by any applicable Laws to withhold or deduct any
Taxes from any payment, then (A) such Loan Party or the Agent, as required by such Laws, shall withhold or make
such deductions as are determined by it to be required based upon the information and documentation it has received
pursuant to subsection (e) below, (B) such Loan Party or the Agent, to the extent required by such Laws, shall timely
pay the full amount withheld or deducted to the relevant Governmental Authority in accordance with such Laws, and
(C) to the extent that the withholding or deduction is made on account of Indemnified Taxes, the sum payable by the
applicable Loan Party shall be increased as necessary so that after any required withholding or the making of all required
deductions (including deductions applicable to additional sums payable under this Section ) the Agents, Lenders or L/C Issuer,
as the case may be, 3.01) the applicable Recipient receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Loan Parties shall make such deductions and (iii) the Loan Parties shall timely pay the full
amount deducted to the relevant Governmental Authority in accordance with Law withholding or deduction been made .
Payment of Other Taxes by the Borrowers . Without limiting or duplicating the provisions of subsection (a) above,
(b)
the Loan Parties Borrowers shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable
Law , or at the option of the Agent timely reimburse it for the payment of, any Other Taxes .
(c)
Tax Indemnifications.
(c) Indemnification by The Loan Parties . The Domestic Loan Parties and the Foreign Borrower (to the
(i)
extent applicable) shall indemnify each Credit Party, and the Canadian Loan Parties and the Foreign Borrower (to the extent
applicable) shall indemnify each Canadian Credit Party, shall, and each Loan Party does hereby, jointly and severally
indemnify each Recipient, and shall make payment in respect thereof within ten ( 10 ) days after demand therefor, for the
full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section 3.01 ) payable or paid by such Credit Party, as the case may be Recipient
or required to be withheld or deducted from a payment to such Recipient , and any penalties, interest and reasonable
expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or
legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or
liability delivered to the Parent Lead Borrower by a Lender or the L/C Issuer (with a copy to the Administrative Agent or the
Canadian Agent, as applicable ), or by the Administrative Agent on its own behalf or on behalf of a Domestic Credit Party, or
by the Canadian Agent on its own behalf or on behalf of a Canadian Credit Party Lender or the L/C Issuer , shall be
conclusive absent manifest error.
Each Lender and the L/C Issuer shall, and does hereby, severally indemnify, and shall make payment
(ii)
in respect thereof within 10 days after demand therefor, (x) the Agent against any Indemnified Taxes attributable to
such Lender or the L/C Issuer (but only to the extent that any Loan Party has not already indemnified the Agent for
such Indemnified Taxes and without limiting the obligation of the Loan Parties to do so), (y) the Agent and the Loan
Parties, as applicable, against any Taxes attributable to such Lender’s failure to comply with the provisions of Section
10.06(d) relating to the maintenance of a Participant Register and (z) the Agent and the Loan Parties, as
(99)
applicable, against any Excluded Taxes attributable to such Lender or the L/C Issuer, in each case, that are payable or
paid by the Agent or a Loan Party in connection with any Loan Document, and any reasonable expenses arising
therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the
relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender
by the Agent shall be conclusive absent manifest error. Each Lender and the L/C Issuer hereby authorizes the Agent to
set off and apply any and all amounts at any time owing to such Lender or the L/C Issuer, as the case may be, under
this Agreement or any other Loan Document against any amount due to the Agent under this clause (ii).
(d)
Evidence of Payments . As soon as practicable Upon request by the Lead Borrower or the Agent, as the case
may be, after any payment of Indemnified Taxes by the Lead Borrower or Other Taxes by the Loan Parties Agent to a Governmental
Authority , the Parent shall deliver to the Administrative Agent or the Canadian as provided in this Section 3.01, the Lead Borrower
shall deliver to the Canadian Agent , as applicable or the Agent shall deliver to the Lead Borrower, as the case may be , the original
or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the any return reporting
required by Laws to report such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent
Lead Borrower or the Canadian Agent, as applicable the case may be .
(e)
Status of Lenders; Tax Documentation .
Any Lender that is entitled to an exemption from , or reduction of , withholding Tax under the law of the
(i)
jurisdiction in which any Loan Party is resident for tax purposes, or any treaty to which such jurisdiction is a party, with
respect to payments hereunder or made under any other Loan Document shall deliver to the Parent (with a copy to the
Administrative Agent) or the Canadian Lead Borrower (with a copy to and the Canadian Agent ), as applicable , at the time or
times prescribed by applicable Law or reasonably requested by the Parent, the Administrative Agent, the Canadian Lead
Borrower or the Canadian Agent, such properly completed and executed documentation prescribed by applicable Law
reasonably requested by the Lead Borrower or the Agent as will permit such payments to be made without withholding or
at a reduced rate of withholding. Such delivery shall be required on the Closing Date and on or before the date such
documentation expires or becomes obsolete or after the occurrence of any event requiring a change in the documentation most
recently delivered. In addition, any Lender, if reasonably requested by the Parent, the Administrative Agent, the Canadian
Lead Borrower or the Canadian Agent, shall deliver such other documentation prescribed by applicable Law or reasonably
requested by the Parent, the Administrative Agent, the Canadian Lead Borrower or the Canadian Agent , as will enable the
Parent, the Administrative Agent, the Canadian Lead Borrower or the Canadian Agent , to determine whether or not such
Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary
in the preceding two sentences, the completion, execution and submission of such documentation (other than such
documentation set forth in Section 3.01(e)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lender’s
reasonable judgment such completion, execution or submission would subject such Lender to any material
unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
(100)
(ii)
Without limiting the generality of the foregoing, in the event that the Lead Borrower is a U.S. Person ,
(A)
any Lender that is a U.S. Person shall deliver to the Lead Borrower and the Agent on or
prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the
reasonable request of the Lead Borrower or the Agent), executed originals of IRS Form W-9 certifying that such Lender is
exempt from U.S. federal backup withholding tax;
(B)
Withou t limiting the generality of the foregoing, in the event that any Loan Party is resident for tax
purposes in the United States, any Foreign Lender shall , to the extent it is legally entitled to do so, deliver to the Parent Lead
Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on
which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of
the Parent Lead Borrower or the Administrative Agent , but only if such Foreign Lender is legally entitled to do so ), whichever of the
following is applicable:
(i) duly completed copies of Internal Revenue Service Form W-8BEN (I) in the case of a Foreign
Lender claiming eligibility for the benefits of an income tax treaty to which the United States is a party ,
(x) with respect to payments of interest under any Loan Document, executed originals of IRS Form W8BEN establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the
“interest” article of such tax treaty and (y) with respect to any other applicable payments under any
Loan Document, IRS Form W-8BEN establishing an exemption from, or reduction of, U.S. federal
withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;
(ii) duly completed copies of Internal Revenue Service (II) executed originals of IRS Form W8ECI , ;
(iii) (III) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio
interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit G-1 to the
effect that such Foreign Lender is not (A) a “bank” within the meaning of Section 881(c)(3)(A) of the Code,
(B) a “10 percent shareholder” of the Domestic Borrowers Borrower within the meaning of Section 881(c)
(3)(B) of the Code, or (C) a “controlled foreign corporation” related to the Domestic Borrowers, as
described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (y) duly
completed copies of Internal Revenue Service executed originals of IRS Form W-8BEN , ; or
(IV)
to the extent a Foreign Lender is not the beneficial owner, executed originals of IRS
Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, a U.S. Tax Compliance
Certificate substantially in the form of Exhibit G-2 or Exhibit G-3, IRS Form W-9, and/or other
certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender
is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming
(101)
the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate
substantially in the form of Exhibit G-4 on behalf of each such direct and indirect partner;
(C)
(iv) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Lead
Borrower and the Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such
Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the
Lead Borrower or the Agent), executed originals of any other form prescribed by applicable Law as a basis for claiming exemption
from or a reduction in United States Federal U.S. federal withholding Tax , duly completed , together with such supplementary
documentation as may be prescribed by applicable Law to permit the Parent Lead Borrower or the Agent to determine the
withholding or deduction required to be made . ; and
(D)
if a payment made to a Lender under any Loan Document would be subject to U.S. federal
withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of
FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the
Lead Borrower and the Agent at the time or times prescribed by law and at such time or times reasonably requested by the
Lead Borrower or the Agent such documentation prescribed by applicable Law (including as prescribed by Section 1471(b)(3)
(C)(i) of the Code) and such additional documentation reasonably requested by the Lead Borrower or the Agent as may be
necessary for the Lead Borrower and the Agent to comply with their obligations under FATCA and to determine that such
Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from
such payment. Solely for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date
of this Agreement.
(iii)
Each Lender agrees that if any form or certification it previously delivered pursuant to this
Section 3.01 expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or
promptly notify the Lead Borrower and the Agent in writing of its legal inability to do so.
(e)
Treatment of Certain Refunds . If any Credit Party Unless required by applicable Laws, at no time shall the
Agent have any obligation to file for or otherwise pursue on behalf of a Lender or the L/C Issuer, or have any obligation to pay
to any Lender or the L/C Issuer, any refund of Taxes withheld or deducted from funds paid for the account of such Lender or
the L/C Issuer, as the case may be. If any Recipient determines, in its sole discretion exercised in good faith , that it has received a
refund of any Taxes or Other Taxes as to which it has been indemnified by any Loan Party or with respect to which the any Loan
Parties have Party has paid additional amounts pursuant to this Section 3.01 , it shall pay to the Loan Parties Party an amount equal to
such refund (but only to the extent of indemnity payments made, or additional amounts paid, by such a Loan Party under this
Section 3.01 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the applicable
Credit Party (including Taxes) incurred by such Recipient, and without interest (other than any interest paid by the relevant
Governmental Authority with respect to such refund), provided that the Loan Parties Party , upon the request of the Administrative
Agent or the Canadian Agent, as applicable, such Lender or the L/C Issuer, agree Recipient, agrees to repay the amount paid over to
the Loan Parties Party (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the applicable
Credit Party Recipient in the event such Credit Party the Recipient is required to repay such refund to such Governmental Authority.
Notwithstanding anything to the
(102)
contrary in this subsection, in no event will the applicable Recipient be required to pay any amount to the Loan Party pursuant
to this subsection the payment of which would place the Recipient in a less favorable net after-Tax position than such Recipient
would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or
otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This
subsection shall not be construed to require any Credit Party Recipient to make available its tax returns (or any other information
relating to its taxes that it deems confidential) to the any Loan Parties Party or any other Person.
(f)
Survival. Each party’s obligations under this Section 3.01 shall survive the resignation or replacement of the
Agent or any assignment of rights by, or the replacement of, a Lender or the L/C Issuer, the termination of the Commitments
and the repayment, satisfaction or discharge of all other Obligations.
Illegality. If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that
3.02
it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund LIBOR Rate Loans, BA Equivalent Loans or Euribor
Rate Loans, as applicable, or to determine or charge interest rates based upon the LIBOR Rate, the Euribor Rate or the BA Rate, as applicable, or
any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars
in the London interbank market, then, on notice thereof by such Lender to the Parent through the Administrative Agent, (i) any obligation of
such Lender to make or continue LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans, as applicable, or to convert Prime Rate
Loans to LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans, as applicable, shall be suspended , and (ii) if such notice asserts the
illegality of such Lender making or maintaining Prime Rate Loans the interest rate on which is determined by reference to the LIBOR
Rate component of the U.S. Prime Rate or the US Index Rate, the interest rate on which Prime Rate Loans of such Lender shall, if
necessary to avoid such illegality, be determined by the Administrative Agent without reference to the LIBOR Rate component of the
U.S. Prime Rate or the US Index Rate, in each case, until such Lender notifies the Administrative Agent and the Parent that the circumstances
giving rise to such determination no longer exist. Upon receipt of such notice, the applicable Borrowers shall, upon demand from such Lender
(with a copy to the Administrative Agent), prepay or, if applicable, convert all LIBOR Rate Loans, Euribor Rate Loans and BA Equivalent
Loans of such Lender to Prime Rate Loans either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain
such LIBOR Rate Loans, Euribor Rate Loans, or BA Equivalent Loans to such day, or immediately, if such Lender may not lawfully continue to
maintain such Loans. Upon any such prepayment or conversion, the applicable Borrowers shall also pay accrued interest on the amount so
prepaid or converted.
3.03
Inability to Determine Rates. If the Required Lenders determine that for any reason in connection with any request for a
LIBOR Rate Loan, Euribor Rate Loan or a BA Equivalent Loan, or a conversion to or continuation thereof that (a) with respect to LIBOR Rate
Loans or Euribor Rate Loans only, Dollar deposits are not being offered to banks in the London interbank market for the applicable amount and
Interest Period of such LIBOR Rate Loan or Euribor Rate Loan, (b) with respect to BA Equivalent Loans only, there is no market for bankers
acceptances, (c) adequate and reasonable means do not exist for determining the LIBOR Rate, Euribor Rate Loan or the BA Rate for any
requested Interest Period with respect to a proposed LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan, or (d) the LIBOR Rate,
Euribor Rate or the BA Rate for any requested Interest Period with respect to a proposed LIBOR Rate Loan, Euribor Rate Loan or BA
Equivalent Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, the Agents will promptly so notify the
Borrowers and each Lender. Thereafter, (x) the obligation of the Lenders to make or maintain LIBOR Rate Loans or of the Canadian Lenders to
make or maintain BA Equivalent Loans or Euribor Rate Loans, as applicable,
(103)
shall be suspended and (y) in respect of a determination with respect to the LIBOR Rate component of the U.S. Prime Rate or the US
Index Rate, the utilization of the LIBOR Rate component in determining the U.S. Prime Rate or the US Index Rate shall be suspended,
in each case until the Administrative Agent or the Canadian Agent, as applicable (but in either case upon the instruction of the Required
Lenders) revokes such notice. Upon receipt of such notice, the Parent or the Foreign Borrower may revoke any pending request for a Committed
Borrowing of, conversion to or continuation of LIBOR Rate Loans made to a Domestic Borrower or the Foreign Borrower (if based on Domestic
Availability) or the Canadian Borrower or the Foreign Borrower may revoke any pending request for a Committed Borrowing of, conversion to
or continuation of LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans, as applicable, made to the Canadian Borrower or the
Foreign Borrower (based on Canadian Availability), as applicable, or, failing that, will be deemed to have converted such request into either a
request for a Domestic Committed Borrowing of Domestic Prime Rate Loans in the amount specified therein, or a request for a Canadian
Committed Borrowing of Canadian Prime Rate Loans in the amount specified therein, as applicable.
3.04
Increased Costs; Reserves on LIBOR Rate Loans .
(a)
Increased Costs Generally . If any Change in Law shall:
(i)
impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or
similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except
any reserve requirement reflected in the LIBOR Rate) or the L/C Issuer;
(ii)
subject any Lender or the L/C Issuer to any tax of any kind whatsoever with respect to this Agreement, any
Letter of Credit, any participation in a Letter of Credit or any LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan made by it,
or change the basis of taxation of payments to such Lender or the L/C Issuer in respect thereof (except for Indemnified Taxes or Other
Taxes covered by Section 3.01 and the imposition of, or any change in the rate of, any Excluded Tax payable by such Lender or the L/C
Issuer); or Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the
definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or
other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or
(iii)
impose on any Lender or the L/C Issuer or the London interbank market any other condition, cost or
expense affecting this Agreement or LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans made by such Lender or any
Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any LIBOR Rate Loan, Euribor Rate
Loan or BA Equivalent Loan (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender or the L/C Issuer of
participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or
to reduce the amount of any sum received or receivable by such Lender or the L/C Issuer hereunder (whether of principal, interest or any other
amount) then, upon request of such Lender or the L/C Issuer, the Loan Parties will pay to such Lender or the L/C Issuer, as the case may be, such
additional amount or amounts as will compensate such Lender or the L/C Issuer, as the case may be, for such additional costs incurred or
reduction suffered.
(104)
(b)
Capital Requirements . If any Lender or the L/C Issuer determines that any Change in Law affecting such Lender or
the L/C Issuer or any Lending Office of such Lender or such Lender’s or the L/C Issuer’s holding company, if any, regarding capital
requirements has had, or would have, the effect of reducing the rate of return on such Lender’s or the L/C Issuer’s capital or on the capital or
liquidity of such Lender’s or the L/C Issuer’s holding company, if any, as a consequence of this Agreement, the Commitments of such Lender or
the Loans made by, or participations in Letters of Credit or Swing Line Loans held by, such Lender, or the Letters of Credit issued by the L/C
Issuer, to a level below that which such Lender or the L/C Issuer or such Lender’s or the L/C Issuer’s holding company could have achieved but
for such Change in Law (taking into consideration such Lender’s or the L/C Issuer’s policies and the policies of such Lender’s or the L/C
Issuer’s holding company with respect to capital adequacy and liquidity ), then from time to time the Loan Parties will pay to such Lender or
the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer or such Lender’s or the
L/C Issuer’s holding company, as the case may be, for any such reduction suffered.
Certificates for Reimbursement . A certificate of a Lender or the L/C Issuer setting forth the amount or amounts
(c)
necessary to compensate such Lender or the L/C Issuer or its holding company, as the case may be, as specified in subsection (a) or (b) of this
Section and delivered to the Parent shall be conclusive absent manifest error. The applicable Borrowers shall pay such Lender or the L/C Issuer,
as the case may be, the amount shown as due on any such certificate within ten (10) days after receipt thereof.
(d)
Delay in Requests . Failure or delay on the part of any Lender or the L/C Issuer to demand compensation pursuant to
the foregoing provisions of this Section 3.04 shall not constitute a waiver of such Lender’s or the L/C Issuer’s right to demand such
compensation, provided that the applicable Borrower shall not be required to compensate a Lender or the L/C Issuer pursuant to the foregoing
provisions of this Section 3.04 for any increased costs incurred or reductions suffered more than nine (9) months prior to the date that such
Lender or the L/C Issuer, as the case may be, notifies the Parent of the Change in Law giving rise to such increased costs or reductions and of
such Lender’s or the L/C Issuer’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs
or reductions is retroactive, then the nine (9) month period referred to above shall be extended to include the period of retroactive effect thereof).
3.05
Compensation for Losses. Upon demand of any Lender (with a copy to the Agents) from time to time, each Borrower shall
promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:
any continuation, conversion, payment or prepayment of any LIBOR Rate Loan, Euribor Rate Loan, or BA
(a)
Equivalent Loan made to such Borrower on a day other than the last day of the Interest Period for such LIBOR Rate Loan, Euribor Rate
Loan or BA Equivalent Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);
(b)
any failure by such Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow,
continue or convert any LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan on the date or in the amount notified by the
applicable Borrower; or
(c)
any assignment of a LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan made to such Borrower on a day
other than the last day of the Interest Period therefor as a result of a request by such Borrower pursuant to Section 10.13 ;
(105)
including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain
such Loan or from fees payable to terminate the deposits from which such funds were obtained. The applicable Borrower shall also pay any
customary administrative fees charged by such Lender in connection with the foregoing.
For purposes of calculating amounts payable by a Borrower to the Lenders under this Section 3.05 , each Lender shall be deemed to
have funded each LIBOR Rate Loan, Euribor Rate Loan or BA Equivalent Loan made by it at the LIBOR Rate, Euribor Rate or BA Rate for
such Loan by a matching deposit or other borrowing for a comparable amount and for a comparable period, whether or not such LIBOR Rate
Loan, Euribor Rate Loan or BA Equivalent Loan was in fact so funded.
3.06
Mitigation Obligations; Replacement of Lenders .
Designation of a Different Lending Office . If any Lender or L/C Issuer requests compensation under Section 3.04 ,
(a)
or the Borrowers are required to pay any additional amount to any Lender or L/C Issuer or any Governmental Authority for the account of any
Lender or L/C Issuer pursuant to Section 3.01 , or if any Lender or L/C Issuer gives a notice pursuant to Section 3.02 , then such Lender or L/C
Issuer shall use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and
obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender or L/C Issuer, such designation or
assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.01 or Section 3.04 , as the case may be, in the future, or
eliminate the need for the notice pursuant to Section 3.02 , as applicable, and (ii) in each case, would not subject such Lender or L/C Issuer to
any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender or L/C Issuer. The Borrowers hereby agree to
pay all reasonable costs and expenses incurred by any Lender or L/C Issuer in connection with any such designation or assignment.
(b)
Replacement of Lenders . If any Lender requests compensation under Section 3.04 , or if any Loan Party is required
to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , the
Borrowers may replace such Lender in accordance with Section 10.13 .
3.07
Survival. All of the obligations of each Loan Party under this Article III shall survive termination of the Aggregate Total
Commitments and Payment in Full of all Obligations hereunder.
3.08
Designation of Parent as Borrowers’ Agent.
(a)
Each Domestic Borrower hereby irrevocably designates and appoints the Parent as such Domestic Borrower’s agent
to obtain Credit Extensions, the proceeds of which shall be available to each Domestic Borrower for such uses as are permitted under this
Agreement. As the disclosed principal for its agent, each Domestic Borrower shall be obligated to each Credit Party on account of Credit
Extensions so made as if made directly by the applicable Credit Party to such Domestic Borrower, notwithstanding the manner by which such
Credit Extensions are recorded on the books and records of the Parent and of any other Domestic Borrower. In addition, each Loan Party hereby
irrevocably designates and appoints the Parent as such Loan Party’s agent to represent such Loan Party in all respects under this Agreement and
the other Loan Documents. The Parent shall act as a conduit for each Borrower (including itself, as a “Borrower”) on whose behalf the Parent
has requested a Credit Extension. Neither the Administrative Agent nor any other Credit Party shall have any obligation to see to the application
of such proceeds therefrom.
(106)
(b)
Each Borrower recognizes that credit available to it hereunder is in excess of and on better terms than it otherwise
could obtain on and for its own account and that one of the reasons therefor is its joining in the applicable credit facility contemplated herein
with all other Borrowers. Consequently, subject to the terms and conditions of this Agreement, each Borrower hereby assumes, guarantees
payment and performance of, and agrees to discharge all Obligations of each of the other Borrowers; provided that, notwithstanding anything
herein or in any of the other Loan Documents to the contrary, the Canadian Loan Parties shall be liable only for the Canadian Liabilities and the
Foreign Borrower shall be liable only for the Foreign Liabilities.
ARTICLE IV
CONDITIONS PRECEDENT TO CREDIT EXTENSIONS
4.01
Conditions of Initial Credit Extension. The obligation of the L/C Issuer and each Lender to make its initial Credit
Extension hereunder is were subject to satisfaction of the following conditions precedent as of the Closing Date and such conditions were
satisfied :
(a)
The Administrative Agent’s receipt of the following, each of which shall be originals, telecopies or other electronic
image scan transmission (e.g., “pdf” or “tif “ via e-mail) (followed promptly by originals) unless otherwise specified, each properly
executed by a Responsible Officer of the signing Loan Party or the Lenders, as applicable, each dated the Closing Date (or, in the case
of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the
Administrative Agent:
executed counterparts of this Agreement sufficient in number for distribution to the Administrative Agent,
(i)
the Canadian Agent, each Lender and the Parent;
(ii)
a Note executed by the Borrowers in favor of each Lender requesting a Note;
(iii)
such certificates of resolutions or other action, incumbency certificates and/or other certificates of
Responsible Officers of each Loan Party as the Administrative Agent may require evidencing (A) the authority of each Loan
Party to enter into this Agreement and the other Loan Documents to which such Loan Party is a party or is to become a party
and (B) the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in
connection with this Agreement and the other Loan Documents to which such Loan Party is a party or is to become a party;
(iv)
copies of each Loan Party’s Organization Documents and a certificate of good standing (where applicable,
or such other customary functionally equivalent certificates, to the extent available in the applicable jurisdiction) from such
Loan Party’s jurisdiction of organization and from each jurisdiction where such Loan Party’s ownership, lease or operation of
properties or the conduct of its business requires such qualification, except to the extent that failure to so qualify in such
jurisdiction would not reasonably be expected to have a Material Adverse Effect;
(v)
a favorable opinion of (x) Alston & Bird LLP, counsel to the Domestic Loan Parties, addressed to the
Administrative Agent and each Domestic Lender, as to such matters concerning the Domestic Loan Parties and the Loan
Documents as the Administrative Agent may reasonably request; (y) Blakes, Cassels & Graydon LLP, and local Canadian
counsel, counsel to the Canadian Loan Parties, addressed to the Canadian
(107)
Agent and each Canadian Lender, as to such matters concerning the Canadian Loan Parties and the Loan Documents as the
Canadian Agent may reasonably request; and (z) Eversheds, counsel to the Foreign Borrower, addressed to the Administrative
Agent and each Domestic Lender and to the Canadian Agent and each Canadian Lender, as to such matters concerning the
Foreign Borrower and the Loan Documents as the Administrative Agent and the Canadian Agent may reasonably request;
(vi)
a certificate signed by a Responsible Officer of the Parent certifying (A) that the conditions specified in
Sections 4.02(a) and (b) have been satisfied, (B) that there has been no event or circumstance since the date of the Audited
Financial Statements that has had or would be reasonably expected to have, either individually or in the aggregate, a Material
Adverse Effect, (C) to the Solvency of the Loan Parties as of the Closing Date after giving effect to the transactions
contemplated hereby, and (D) either that (1) no consents, licenses or approvals are required in connection with the execution,
delivery and performance by such Loan Party and the validity against such Loan Party of the Loan Documents to which it is a
party, or (2) that all such consents, licenses and approvals have been obtained and are in full force and effect;
(vii)
a payoff letter from the agent for the lenders under the Existing that certain Credit Agreement dated as of
November 16, 2006 among Sally Holdings LLC, General Electric Capital Corporation, as administrative agent
(successor to Merrill Lynch Capital Corporation), and the other parties thereto, satisfactory in form and substance to the
Administrative Agent evidencing that the Existing Credit Agreement such agreement has been or concurrently with the
Closing Date is being terminated, all obligations thereunder are being paid in full, and all Liens securing obligations under the
Existing Credit Agreement such agreement have been or concurrently with the Closing Date are being released;
the Security Documents and certificates evidencing any stock being pledged thereunder, together with
(viii)
undated stock powers executed in blank, each duly executed by the applicable Loan Parties and the Loan Parties shall have
used commercially reasonable efforts to obtain any Collateral Access Agreements reasonably requested by the Agents (failing
which the Administrative Agent may establish Reserves against the Borrowing Base);
(ix)
all other Loan Documents, each duly executed by the applicable Loan Parties;
(x)
results of searches or other evidence reasonably satisfactory to the Agents (in each case dated as of a date
reasonably satisfactory to the Agents) indicating the absence of Liens on the assets of the Loan Parties, except for Permitted
Encumbrances and Liens for which termination statements and releases, satisfactions and releases or subordination agreements
satisfactory to the Agents are being tendered concurrently with such extension of credit or other arrangements satisfactory to
the Agents for the delivery of such termination statements and releases, satisfactions and discharges have been made;
(A)
all documents and instruments, including Uniform Commercial Code and PPSA financing
(xi)
statements, required by law or reasonably requested by the Agents to be filed, registered or recorded to create or perfect the
first priority Liens intended to be created under the Loan Documents and all such documents and instruments shall have been
so filed, registered or recorded to the satisfaction of the
(108)
Agents, (B) the Credit Card Notifications, and Blocked Account Agreements required pursuant to Section 6.12 hereof shall
have been obtained, and (C) control agreements with respect to the Loan Parties’ securities and investment accounts have been
obtained;
(xii)
satisfactory evidence of insurance to be maintained by the Loan Parties with respect to the Collateral, in
each case reasonably satisfactory to the Agents and customary for transactions of this type; and
(xiii)
such other assurances, certificates, documents, consents or opinions as the Agents reasonably may require.
(b)
After giving effect to (i) the first funding under the Loans, (ii) any charges to the Loan Account made in connection
with the establishment of the credit facility contemplated hereby and (iii) all Letters of Credit to be issued at, or immediately subsequent
to, such establishment, Combined Availability shall be not less than $200,000,000.
(c)
The Administrative Agent shall have received a Borrowing Base Certificate with respect to the Domestic Borrowing
Base and the Canadian Borrowing Base dated the Closing Date, relating to the month ended on September 30, 2010, and executed by a
Responsible Officer of the Parent and by the Canadian Borrower.
(d)
The Administrative Agent shall be reasonably satisfied that any financial statements delivered to it and the Lenders
fairly present the business and financial condition of the Loan Parties and that there has not been, nor has an event or condition occurred
that would reasonably be expected, either individually or in the aggregate, to have, a Material Adverse Effect since June 30, 2010.
(e)
The Administrative Agent shall have received and be satisfied with financial projections for the Parent and its
Subsidiaries (x) for the consecutive monthly periods following the Closing Date ending September 30, 2011 and (y) on an annual basis,
for each Fiscal Year thereafter through fiscal year 2014, including, in each case, a consolidated income statement, balance sheet,
statement of cash flow and Availability model (which Availability model shall be prepared on a four week-accounting period basis
through July 2011).
There shall not be pending any litigation or other proceeding, the result of which, either individually or in the
(f)
aggregate, would reasonably be expected to have a Material Adverse Effect.
(g)
All governmental consents and approvals, and all third party consents required for the Loan Parties to consummate
the financing, shall have been obtained by the Loan Parties other than those consents and approvals that, if not obtained, would not be
reasonably expected, either individually or in the aggregate, to have a Material Adverse Effect.
The Lenders shall have completed a due diligence investigation of the Borrowers and their Subsidiaries in scope, and
(h)
with results, satisfactory to the Lenders (including, without limitation a satisfactory commercial finance examination and inventory
appraisal) and shall have been given such access to the management, records, books of account, contracts and properties of the
Borrowers and their Subsidiaries and shall have received such financial, business and other information regarding each of the foregoing
persons and businesses as they shall have requested, including, without limitation, information as to possible contingent liabilities, tax
matters, collective bargaining agreements and other arrangements with employees, the annual (or other
(109)
audited) financial statements of Sally Investment Holdings LLC and its Subsidiaries for the most recently ended Fiscal Year and interim
financial statements of Sally Investment Holdings LLC and its Subsidiaries dated the end of the most recent Fiscal Quarter for which
financial statements are available. All of the Information shall be complete and correct in all material respects; and no changes or
developments shall have occurred, and no new or additional information, shall have been received or discovered by the Agents or the
Lenders regarding Sally Investment Holdings LLC or its Subsidiaries or the transactions contemplated hereby after September 23, 2010
that (A) either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect or (B) purports to
adversely affect the transactions contemplated hereby, and nothing shall have come to the attention of the Lenders to lead them to
believe that any information furnished to the Administrative Agent prior to the Closing Date was or has become misleading, incorrect or
incomplete in any material respect or (y) the transactions contemplated hereby will have a Material Adverse Effect.
(i)
The Administrative Agent and the other parties to the Intercreditor Agreement shall have entered into an agreement
ratifying and confirming the Intercreditor Agreement.
(j)
Document.
The consummation of the transactions contemplated hereby shall not violate any Law or any Organization
(k)
All fees required to be paid to the Agents or the Arranger on or before the Closing Date shall have been paid in full,
and all fees required to be paid to the Lenders on or before the Closing Date shall have been paid in full.
The Borrowers shall have paid all fees, charges and disbursements of counsel to the Administrative Agent and the
(l)
Canadian Agent to the extent invoiced prior to or on the Closing Date, plus such additional amounts of such fees, charges and
disbursements as shall constitute its reasonable estimate of such fees, charges and disbursements incurred or to be incurred by it through
the closing proceedings (provided that such estimate shall not thereafter preclude a final settling of accounts between the Borrowers and
the Agents).
(m)
The Administrative Agent shall have received all documentation and other information required by regulatory
authorities under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the
USA PATRIOT Act.
Without limiting the generality of the provisions of Section 9.04 , for purposes of determining compliance with the conditions specified
in this Section 4.01 , each Lender that has signed this Agreement shall be deemed to have Consented to, approved or accepted or to be
satisfied with, each document or other matter required thereunder to be Consented to or approved by or acceptable or satisfactory to a
Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its
objection thereto.
Conditions to all Credit Extensions. The obligation of each Lender to honor any Request for Credit Extension (other than a
4.02
Committed Loan Notice requesting only a Conversion of Committed Loans to the other Type, or a continuation of LIBOR Rate Loans, Euribor
Rate Loans and BA Equivalent Loans) and of each L/C Issuer to issue each Letter of Credit is subject to the following conditions precedent:
(a)
The representations and warranties of each Loan Party contained in Article V or any other Loan Document, or which
are contained in any document furnished at any time under or in connection herewith or therewith, shall be true and correct on and as of
the date of such
(110)
Credit Extension, except (i) to the extent that such representations and warranties specifically refer to an earlier date, in which case they
shall be true and correct as of such earlier date, (ii) in the case of any representation and warranty qualified by materiality, they shall be
true and correct in all respects and (iii) for purposes of this Section 4.02 , the representations and warranties contained in subsections
(a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively,
of Section 6.01 .
No Default or Event of Default shall exist, or would result from such proposed Credit Extension or from the
(b)
application of the proceeds thereof.
(c)
The Administrative Agent or the Canadian Agent, if applicable, and, if applicable, the L/C Issuer or the Swing Line
Lender shall have received a Request for Credit Extension in accordance with the requirements hereof.
After giving effect to the Credit Extension requested to be made on any such date and the use of proceeds
(d)
thereof, Excess Availability shall be greater than zero.
Each Request for a Credit Extension (other than a Committed Loan Notice requesting only a conversion of a Committed Loan to another Type of
Committed Loan or a continuation of LIBOR Rate Loans, BA Equivalent Loans or Euribor Rate Loans) submitted by the Parent or the Canadian
Borrower, as applicable, shall be deemed to be a representation and warranty by the Domestic Borrowers or the Canadian Borrower or the
Foreign Borrower, as applicable, that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of the
applicable Credit Extension. The conditions set forth in this Section 4.02 are for the sole benefit of the Credit Parties but unless and until the
Required Lenders otherwise direct the Administrative Agent and the Canadian Agent (in accordance with the terms of this Agreement) to cease
making Committed Loans, the Lenders will fund their Applicable Percentage of all Loans that are requested by the Parent or the Canadian
Borrower, as applicable, of all L/C Advances required to be made hereunder and participate in all Swing Line Loans and Letters of Credit
whenever made or issued in accordance with the provisions of this Agreement, and which, notwithstanding the failure of the Loan Parties to
comply with the provisions of this Article IV , are agreed to by the Administrative Agent or the Canadian Agent, as applicable; provided that, the
making of any such Loans or the issuance of any Letters of Credit in the event the provisions of this Article IV are not complied with shall not be
deemed to be a modification or waiver by any Credit Party of the provisions of this Article IV on any future occasion or a waiver of any rights of
the Credit Parties as a result of any such failure to comply.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
To induce the Credit Parties to enter into this Agreement and to make Loans and to issue Letters of Credit hereunder, each Loan Party
represents and warrants to the Administrative Agent and the other Credit Parties that:
5.01
Existence, Qualification and Power. Each Loan Party (a) is a corporation, limited liability company, unlimited liability
company, partnership or limited partnership, duly incorporated, organized or formed, validly existing and, where applicable, in good standing
under the Laws of the jurisdiction of its incorporation, organization or formation, (b) has all requisite power and authority and all requisite
governmental licenses, permits, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute,
deliver and perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, where
applicable, in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the
(111)
conduct of its business requires such qualification or license; except in each case referred to in clause (b)(i) or (c), to the extent that failure to do
so would not reasonably be expected to have a Material Adverse Effect. Schedule 5.01 annexed hereto sets forth, as of the Closing Effective
Date, each Loan Party’s name as it appears in official filings in its state or province of incorporation or organization, its state or province of
incorporation or organization, organization type, organization number, if any, issued by its state of incorporation or organization (in the case of
each Domestic Loan Party), and its federal employer identification number (if any).
5.02
Authorization; No Contravention. The execution, delivery and performance by each Loan Party of each Loan Document to
which such Person is or is to be a party, has been duly authorized by all necessary corporate or other organizational action, and does not and will
not (a) contravene the terms of any of such Person’s Organization Documents; (b) conflict with or result in any breach, termination, or
contravention of, or constitute a default under, or require any payment to be made under (i) any material contract or any Material Indebtedness to
which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries or (ii) any order, injunction, writ
or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; (c) result in or require the creation
of any Lien upon any asset of any Loan Party (other than Liens in favor of the Collateral Agent or the Canadian Agent, as applicable, under the
Security Documents); or (d) violate any Law.
5.03
Governmental Authorization; Other Consents. No approval, consent, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or
performance by, or enforcement against, any Loan Party of this Agreement or any other Loan Document, except for (a) consents, authorizations,
notices and filings described in Schedule 5.4, all of which have been obtained or made prior to the Closing Effective Date, (b) filings to perfect
the Liens created by the Security Documents, (c) filings pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. § 3727 et
seq.), in respect of Accounts of the Parent and its Subsidiaries the Obligor in respect of which is the United States of America or any department,
agency or instrumentality thereof, (d) filings pursuant to the Financial Administration Act (Canada) in respect of accounts of the Parent and its
Subsidiaries the Obligor in respect of which is Her Majesty the Queen in the right of Canada or any department, agency or
instrumentality thereof and (e) consents, authorizations, notices and filings which the failure to obtain or make would not reasonably be expected
to have a Material Adverse Effect.
5.04
Binding Effect. This Agreement has been, and each other Loan Document, when delivered, will have been, duly executed
and delivered by each Loan Party that is party thereto. This Agreement constitutes, and each other Loan Document when so delivered will
constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject
to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
5.05
Financial Statements; No Material Adverse Effect .
The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the
(a)
period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Parent and its Subsidiaries as
of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the
period covered thereby, except as otherwise expressly noted therein; and (iii) show all Material Indebtedness and other liabilities, direct or
contingent, of the Parent and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness.
(112)
(b)
The unaudited Consolidated balance sheet of the Parent and its Subsidiaries dated June 30 March 31 , 2010 2013 ,
and the related Consolidated statements of income or operations, Shareholders’ Equity and cash flows for the fiscal quarter ended on that date
(i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted
therein, and (ii) fairly present the financial condition of the Parent and its Subsidiaries as of the date thereof and their results of operations for the
period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments.
Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in
(c)
the aggregate, that has had or would reasonably be expected to have a Material Adverse Effect with respect to the Collateral included in the
Borrowing Base, including, without limitation, which adversely affects in any material respect the value of such Collateral, the enforceability or
priority of the applicable Agent’s Liens thereon or the amount which any Agent, the Lenders or any Issuing Lender would be likely to receive
(after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral.
(d)
To the best knowledge of the Parent, no Internal Control Event exists or has occurred since the date of the Audited
Financial Statements through the Closing Effective Date, that has resulted in or would reasonably be expected to result in a misstatement in any
material respect, in any financial information delivered or to be delivered to the Administrative Agent or the Lenders, of (i) covenant compliance
calculations provided hereunder or (ii) the assets, liabilities, financial condition or results of operations of the Parent and its Subsidiaries on a
Consolidated basis.
(e)
To the best knowledge of the Parent, no Internal Control Event exists or has occurred since the date of the Audited
Financial Statements that has resulted in or would reasonably be expected to result in a misstatement in any material respect, in any financial
information or Borrowing Base Certificate delivered or to be delivered to the Administrative Agent or the Lenders with respect to any
components of the Combined Borrowing Base.
(f)
The Consolidated forecasted balance sheet and statements of income and cash flows of the Parent and its Subsidiaries
delivered pursuant to Section 6.01(d) were prepared in good faith on the basis of the assumptions stated therein, which assumptions were fair in
light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of delivery, the Loan Parties’ best estimate
of its future financial performance.
5.06
Litigation. There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Loan Parties after
due and diligent investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against
any Loan Party or any of its Subsidiaries or against any of its properties or revenues that (a) purport to affect or pertain to this Agreement or any
other Loan Document, or any of the transactions contemplated hereby, or (b) except as specifically disclosed in Schedule 5.06 , either
individually or in the aggregate, if determined adversely, would reasonably be expected to have a Material Adverse Effect.
No Default . No Loan Party is in default under or with respect to, or party to, any Material Indebtedness. No Default or
5.07
Event of Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or
any other Loan Document.
5.08
Ownership of Property; Liens
(a)
Each of the Loan Parties has good record and marketable title in fee simple to or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of its business,
(113)
except for such defects in title as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each of
the Loan Parties has good and marketable title to, valid leasehold interests in, or valid licenses to use all personal property and assets material to
the ordinary conduct of its business.
(b)
Schedule 5.08(b)(1) sets forth the address (including street address, state, province or territory and postal or zip
code) of all Real Estate that is owned by the Loan Parties, together with a list of the holders of any mortgage or other Lien thereon as of the
Closing Effective Date. Each Loan Party has good, marketable and insurable fee simple title to the real property owned by such Loan Party or
such Subsidiary, free and clear of all Liens, other than Permitted Encumbrances. Schedule 5.08(b)(2) sets forth the address (including street
address, county, state, province and zip/postal code) of all Leases of the Loan Parties. As of the Closing Effective Date each of such Leases is in
full force and effect and the Loan Parties are not in default of the terms thereof.
(c)
The property of each Loan Party is subject to no Liens other than Permitted Encumbrances.
(d)
Schedule 7.01 sets forth a complete and accurate list of all Liens on the property or assets of each Loan Party,
showing as of the Closing Effective Date the lienholder thereof, the principal amount of the obligations secured thereby and the property or
assets of such Loan Party or such Subsidiary subject thereto.
(e)
Schedule 7.02 sets forth a complete and accurate list of all Investments held by any Loan Party on the Closing
Effective Date, showing as of the date hereof the amount, obligor or issuer and maturity, if any, thereof.
Schedule 7.03 sets forth a complete and accurate list of all Material Indebtedness of each Loan Party on the Closing
(f)
Effective Date, showing as of the date hereof the amount, obligor or issuer and maturity thereof.
5.09
Environmental Compliance
Except for events, conditions or circumstances that would not constitute a Material Adverse Effect:
(a)
No Loan Party or any Subsidiary thereof (i) has failed to comply with any Environmental Law or to obtain, maintain
or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental
Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental
Liability.
(b)
Except as otherwise set forth in Schedule 5.09 , none of the properties currently or formerly owned or operated by
any Loan Party or any Subsidiary thereof is listed or proposed for listing on the NPL or on the CERCLIS or any analogous foreign, state or local
list or is adjacent to any such property; there are no and never have been any underground or above-ground storage tanks or any surface
impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been treated, stored or disposed on any
property currently owned or operated by any Loan Party or, to the best of the knowledge of the Loan Parties, on any property formerly owned or
operated by any Loan Party or any Subsidiary thereof; there is no asbestos or asbestos-containing material on any property currently owned or
operated by any Loan Party; and Hazardous Materials have not been released, discharged or
(114)
disposed of on any property currently or formerly owned or operated by any Loan Party or any Subsidiary thereof.
(c)
Except as otherwise set forth on Schedule 5,09 , no Loan Party is undertaking, and no Loan Party or any Subsidiary
thereof has completed, either individually or together with other potentially responsible parties, any investigation or assessment or remedial or
response action relating to any actual or threatened release, discharge or disposal of Hazardous Materials at any site, location or operation, either
voluntarily or pursuant to the order of any Governmental Authority or the requirements of any Environmental Law; and all Hazardous Materials
generated, used, treated, handled or stored at, or transported to or from, any property currently or formerly owned or operated by any Loan Party
have been disposed of in a manner not reasonably expected to result in material liability to any Loan Party.
(d)
There is no judicial, administrative, or arbitral proceeding (including any notice of violation or alleged violation)
under any Environmental Law to which the Parent or any of its Subsidiaries is, or to the knowledge of the Parent or any of its Subsidiaries is
reasonably likely to be, named as a party that is pending or, to the knowledge of the Parent or any of its Subsidiaries, threatened.
Neither the Parent nor any of its Subsidiaries has entered into or agreed to any consent decree, order, or settlement or
(e)
other agreement, nor is subject to any judgment, decree, or order or other agreement, in any judicial, administrative, arbitral, or other forum,
relating to compliance with or liability under any Environmental Law.
5.10
Insurance. Schedule 5.10 sets forth a complete and correct listing of all insurance that is (a) maintained by the Loan Parties
and (b) material to the business and operations of the Parent and its Subsidiaries, taken as a whole, maintained by Subsidiaries other than Loan
Parties, in each case as of the Closing Effective Date, with the amounts insured (and any deductibles) set forth therein.
5.11
Taxes. The Loan Parties have filed all federal, state, provincial, territorial, municipal, local and other material tax returns and
reports required to be filed, and have paid all federal, state, provincial, territorial, municipal, local and other material taxes, assessments, fees and
other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are
being contested in good faith by appropriate proceedings for which adequate reserves have been provided in accordance with GAAP, as to which
Taxes no Lien has been filed and which contest effectively suspends the collection of the contested obligation and the enforcement of any Lien
securing such obligation. There is no proposed tax assessment against any Loan Party or any Subsidiary that would, if made, have a Material
Adverse Effect. No Loan Party or any Subsidiary thereof is a party to any tax sharing agreement.
5.12
Plans .
(a)
(i) Each Plan in respect of employees of any Domestic Loan Party is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state Laws; (ii) each Plan in respect of employees of any Domestic Loan Party
that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such
a letter is currently being processed by the IRS with respect thereto and, to the knowledge of the Parent, nothing has occurred which would
prevent, or cause the loss of, such qualification; (iii) the Domestic Loan Parties and each ERISA Affiliate have made all required contributions to
each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to
Section 412 of the Code has been made with respect to any Plan in respect of employees of any Domestic Loan Party; and (iv) no Lien imposed
under the
(115)
Code or ERISA exists or is likely to arise on account of any Plan in respect of employees of any Domestic Loan Party.
(b)
There are no pending or, to the best knowledge of the Parent, threatened claims, actions or lawsuits, or action by any
Governmental Authority, with respect to any Plan that would reasonably be expected to have a Material Adverse Effect. There has been no
prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or would reasonably be expected
to result in a Material Adverse Effect.
(c)
There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan in
respect of employees of any Domestic Loan Party that has resulted or would reasonably be expected to result in a Material Adverse Effect.
(d)
(i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension
Liability; (iii) neither any Domestic Loan Party nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV
of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither any
Domestic Loan Party nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with
the giving of notice under Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a
Multiemployer Plan; and (v) neither any Loan Party nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069
or 4212(c) of ERISA.
(e)
As of the Closing Effective Date, no Canadian Loan Party sponsors, maintains or contributes to any Canadian
Pension Plan.
(f)
During the five year period prior to each date as of which this representation is made, or deemed made, with respect
to any Domestic Pension Plan (or, with respect to (g) below, as of the date such representation is made or deemed made), none of the following
events or conditions, either individually or in the aggregate, has resulted or is reasonably likely to result in a Material Adverse Effect: (a) a
Reportable Event; (b) an “accumulated funding deficiency” (within the meaning of Section 412 of the Code or Section 302 of ERISA); (c) any
noncompliance with the applicable provisions of ERISA or the Code; (d) a termination of a single employer plan (other than a standard
termination pursuant to Section 4041(b) of ERISA); (e) a Lien on the property of the Parent or its Subsidiaries in favor of the PBGC or a Plan;
(f) any Underfunding with respect to any Single Employer Plan; (g) a complete or partial withdrawal from any Multiemployer Plan by the Parent
or any Commonly Controlled Entity; (h) any liability of the Parent or any Commonly Controlled Entity under ERISA if the Parent or any such
Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the annual valuation date most closely preceding
the date on which this representation is made or deemed made; (i) the Reorganization or Insolvency of any Multiemployer Plan; or (j) any
transactions that resulted or would reasonably be expected to result in any liability to the Parent or any Commonly Controlled Entity under
Section 4069 of ERISA or Section 4212(c) of ERISA
With respect to any Pension Plan under the laws of any foreign jurisdiction, none of the following events or
(g)
conditions exists and is continuing that, either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect:
(a) substantial non-compliance with its terms and with the requirements of any and all applicable laws, statutes, rules, regulations and orders;
(b) failure to be maintained, where required, in good standing with applicable regulatory authorities; (c) any obligation of the Parent or its
Subsidiaries in connection with the termination or partial termination of, or withdrawal from, any such foreign plan; (d) any Lien on the property
of the Parent or its Subsidiaries in favor of a Governmental Authority as a result of any action or inaction regarding such a foreign plan; (e)
(116)
for each such foreign plan which is a funded or insured plan, failure to be funded or insured on an ongoing basis to the extent required by
applicable non-U.S. law (using actuarial methods and assumptions which are consistent with the valuations last filed with the applicable
Governmental Authorities); (f) any facts that, to the best knowledge of the Parent or any of its Subsidiaries, exist that would reasonably be
expected to give rise to a dispute and any pending or threatened disputes that, to the best knowledge of the Parent or any of its Subsidiaries,
would reasonably be expected to result in a material liability to the Parent or any of its Subsidiaries concerning the assets of any such foreign
plan (other than individual claims for the payment of benefits); and (g) failure to make all contributions in a timely manner to the extent required
by applicable non-U.S. law.
5.13
Subsidiaries; Equity Interests. As of the Closing Effective Date, the Loan Parties have no Subsidiaries other than those
specifically disclosed in Part (a) of Schedule 5.13 , which Schedule sets forth the legal name, jurisdiction of incorporation or formation and
authorized Equity Interests of each such Subsidiary. All of the outstanding Equity Interests in such Subsidiaries have been validly issued, are
fully paid and non-assessable and are owned by a Loan Party (or a Subsidiary of a Loan Party) in the amounts specified on Part (a) of Schedule
5.13 free and clear of all Liens except for those created under the Security Documents and other Permitted Encumbrances. Except as set forth in
Schedule 5.13 , as of the Closing Effective Date, there are no outstanding rights to purchase any Equity Interests in any Subsidiary. As of the
Closing Effective Date, the Loan Parties have no equity investments in any other corporation or entity other than those specifically disclosed in
Part (b) of Schedule 5.13 . As of the Closing Effective Date, all of the outstanding Equity Interests in the Loan Parties have been validly issued,
and are fully paid and non-assessable and , other than with respect to the Parent, are owned in the amounts specified on Part (c) of Schedule
5.13 free and clear of all Liens except for those created under the Security Documents. As of the Closing Effective Date, the copies of the
Organization Documents of each Loan Party and each amendment thereto provided pursuant to Section 4.01 are true and correct copies of each
such document, each of which is valid and in full force and effect.
5.14
Margin Regulations; Investment Company Act.
(a)
No Loan Party is engaged or will be engaged, principally or as one of its important activities, in the business of
purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing
or carrying margin stock. None of the proceeds of the Credit Extensions shall be used directly or indirectly for the purpose of purchasing or
carrying any margin stock, for the purpose of reducing or retiring any Indebtedness that was originally incurred to purchase or carry any margin
stock or for any other purpose that might cause any of the Credit Extensions to be considered a “purpose credit” within the meaning of
Regulations T, U, or X issued by the FRB.
(b)
None of the Loan Parties, any Person Controlling any Loan Party, or any Subsidiary is or is required to be registered
as an “investment company” under the Investment Company Act of 1940.
Disclosure . As of the Closing Effective Date, each Loan Party has disclosed to the Administrative Agent and the Lenders all
5.15
agreements, instruments and corporate or other restrictions to which it is subject, and all other matters known to it, that, individually or in the
aggregate, would reasonably be expected to result in a Material Adverse Effect. No report, financial statement, certificate or other information
furnished (whether in writing or orally) by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the
transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Loan Document (in each case,
as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact
necessary to make the statements therein, in the light of the
(117)
circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Loan Parties
represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
5.16
Compliance with Laws. Each of the Loan Parties is in compliance in all material respects with the requirements of all Laws
and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or
order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply
therewith, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect.
5.17
Intellectual Property; Licenses, Etc. The Loan Parties own, or possess the right to use, all of the Intellectual Property,
licenses, permits and other authorizations that are reasonably necessary for the operation of their respective businesses, without conflicting with
the material rights of any other Person which would give rise to a Material Adverse Effect. To the best knowledge of the Parent, no slogan or
other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by
any Loan Party infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 5.17 , no claim or litigation
regarding any of the foregoing is pending or, to the best knowledge of the Parent, threatened, which, either individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect.
5.18
Labor Matters .
As of the Closing Effective Date, there are no strikes, lockouts, slowdowns or other material labor disputes against any Loan Party
pending or, to the knowledge of any Loan Party, threatened. The hours worked by and payments made to employees of the Loan Parties comply
with the Fair Labor Standards Act and any other applicable federal, state, provincial, territorial, municipal, local or foreign Law dealing with
such matters except to the extent that any such violation would not reasonably be expected to have a Material Adverse Effect. No Loan Party has
incurred any material liability or obligation under the Worker Adjustment and Retraining Act or similar federal, state, provincial, territorial,
municipal, local or foreign Law. All material payments due from any Loan Party, or for which any material claim may be made against any
Loan Party, on account of wages and employee health and welfare insurance and other benefits, have been paid or properly accrued in
accordance with GAAP as a liability on the books of such Loan Party. Except as set forth on Schedule 5.18 no Loan Party is a party to or bound
by any material collective bargaining agreement, management agreement, employment agreement, bonus, restricted stock, stock option, or stock
appreciation plan or agreement or any similar plan, agreement or arrangement. There are no representation proceedings pending or, to any Loan
Party’s knowledge, threatened to be filed with the National Labor Relations Board or other applicable Governmental Authority, and no labor
organization or group of employees of any Loan Party has made a pending demand for recognition. There are no complaints, unfair labor
practice charges, grievances, arbitrations, unfair employment practices charges or any other claims or complaints against any Loan Party pending
or, to the knowledge of any Loan Party, threatened to be filed with any Governmental Authority or arbitrator based on, arising out of, in
connection with, or otherwise relating to the employment or termination of employment of any employee of any Loan Party that would
reasonably be expected to have a Material Adverse Effect . The consummation of the transactions contemplated by the Loan Documents will
not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any
Loan Party is bound.
(118)
5.19
Security Documents .
The Security Documents create in favor of the Administrative Agent (for the benefit of itself and the other Credit Parties) or the
Canadian Agent (for the benefit of itself and the other Canadian Credit Parties), as applicable, a legal, valid, continuing and enforceable security
interest in, and Lien on, the Collateral, and the Security Documents constitute, or will upon the filing of financing statements or other requisite
registrations and recordations and/or the obtaining of “control”, in each case with respect to the relevant Collateral as required under the
applicable UCC or similar legislation of any jurisdiction, including, without limitation, the PPSA and the Civil Code of Quebec, the creation of a
perfected Lien on, and security interest in, all right, title and interest of the Loan Parties thereunder in such Collateral that may be perfected in
the United States or Canada by filing, recording or registering a financing statement or analogous document or, to the extent required by the
Loan Documents (it being understood that subsequent recordings in the United States Patent and Trademark Office, United States Copyright
Office, Canadian Intellectual Property Office or a substitute or successor agency may be necessary to perfect a Lien on Intellectual Property
acquired, register or applied for after the date hereof). Notwithstanding anything to the contrary herein, the Loan Parties shall have no obligation
to prefect Liens on any Collateral in any jurisdiction outside the United States of America or Canada.
5.20
Solvency
After giving effect to the transactions contemplated by this Agreement, and before and after giving effect to each Credit Extension, the
Loan Parties, on a Consolidated basis, are Solvent. No transfer of property has been or will be made by any Loan Party and no obligation has
been or will be incurred by any Loan Party in connection with the transactions contemplated by this Agreement or the other Loan Documents
with the intent to hinder, delay, or defraud either present or future creditors of any Loan Party.
5.21
Deposit Accounts; Credit Card Arrangements .
(a)
Annexed hereto as Schedule 5.21(a) is a list of all DDAs maintained by the Loan Parties as of the Closing Effective
Date, which Schedule includes, with respect to each DDA (i) the name and address of the depository; (ii) the account number(s) maintained with
such depository; (iii) a contact person at such depository, and (iv) the identification of each Blocked Account Bank.
Annexed hereto as Schedule 5.21(b) is a list describing all arrangements as of the Closing Effective Date to which
(b)
any Loan Party is a party with respect to the processing and/or payment to such Loan Party of the proceeds of any credit card charges and debit
card charges for sales made by such Loan Party.
5.22
Brokers . No broker or finder brought about the obtaining, making or closing of the Loans or transactions contemplated by
the Loan Documents, and no Loan Party or Affiliate thereof has any obligation to any Person in respect of any finder’s or brokerage fees in
connection therewith.
5.23
Customer and Trade Relations . As of the Closing Effective Date, and except as described in Schedule 5.06 hereof, there
exists no actual or, to the knowledge of any Loan Party, threatened, termination or cancellation of, or any material adverse modification or
change in the business relationship of any Loan Party with any supplier material to its operations except for those that would not constitute a
Material Adverse Effect.
5.24
Casualty . As of the Closing Effective Date, neither the businesses nor the properties of any Loan Party or any of its
Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of
God or of the public enemy or other casualty (whether or not covered by insurance) that, either individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect.
(119)
5.25 Senior Indebtedness . The Loans, L/C Obligations and all other Obligations of the Loan Parties hereunder and under the other
Loan Documents (including, without limitation, the Facility Guaranty) constitute “Senior Indebtedness” and “Designated Senior Indebtedness”
under and as defined in the Senior Subordinated Notes Indenture (to the extent such obligations constitute “Indebtedness” as defined in such
document on the date hereof).
5.26 Anti-Terrorism . As of the Closing Effective Date, the Parent and its Subsidiaries are in compliance with the Uniting
5.25
and Strengthening of America by Providing the Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or
unsatisfied (other than contingent indemnification claims for which a claim has not been asserted), or any Letter of Credit shall remain
outstanding, the Loan Parties shall, and shall (except in the case of the covenants set forth in Sections 6.01, 6.02, and 6.03) cause each
Subsidiary to:
6.01
Financial Statements Deliver to the Administrative Agent, in form and detail satisfactory to the Administrative Agent:
as soon as available, but in any event within five (5) Business Days after ninety (90) days after the end of each Fiscal
(a)
Year of the Parent, a Consolidated balance sheet of the Parent and its Subsidiaries as at the end of such Fiscal Year, and the related
consolidated statements of income or operations, Shareholders’ Equity and cash flows for such Fiscal Year, setting forth in each case in
comparative form the figures for the previous Fiscal Year, all in reasonable detail and prepared in accordance with GAAP, audited and
accompanied by (i) a report and unqualified opinion of a Registered Public Accounting Firm of nationally recognized standing
reasonably acceptable to the Administrative Agent, which report and opinion shall be prepared in accordance with generally accepted
auditing standards and shall not be subject to any “going concern” or like qualification or exception or any qualification or exception as
to the scope of such audit (it being agreed that the furnishing or filing of Holdings’ annual report on Form 10-K for such year as filed
with the SEC, shall satisfy this subsection 6.01(a) with respect to such year except with respect to the requirement that such financial
statements be reported on without a “going concern” or like qualification or exception, or qualification arising out of the scope of the
audit);
(b)
if the Borrowers maintain Excess Availability greater than fifty twenty-five percent ( 50 25 %) of the Loan Cap for
each of the prior three Fiscal Months, as soon as available, but in any event within five (5) Business Days after forty-five (45) days after
the end of each of the Fiscal Quarters of each Fiscal Year of the Parent, a Consolidated balance sheet of the Parent and its Subsidiaries
as at the end of such Fiscal Quarter, and the related consolidated statements of income or operations, Shareholders’ Equity and cash
flows for such Fiscal Quarter and for the portion of the Parent’s Fiscal Year then ended, setting forth in each case in comparative form
the figures for (A) the corresponding Fiscal Quarter of the previous Fiscal Year and (B) the corresponding portion of the previous Fiscal
Year, all in reasonable detail, certified by a Responsible Officer of the Parent as fairly presenting the financial condition, results of
operations, Shareholders’ Equity and cash flows of the Parent and its Subsidiaries as of the end of such Fiscal Quarter in accordance
with GAAP, subject only to normal year-end audit adjustments
(120)
and the absence of footnotes (it being agreed that the furnishing of filing or the Holdings’ quarterly reports on Form 10-Q, as filed with
the SEC, shall satisfy this subsection 6.01(b));
(c)
if the Borrowers fail to maintain Excess Availability greater than fifty twenty-five percent ( 50 25 %) of the Loan
Cap for the prior Fiscal Month, as soon as available, but in any event within five (5) days after the date thirty (30) days after the end of
each of the Fiscal Months of each fiscal year of Holdings (commencing with the Fiscal Month ended October 31, 2010) , a consolidated
balance sheet of Holdings as at the end of such Fiscal Month, and the related consolidated statements of income or operations, and cash
flows, and for the portion of Holdings’ Fiscal Year then ended, setting forth in each case in comparative form the figures for (A) the
corresponding Fiscal Month of the previous Fiscal Year and (B) the corresponding portion of the previous fiscal year, all in reasonable
detail, certified by a Responsible Officer of Holdings as fairly presenting the financial condition and results of operations and cash
flows of Holdings as of the end of such Fiscal Month in accordance with GAAP, subject only to normal year-end audit adjustments and
the absence of footnotes;
(d)
as soon as available, but in any event within five (5) Business Days after ninety (90) days after the end of each Fiscal
Year of the Parent, forecasts prepared by management of the Parent, in form consistent with past practice, of Canadian Availability,
Domestic Availability, and Excess Availability and the consolidated balance sheets and statements of income or operations and cash
flows of the Parent and its Subsidiaries on a quarterly basis for the immediately following Fiscal Year (including the fiscal year in
which the Maturity Date occurs).
6.02
Certificates; Other Information. Deliver to the Administrative Agent, in form and detail satisfactory to the Administrative
Agent:
(a)
concurrently with the delivery of the financial statements referred to in Section 6.01(a) , a certificate of its Registered
Public Accounting Firm certifying such financial statements and stating that in making the examination necessary for their certification
of such financial statements, such Registered Public Accounting Firm has not obtained any knowledge of the existence of any Default
under Section 7.13 (but only if, during the Fiscal Year, Section 7.13 was applicable) the financial covenants set forth herein or, if any
such Default shall exist, stating the nature and status of such event (which certificate may be limited to the extent required by
accounting rules or guidelines);
(b)
concurrently with the delivery of the financial statements referred to in clauses (a) , (b) and (c) of Section 6.01
(commencing with the delivery of the financial statements for the Fiscal Quarter ended December 31 June 30 , 2010 2013 ), a duly
completed Compliance Certificate signed by a Responsible Officer of Holdings, and in the event of any change in generally accepted
accounting principles used in the preparation of such financial statements, Holdings shall also provide a statement of reconciliation
conforming such financial statements to GAAP, and in the case of quarterly reporting only, a copy of management’s discussion and
analysis with respect to such financial statements if not included in Holdings’ Form 10-Q;
(i) within ten (10) Business Days after end of each Fiscal Month (or, if such day is not a Business Day, on the next
(c)
succeeding Business Day), a certificate in the form of Exhibit E (a “ Borrowing Base Certificate ”) showing the Domestic Borrowing
Base, Canadian Borrowing Base, Distribution Borrowing Base and Combined Borrowing Base as of the close of business as of the last
day of the immediately preceding Fiscal Month, each Borrowing Base Certificate to be certified as complete and correct by a
Responsible Officer of the Parent or Holdings; provided that at any time that an Trigger Accelerated Borrowing Base Delivery Event
has occurred and is
(121)
continuing, such Borrowing Base Certificate shall be delivered on Wednesday of each week (or, if Wednesday is not a Business Day,
on the next succeeding Business Day), as of the close of business on the immediately preceding Saturday, and (ii) within one
(1) Business Day after the consummation of the Disposition outside of the ordinary course of business of any Collateral included in the
Domestic Borrowing Base or the Canadian Borrowing Base, in each case either with a cost value as included in the Combined
Borrowing Base of equal to or greater than $25,000,000, or in connection with the Disposition of Stores consisting of more than five
percent (5%) of the number of the Borrowers’ Stores as of the beginning of such Fiscal Year, a Borrowing Base Certificate showing the
Domestic Borrowing Base, Canadian Borrowing Base and Combined Borrowing Base after giving effect to the consummation of such
Disposition. In connection with each Borrowing Base Certificate, if the Accounts Receivable Reporting Requirement is not in effect,
the Borrowers’ reporting of Accounts shall be summary in nature and shall be from the Parent’s or Holdings’ then current financial
statements with classification by only entity or business segment; if the Accounts Receivable Reporting Requirement is in effect (or the
Borrowers elect to provide detailed Accounts reporting pursuant to the definition thereof) the Borrowers’ reporting of Accounts shall
set forth in reasonable detail the aging and dilution thereof and incorporate appraisal and audit work with respect thereto;
(d)
promptly upon receipt, copies of any detailed audit reports, management letters or recommendations submitted to the
board of directors (or the audit committee of the board of directors) of any Loan Party by its Registered Public Accounting Firm in
connection with the accounts or books of the Loan Parties or any Subsidiary, or any audit of any of them, including, without limitation,
specifying any Internal Control Event, to the extent that any of the foregoing relates to any weaknesses in the reporting of any
components of the Collateral included in the Combined Borrowing Base or would reasonably be expected to have a Material Adverse
Effect;
(e)
promptly after the same are available, copies of each annual report, proxy or financial statement or other material
report or communication sent to the stockholders of Holdings, and copies of all annual, regular, periodic and special reports
and registration statements which Holdings may file or be required to file with the SEC under Section 13 or 15(d) of the Securities
Exchange Act of 1934 or with any national or foreign securities exchange or applicable Governmental Authority, and in any case not
otherwise required to be delivered to the Administrative Agent pursuant hereto;
(f)
The financial and collateral reports described on Schedule 6.02 hereto, at the times set forth in such Schedule;
promptly after the furnishing thereof, copies of any statement or report furnished to any holder of debt securities of
(g)
Holdings pursuant to the terms of either Notes Indenture or other public note issuance;
(h)
as soon as available, but in any event within thirty (30) days after the end of each Fiscal Year of the Loan Parties, if
requested by the Administrative Agent, a report summarizing the insurance coverage (specifying type, amount and carrier) in effect for
each Loan Party and its Subsidiaries and containing such additional information as the Administrative Agent, or any Lender through the
Administrative Agent, may reasonably specify;
(i)
Indebtedness;
promptly after the Administrative Agent’s request therefor, copies of all documents evidencing Material
(122)
(j)
promptly, and in any event within ten (10) days after receipt thereof by any Loan Party or any Subsidiary thereof,
copies of each notice or other correspondence received from any Governmental Authority (including, without limitation, the SEC (or
comparable agency in any applicable non-U.S. jurisdiction)) concerning any proceeding with, or investigation or possible investigation
or other inquiry by such Governmental Authority regarding financial or other operational results of any Loan Party or any Subsidiary
thereof or any other matter which, if adversely determined, would reasonably expected to have a Material Adverse Effect (unless the
disclosure thereof would violate any attorney-client privilege or its disclosure would violate Applicable Law); and
(k)
promptly, such additional information regarding the business affairs, financial condition or operations of any Loan
Party or any Subsidiary, or compliance with the terms of the Loan Documents, as the Administrative Agent (or any Lender through the
Administrative Agent) may from time to time reasonably request, that would not violate the attorney-client privilege.
Documents required to be delivered pursuant to paragraphs (a) and (b) of Section 6.01 or pursuant to Section 6.02(e) (to the extent any such
documents and the information required to be provided therewith as set forth above are included in materials otherwise filed with the SEC) may
be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which Holdings posts such documents,
or provides a link thereto on Holdings’ website on the Internet at the website address listed on Schedule 10.02 or filed with the SEC; or (ii) on
which such documents are posted on Holdings’ behalf on an Internet or intranet website, if any, to which each Lender and the Administrative
Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) Holdings
shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests Holdings to deliver such paper copies until
a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) Holdings shall notify the
Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative
Agent by electronic mail electronic versions ( i.e. , soft copies) of such documents. The Administrative Agent shall have no obligation to request
the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the
Loan Parties with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies
of such documents.
The Loan Parties hereby acknowledge that (a) the Administrative Agent and/or the Arranger will make available to the Lenders and the
L/C Issuer materials and/or information provided by or on behalf of the Loan Parties hereunder (collectively, “ Borrower Materials ”) by posting
the Borrower Materials on Debt Domain, Syndtrak, IntraLinks or another similar electronic system (the “ Platform ”) and (b) certain of the
Lenders may be “public-side” Lenders ( i.e. , Lenders that do not wish to receive material non-public information with respect to the Loan
Parties or their securities) (each, a “ Public Lender ”). The Loan Parties hereby agree that so long as any Loan Party is the issuer of any
outstanding debt or equity securities that are registered or issued pursuant to a private offering or is actively contemplating issuing any such
securities they will use commercially reasonable efforts to identify that portion of the Borrower Materials that may be distributed to the Public
Lenders and that (w) all such Borrower Materials shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that
the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Loan Parties shall be
deemed to have authorized the Administrative Agent, the Arranger, the L/C Issuer and the Lenders to treat such Borrower Materials as not
containing any material non-public information (although it may be sensitive and proprietary) with respect to the Loan Parties or their securities
for purposes of all applicable securities laws ( provided , however , that to the extent such Borrower Materials constitute Information, they shall
be treated as set forth in Section 10.07 ); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of
the Platform designated
(123)
“Public Investor”; and (z) the Administrative Agent and the Arranger shall be entitled to treat any Borrower Materials that are not marked
“PUBLIC” as being suitable only for posting on a portion of the Platform not designated “Public Investor.”
6.03
know thereof:
Notices. Promptly notify the Administrative Agent after a Responsible Officer of the Parent knows or reasonably should
(a)
of the occurrence of any Default or Event of Default;
(b)
of any matter that has resulted or, if adversely determined (and such adverse determination is reasonably likely)
would result in, a Material Adverse Effect, including (i) breach or non-performance in a material respect of, or any default with respect
to, Material Indebtedness of any Loan Party; (ii) any dispute, litigation, investigation, proceeding or suspension between any Loan Party
or any Subsidiary thereof and any Governmental Authority; or (iii) the commencement of any litigation or proceeding affecting any
Loan Party, including pursuant to any applicable Environmental Laws;
(c)
of (i) the occurrence of any ERISA Event, (ii) the complete or partial withdrawal by a Canadian Loan Party from
participation in a “multi-employer pension plan” as defined under the Pension Benefits Act (Ontario) or any similar type of plan subject
to pension benefits standards legislation of another jurisdiction in Canada, or the termination in whole or in part of a Canadian Pension
Plan, where such withdrawal or termination is reasonably expected to result in a material liability of the Canadian Loan Party; (iii) the
creation of any Lien on the property of the Parent or its Subsidiaries in favor of the PBGC or a Plan (other than a Lien in respect of
employee contributions withheld from pay but not yet remitted to a Canadian Pension Plan; provided , however, that no such notice will
be required under clauses (i), (ii) or (iii) above unless the event giving rise to such notice, when aggregated with all other such events
under clause (i), (ii) or (iii) above, would be reasonably expected to result in a Material Adverse Effect; or (iv) the first occurrence of an
Underfunding under a Single Employer Plan or Foreign Plan that exceeds 10% of the value of the assets of such Single Employer Plan
or Foreign Plan, in each case, determined as of the most recent annual valuation date of such Single Employer Plan or Foreign Plan on
the basis of the actuarial assumptions used to determine the funding requirements of such Single Employer Plan or Foreign Plan as of
such date;
(i) of any release or discharge by the Parent or any of its Subsidiaries of any Hazardous Materials required to be
(d)
reported under applicable Environmental Laws to any Governmental Authority, unless the Parent reasonably determines that the total
environmental costs arising out of such release or discharge would not reasonably be expected to have a Material Adverse Effect;
(ii) any condition, circumstance, occurrence or event not previously disclosed in writing to the Administrative Agent that would
reasonably be expected to result in liability or expense under applicable Environmental Laws, unless the Parent reasonably determines
that the total environmental costs arising out of such condition, circumstance, occurrence or event would not reasonably be expected to
have a Material Adverse Effect, or would not reasonably be expected to result in the imposition of any Lien or other material restriction
on the title, ownership or transferability of any properties owned, leased or operated by the Parent or any of its Subsidiaries that would
reasonably be expected to result in a Material Adverse Effect; and (iii) any proposed action to be taken by the Parent or any of its
Subsidiaries that would reasonably be expected to subject the Parent or any of its Subsidiaries to any material additional or different
requirements or liabilities under Environmental Laws, unless the Parent reasonably determines that the total environmental costs arising
out of such proposed action would not reasonably be expected to have a Material Adverse Effect;
(124)
(e)
Documents ;
the occurrence of any default or event of default under either of the Notes Indentures or the Senior Term Loan
(f)
of any material change in accounting policies (but only to the extent that such change have any effect on the
reporting or calculation of Collateral included in the Combined Borrowing Base) or financial reporting practices by any Loan Party or
any Subsidiary thereof;
(g)
of any change in Holdings’ senior executive officers;
(h)
of the discharge by Holdings’ of its present Registered Public Accounting Firm or any withdrawal or resignation by
such Registered Public Accounting Firm;
of any collective bargaining agreement or other labor contract to which a Loan Party becomes a party, or the
(i)
application for the certification of a collective bargaining agent;
(j)
of the filing of any Lien for unpaid Taxes against any Loan Party in excess of $10,000,000;
(k)
of any loss, damage, destruction, or casualty to any portion of the Collateral in the amount of $10,000,000 or more,
whether or not covered by insurance; or the commencement of any action or proceeding for the taking of any interest in any portion of
the Collateral in the amount of $10,000,000 or more under power of eminent domain or by condemnation or similar proceeding or if
any material portion of the Collateral is damaged or destroyed; and
(l)
any and all default notices received under or with respect to any lease of any distribution center where Collateral
with a cost value in excess of $10,000,000, either individually or in the aggregate, is located or of any failure by any Loan Party to pay
rent at any of such Loan Party’s locations if such failure continues for more than ten (10) days following the day on which such rent
first came due and such failure would be reasonably likely to result in a Material Adverse Effect.
Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Parent setting forth details of the
occurrence referred to therein and stating what action the Parent has taken and proposes to take with respect thereto.
6.04
Payment of Obligations . Except to the extent that the failure to make any of the following payments would not reasonably
be expected to result in a Material Adverse Effect, pay and discharge as the same shall become due and payable, all its obligations and liabilities,
including (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, (b) all lawful claims (including,
without limitation, claims of landlords, warehousemen, customs brokers, and carriers) which, if unpaid, would by Law become a Lien upon its
property; and (c) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or
agreement evidencing such Indebtedness, except, in each case, where (i) the validity or amount thereof is being contested in good faith by
appropriate proceedings, (ii) such Loan Party has set aside on its books adequate reserves with respect thereto in accordance with GAAP,
(iii) such contest effectively suspends collection of the contested obligation and enforcement of any Lien securing such obligation, and (iv) no
Lien has been filed with respect thereto. Nothing contained herein shall be deemed to limit the rights of the Agents with respect to determining
Reserves pursuant to this Agreement.
6.05
Preservation of Existence, Etc. (a) Preserve, renew and maintain in full force and effect its legal existence and good
standing under the Laws of the jurisdiction of its organization or formation
(125)
except in a transaction permitted by Section 7.04 or 7.05 ; (b) take all reasonable action to maintain all rights, privileges, permits, licenses and
franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so would not reasonably be
expected to have a Material Adverse Effect; and (c) preserve or renew all of its Intellectual Property, except to the extent such Intellectual
Property is no longer used or useful in the conduct of the business of the Loan Parties.
6.06
Maintenance of Properties . (a) Maintain, preserve and protect all of its material properties and equipment necessary in the
operation of its business in good working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and
renewals and replacements thereof except where the failure to do so would not reasonably be expected to have a Material Adverse Effect.
6.07
Maintenance of Insurance .
Maintain with financially sound and reputable insurance companies insurance on, or self insurance, all properties
(a)
material to the business of the Parent and its Subsidiaries, taken as a whole, in at least such amounts and against at least such risks (but
including in any event public liability, product liability and business interruption) as are consistent with past practices of the Parent and
its Subsidiaries and otherwise are usually insured against in the same general area by companies engaged in the same or a similar
business.
(b)
Furnish to the Administrative Agent, upon written request, information in reasonable detail as to the insurance
carried.
Ensure that at all times the Collateral Agent or the Canadian Agent, as applicable, shall be named as additional insureds with
(c)
respect to liability policies and the Collateral Agent or the Canadian Agent, as applicable, shall be named as loss payee with respect to
the property insurance maintained by the Loan Parties; provided that notwithstanding anything to the contrary herein contained, but
subject to the provisions of Section 2.05(f) hereof, unless a Trigger Event shall have occurred and be continuing, the Agents shall turn
over to the Parent any amounts received by it as loss payee under any property insurance covering any Collateral maintained by the
Parent and its Subsidiaries, and, unless a Trigger Event shall have occurred and be continuing, the Agents agree that the Parent and/or
the applicable Subsidiary shall have the sole right to adjust or settle any claims under such insurance.
6.08
Compliance with Laws. Comply in all material respects with the requirements of all Laws and all orders, writs, injunctions
and decrees applicable to it or to its business or property, except in such instances in which the failure to comply therewith would not have a
Material Adverse Effect.
6.09
Books and Records; Accountants
(a)
Maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP in all
material respects consistently applied shall be made of all financial transactions and matters involving the assets and business of the Loan Parties
or such Subsidiary, as the case may be; and (ii) maintain such books of record and account in material conformity with all applicable
requirements of any Governmental Authority having regulatory jurisdiction over the Loan Parties or such Subsidiary, as the case may be.
(b)
At all times retain a Registered Public Accounting Firm of national standing and shall instruct such Registered Public
Accounting Firm, if a Trigger Event has occurred and is continuing, to cooperate with, and be available to, the Administrative Agent or its
representatives to discuss the Loan
(126)
Parties’ financial performance, financial condition, operating results, controls, and such other matters, within the scope of the retention of such
Registered Public Accounting Firm, as may be raised by the Administrative Agent.
6.10
Inspection Rights
Permit representatives and independent contractors of the Administrative Agent to visit and inspect any of its
(a)
properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs,
finances and accounts with its directors, officers, and Registered Public Accounting Firm, all at the expense of the Administrative Agent and at
such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Parent,
without unreasonable interference with the Loan Parties’ business operation; provided , however , that when an Event of Default exists the
Administrative Agent (or any of its representatives or independent contractors) may do any of the foregoing at the expense of the Loan Parties at
any time during normal business hours and without advance notice.
Upon the request of the Administrative Agent after reasonable prior notice, permit the Administrative Agent or
(b)
professionals (including investment bankers, consultants, accountants, lawyers and appraisers) retained by the Administrative Agent,
independently of or in connection with the visits and inspections provided for in clause (a) above, to conduct appraisals, commercial finance
examinations and other evaluations, including, without limitation, of (i) the Parent’s practices in the computation of the Domestic Borrowing
Base and the Distribution Borrowing Base and the Canadian Borrower’s practices in the computation of the Canadian Borrowing Base and
(ii) the assets included in the Domestic Borrowing Base, the Canadian Borrowing Base and the Distribution Borrowing Base and related
financial information such as, but not limited to, sales, gross margins, payables, accruals and reserves. Except as provided in the next sentence,
all such costs of such professionals shall be at the expense of the Administrative Agent. The Loan Parties acknowledge that the Administrative
Agent and the Canadian Agent shall each undertake one (1) commercial finance examination in each twelve (12) month period at the Loan
Parties’ expense; provided that if Excess Availability is less than 50 25 % of the Loan Cap at any time during such twelve (12) month period, the
Administrative Agent or the Canadian Agent, as applicable, may, in its discretion, each undertake up to two (2) commercial finance
examinations in each such twelve (12) month period at the Loan Parties’ expense, provided further that if Excess Availability is less than 15% of
the Loan Cap at any time during such twelve (12) month period, the Administrative Agent or the Canadian Agent, as applicable, may, in its
discretion, each undertake up to three (3) commercial finance examinations in each such twelve (12) month period at the Loan Parties’ expense,
such expense to be reasonable and the Parent shall have the opportunity to review the invoices thereof. Notwithstanding the foregoing, the
Administrative Agent may cause additional commercial finance examinations to be undertaken (i) as it in its discretion deems necessary or
appropriate, at its own expense, without unreasonable interference with the Loan Parties’ business operation, or (ii) if required by Law or if a
Default or Event of Default shall have occurred and be continuing, at the expense of the Loan Parties.
(c)
Upon the request of the Administrative Agent after reasonable prior notice, permit the Administrative Agent or
professionals (including appraisers) retained by the Administrative Agent, independently of or in connection with the visits and inspections
provided for in clause (a) above, to conduct appraisals of the Collateral, including, without limitation, the assets included in the Domestic
Borrowing Base and the Canadian Borrowing Base. Except as provided in the next sentence, all such costs of such professionals shall be at the
expense of the Administrative Agent. The Loan Parties acknowledge that the Administrative Agent and the Canadian Agent shall each
undertake one (1) inventory appraisal in each twelve (12) month period at the Loan Parties’ expense; provided that if Excess Availability is less
than 50 25 % of the Loan Cap at any time, the Administrative Agent or the Canadian
(127)
Agent, as applicable, may, in its discretion, each undertake up to two (2) inventory appraisals in each such twelve (12) month period at the Loan
Parties’ expense, provided further that if Excess Availability is less than 15% of the Loan Cap at any time, the Administrative Agent or the
Canadian Agent, as applicable, may, in its discretion, each undertake up to three (3) inventory appraisals in each such twelve (12) month period
at the Loan Parties’ expense, such expense to be reasonable and the Parent shall have the opportunity to review the invoices thereof.
Notwithstanding the foregoing, the Administrative Agent may cause additional appraisals to be undertaken (i) as it in its discretion deems
necessary or appropriate, at its own expense, without unreasonable interference with the Loan Parties’ business operation, or (ii) if required by
Law or if a Default or Event of Default shall have occurred and be continuing, at the expense of the Loan Parties.
(d)
In addition to the provisions of clause (c) above, after the consummation of the Disposition outside of the ordinary
course of business of any Collateral included in the Domestic Borrowing Base or the Canadian Borrowing Base, in each case either with a cost
value as included in the Combined Borrowing Base of equal to or greater than $25,000,000, or in connection with the Disposition of Stores
consisting of more than five percent (5%) of the number of the Borrowers’ Stores as of the beginning of such Fiscal Year, the Administrative
Agent shall have the right to conduct an updated appraisal of the Inventory, at the Loan Parties’ expense;
6.11
Additional Loan Parties
(a)
If any Domestic Loan Party shall form or acquire a Subsidiary the Parent will notify the Administrative Agent
thereof and (i) if such Subsidiary is a Material Subsidiary but not a Foreign Subsidiary, the Parent will cause such Subsidiary to become a Loan
Party hereunder and under each applicable Security Document within sixty (60) days after such Subsidiary is formed or acquired and promptly
take such actions to create and perfect Liens on such Subsidiary’s personal property the assets of such Subsidiary of the same type comprising
Collateral to secure the Obligations (subject to the Intercreditor Agreement) , and (ii) if such Subsidiary is not a Material Subsidiary, at the
request of the Administrative Agent the Parent will cause such Subsidiary to become a Loan Party hereunder and under each applicable Security
Document within sixty (60) days after such Subsidiary is formed or acquired and promptly take such actions to create and perfect Liens on such
Subsidiary’s personal property the assets of such Subsidiary of the same type comprising Collateral to secure the Obligations (subject to the
Intercreditor Agreement) and (iii) if any Equity Interests or Indebtedness of such Subsidiary are owned by or on behalf of the Parent or any of its
Domestic Subsidiaries, the Parent will cause such Equity Interests and promissory notes evidencing such Indebtedness to be pledged to secure
the Obligations within sixty (60) days after such Subsidiary is formed or acquired (subject to the Intercreditor Agreement). .
(b)
If the Canadian Borrower shall form or acquire a Subsidiary the Parent will notify the Administrative Agent thereof
and (i) if such Subsidiary is a Material Subsidiary organized under the laws of Canada or any province or territory thereof, the Canadian
Borrower will cause such Subsidiary to become a Canadian Loan Party hereunder and under each applicable Canadian Security Document
within sixty (60) days after such Subsidiary is formed or acquired and promptly take such actions to create and perfect Liens on such
Subsidiary’s personal property the assets of such Subsidiary of the same type comprising Collateral to secure the Canadian Liabilities and
the Foreign Liabilities (subject to the Intercreditor Agreement) , and (ii) if such Subsidiary is not a Material Subsidiary, at the request of the
Administrative Agent the Canadian Borrower will cause such Subsidiary to become a Canadian Loan Party hereunder and under each applicable
Canadian Security Document within sixty (60) days after such Subsidiary is formed or acquired and promptly take such actions to create and
perfect Liens on such Subsidiary’s personal property the assets of such Subsidiary of the same type comprising Collateral to secure the
Canadian Liabilities and the Foreign Liabilities (subject to the Intercreditor Agreement), and (iii) if any Equity Interests or Indebtedness of such
Subsidiary are owned by or on behalf of the Canadian
(128)
Borrower or any of its Subsidiaries, the Canadian Borrower will cause such Equity Interests and promissory notes evidencing such Indebtedness
to be pledged to secure the Canadian Liabilities and Foreign Liabilities within sixty (60) days after such Subsidiary is formed or acquired
(subject to the Intercreditor Agreement). .
(c)
In connection with a Disposition permitted hereby, including a Disposition of the Equity Interests of a Subsidiary,
the Administrative Agent shall, at the expense of the Borrowers, release its Lien upon the assets and/or Equity Interests subject to such
Disposition and/or release the Guaranty of such Person subject to such Disposition of Equity Interests, all pursuant to such release documents as
the Borrowers shall reasonably request.
6.12
Cash Management .
(a)
On or prior to the Closing Date, the Loan Parties shall:
(i)
deliver to the Administrative Agent copies of notifications (each, a “ Credit Card Notification ”)
substantially in the form attached hereto as Exhibit G which have been executed on behalf of such Loan Party and delivered to such
Loan Party’s credit card clearinghouses and processors listed on Schedule 5.21(b) ; and
(ii)
deliver to the Administrative Agent a Blocked Account Agreement satisfactory in form and substance to the
Agents with each Blocked Account Bank executed and delivered by the applicable Loan Party and such Blocked Account Bank
(collectively, the “ Blocked Accounts ”).
(b)
ACH or wire transfer no less frequently than daily (and whether or not there are then any outstanding Obligations) to
a Blocked Account all amounts on deposit in each DDA and all payments due from credit card processors.
(c)
Each Blocked Account Agreement shall require, after the occurrence and during the continuance of a Trigger Event
and notice from the Administrative Agent or the Required Lenders, the ACH or wire transfer no less frequently than daily (and whether or not
there are then any outstanding Obligations) to the concentration account maintained by the Administrative Agent at Bank of America (the “
Domestic Concentration Account ”) (in the case of any Domestic Loan Party) or maintained by the Canadian Agent at Bank of America-Canada
Branch (the “ Canadian Concentration Account ”) (in the case of any Canadian Loan Party) of all cash receipts and collections, including,
without limitation, the following:
(i)
all available cash receipts from the sale of Inventory (including without limitation, proceeds of credit card
charges) and other assets (whether or not constituting Collateral);
(ii)
all proceeds of collections of Accounts;
(iii)
all Net Proceeds, and all other cash payments received by a Loan Party from any Person or from any source
or on account of any sale or other transaction or event, including, without limitation, any Prepayment Event;
(iv)
the then contents of each DDA (net of any minimum balance, not to exceed in the aggregate for all DDAs
the amount equal to the Target Amount); and
(129)
(v)
the then entire ledger balance of each Blocked Account (net of any minimum balance, not to exceed $2,500,
as may be required to be kept in the subject Blocked Account by the Blocked Account Bank).
The Loan Parties shall undertake all action which may be necessary to effectuate the foregoing ACH and wire transfers as and when
required hereunder.
The Domestic Concentration Account shall at all times be under the sole dominion and control of the Collateral
(d)
Agent, and the Canadian Concentration Account shall at all times be under the sole dominion and control of the Canadian Agent. The Loan
Parties hereby acknowledge and agree that (i) the Loan Parties have no right of withdrawal from the Concentration Accounts, (ii) the funds on
deposit in each Domestic Concentration Account shall at all times be collateral security for the Obligations, (iii) the funds on deposit in each
Canadian Concentration Account shall at all times be collateral security for all of the Canadian Liabilities and Foreign Liabilities and (iv) the
funds on deposit in the Concentration Accounts shall be applied as provided in this Agreement. In the event that, notwithstanding the provisions
of this Section 6.12 , any Loan Party receives or otherwise has dominion and control of any such proceeds or collections while a Trigger Event
exists, such proceeds and collections shall be held in trust by such Loan Party for the Agents, shall not be commingled with any of such Loan
Party’s other funds or deposited in any account of such Loan Party and shall, not later than the Business Day after receipt thereof, be deposited
into the Domestic Concentration Account or the Canadian Concentration Account, as applicable, or dealt with in such other fashion as such Loan
Party may be instructed by the Agents. Notwithstanding the foregoing, to the extent that no Obligations are outstanding any amounts deposited
in the Domestic Concentration Account and the Canadian Concentration Account shall be disbursed by the Administrative Agent or Canadian
Agent, as applicable to such depository accounts as may be designated by the applicable Borrower.
Upon the request of the Administrative Agent, the Loan Parties shall cause bank statements and/or other reports to be
(e)
delivered to the Agents not less often than monthly, accurately setting forth all amounts deposited in each Blocked Account to ensure the proper
transfer of funds as set forth above.
6.13
Information Regarding the Collateral .
(a)
Furnish to the Administrative Agent at least thirty (30) days prior written notice of any change in: (i) any Loan
Party’s legal name; (ii) the location of any Loan Party’s chief executive office, registered office, its principal place of business, any office in
which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located
(including the establishment of any such new office or facility); (iii) any Loan Party’s organizational structure or jurisdiction of incorporation or
formation; or (iv) any Loan Party’s Federal Taxpayer Identification Number or organizational identification number assigned to it by its
jurisdiction of organization. The Loan Parties shall not effect or permit any change referred to in the preceding sentence unless the Loan Parties
have timely furnished to the Administrative Agent all information, and executed all such documents and agreements, if any, requested by the
Administrative Agent or the Collateral Agent to be executed prior to the expiration of such thirty (30) day period in order for the Collateral
Agent or the Canadian Agent, as applicable, to continue at all times following such change to have a valid, legal and perfected first priority
security interest, and Lien on, in all the Collateral for its own benefit and the benefit of the other applicable Credit Parties.
(b)
Should any of the information on any of the Schedules hereto become inaccurate or misleading in any material
respect as a result of changes after the Closing Effective Date, advise the Administrative Agent in writing of such revisions or updates as may be
necessary or appropriate to update
(130)
or correct the same. From time to time as may be reasonably requested by the Administrative Agent, the Parent shall supplement each Schedule
hereto, or any representation herein or in any other Loan Document, with respect to any matter arising after the Closing Effective Date that, if
existing or occurring on the Closing Effective Date, would have been required to be set forth or described in such Schedule or as an exception to
such representation or that is necessary to correct any information in such Schedule or representation which has been rendered inaccurate thereby
(and, in the case of any supplements to any Schedule, such Schedule shall be appropriately marked to show the changes made therein).
Notwithstanding the foregoing, no supplement or revision to any Schedule or representation shall be deemed the Credit Parties’ consent to the
matters reflected in such updated Schedules or revised representations nor permit the Loan Parties to undertake any actions otherwise prohibited
hereunder or fail to undertake any action required hereunder from the restrictions and requirements in existence prior to the delivery of such
updated Schedules or such revision of a representation; nor shall any such supplement or revision to any Schedule or representation be deemed
the Credit Parties’ waiver of any Default resulting from the matters disclosed therein.
6.14
Physical Inventories .
(a)
Cause not less than one (1) physical inventory to be undertaken, at the expense of the Loan Parties, in each twelve
(12) month period or periodic cycle counts, in each case consistent with past practices, conducted by such inventory takers as are satisfactory to
the Agents and following such methodology as is consistent with the methodology used in the immediately preceding inventory or as otherwise
may be satisfactory to the Agents. The Agents, at the expense of the Loan Parties, may participate in and/or observe each scheduled physical
count of Inventory which is undertaken on behalf of any Loan Party. The Parent or the Canadian Borrower, as applicable, upon the request of the
Administrative Agent (which request may be made no more frequently than quarterly or if such information has been obtained in such quarter
through the conduct of a commercial finance examination) shall provide the Agents with the results of such inventory (as well as of any other
physical inventory undertaken by a Loan Party).
(b)
Permit any Agent, in its discretion, if any Default or Event of Default exists, to cause additional such inventories to
be taken as any such Agent determines (each, at the expense of the Loan Parties).
6.15
Environmental Laws .
(a)
Conduct its operations and keep and maintain its Real Estate in material compliance with all Environmental Laws;
(b) obtain and renew all environmental permits necessary for its operations and properties except where such failure will not cause a Material
Adverse Effect; and (c) implement any and all investigation, remediation, removal and response actions that are appropriate or necessary to
maintain the value and marketability of the Real Estate or to otherwise comply with Environmental Laws pertaining to the presence, generation,
treatment, storage, use, disposal, transportation or release of any Hazardous Materials on, at, in, under, above, to, from or about any of its Real
Estate except where such failure will not cause a Material Adverse Effect, provided , however , that neither a Loan Party nor any of its
Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being
contested in good faith and by proper proceedings and adequate reserves have been set aside and are being maintained by the Loan Parties with
respect to such circumstances in accordance with GAAP.
(131)
6.16
Further Assurances .
(a)
Execute any and all further documents, financing statements, filings, agreements and instruments, and take all such
further actions (including the filing and recording of financing statements, amendments to financing statements or other documents
under the UCC, the PPSA or any other similar legislation), that may be required under any applicable Law, or which the Collateral
Agent or the Canadian Agent may reasonably request, to effectuate the transactions contemplated by the Loan Documents or to grant,
preserve, protect or perfect the Liens created or intended to be created by the Security Documents or the validity or priority of any such
Lien, all at the expense of the Loan Parties. The Loan Parties also agree to provide to the Agents, from time to time upon request,
evidence reasonably satisfactory to the Agents as to the perfection and priority of the Liens created or intended to be created by the
Security Documents.
(b)
Upon the request of the Administrative Agent, use commercially reasonable efforts to cause (i) any holder of a Lien
on, or possession of, any of the Collateral included in the Combined Borrowing Base to execute an intercreditor agreement
reasonably satisfactory to the Agents , or (ii) any holder of a Lien on any real or personal properties (including, without limitation,
licensees or transferees of Intellectual Property) which the Collateral Agent or the Canadian Agent as applicable, reasonably deems
necessary to be utilized to realize upon, and maximize the amounts recovered on any liquidation of, any of the Collateral included in the
Combined Borrowing Base, to execute and deliver a Collateral Access Agreement.
6.17
Compliance with Terms of Leaseholds Except as otherwise expressly permitted hereunder, keep all Leases in full force and
effect and not allow such Leases to lapse or be terminated, except, in any case, other than in the ordinary course of business or where the failure
to do so, either individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect.
6.18
Maintenance of New York Process Agent . In the case of a Canadian Loan Party and the Foreign Borrower, maintain in
New York, New York or at such other location in the United States of America as may be reasonably satisfactory to the Administrative Agent a
Person acting as agent to receive on its behalf and on behalf of its property service of process.
6.19
Canadian Pension Benefit Plans . Each Canadian Loan Party shall cause each of its Canadian Pension Plans (other than any
Canadian Pension Plan which is a “multi-employer pension plan”, as defined under the Pension Benefits Act (Ontario) or any similar
type of plan subject to pension benefits standards legislation of another jurisdiction in Canada) to be duly registered and administered in all
material respects in compliance with the Pension Benefits Act (Ontario) or other applicable pension benefits standards legislation and all other
applicable laws (including regulations, orders and directives), and the terms of the Canadian Pension Plans and any agreements relating thereto.
Each Canadian Loan Party shall ensure:
(a)
that no Lien arises on any of its assets in respect of any Canadian Pension Plan (other than Liens in respect of
employee contributions withheld from pay but not yet due to be remitted to any Canadian Pension Plan); and
(b)
it makes all required contributions to any Canadian Pension Plan when due . ; and
(c)
that it does not maintain, sponsor or administer, contribute or otherwise become liable for any Canadian
Pension Plan which is a defined benefit plan.
(132)
ARTICLE VII
NEGATIVE COVENANTS
So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or
unsatisfied (other than contingent indemnification claims for which a claim has not been asserted), or any Letter of Credit shall remain
outstanding, no Loan Party shall directly or indirectly:
7.01
Liens Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired; or assign or otherwise transfer any accounts or other rights to receive income, other than, as to all of the above, Permitted
Encumbrances.
7.02
Investments. Make any Investments, except Permitted Investments.
7.03
Secured Indebtedness.
Create, incur, assume, guarantee, suffer to exist or otherwise become or remain liable with respect to, any Secured Funded
Indebtedness, except:
(a)
Purchase money Indebtedness and Capital Lease Obligations, and any Permitted Refinancing thereof;
Secured Funded Indebtedness incurred from time to time if, as of and after giving effect to incurrence of such
(b)
Indebtedness, the Secured Leverage Ratio shall not exceed 4.00 to 1.00 and any Permitted Refinancing thereof; provided that, unless
otherwise agreed by the Administrative Agent, if such Secured Funded Indebtedness includes security consisting of (i) any of the
Collateral, or (ii) any other real or personal property (including, without limitation, licensees or transferees of Intellectual
Property), which property is deemed by the Collateral Agent or the Canadian Agent, as applicable, reasonably necessary to be
utilized to realize upon, and maximize the amounts recovered on any liquidation of, any of the Collateral included in the
Combined Borrowing Base, the holder of such Indebtedness shall have entered into an intercreditor agreement with the applicable
Agent so as to permit the Collateral Agent and or the Canadian Agent on terms , as applicable, access to and use of such property
for a reasonable period of time to collect upon, effect a liquidation of, or otherwise exercise rights with respect to, the Collateral,
all on such terms and conditions reasonably acceptable to the Agents Administrative Agent in its Permitted Discretion ; for clarity,
such intercreditor agreement shall not include provisions subordinating the debt (as opposed to the Liens on any Collateral ) of the
holder of such Secured Funded Indebtedness to the Obligations.
(c)
Secured Funded Indebtedness existing on the Closing Effective Date and any Permitted Refinancing thereof.
7.04
Fundamental Changes . Merge, dissolve, liquidate, amalgamate, consolidate with or into another Person, (or agree to do any
of the foregoing), except that, so long as no Default or Event of Default shall have occurred and be continuing prior to or immediately after
giving effect to any action described below or would result therefrom:
(a)
any Subsidiary of Holdings which is not a Loan Party may merge, amalgamate or consolidate with (i) a Loan Party,
provided that the Loan Party shall be the continuing or surviving Person, or (ii) any other Person;
(b)
any Subsidiary of Holdings which is a Loan Party may merge, amalgamate or consolidate into any Subsidiary which
is a Loan Party or into a Borrower, provided that in any
(133)
merger, amalgamation or consolidation involving a Borrower, a Borrower shall be the continuing or surviving Person;
(c)
in connection with a Permitted Acquisition, any Subsidiary of Holdings may merge or amalgamate with or into or
consolidate with any other Person or permit any other Person to merge, amalgamate with or into or consolidate with it; provided that
(i) the Person surviving such merger or amalgamation shall be a wholly-owned Subsidiary of a Loan Party and (ii) in the case of any
such merger to which any Loan Party is a party, such Loan Party is the surviving Person or, alternatively, such surviving Person
executes the joinder documents contemplated by Section 6.11; and
(d)
any CFC that is not a Loan Party may merge into any CFC that is not a Loan Party.
(e)
Intermediate Holdco may dissolve or may merge or consolidate into another Person;
Holdings may merge or consolidate into another Person organized under the laws of the United States so long as such
(f)
transaction does not constitute a Change of Control; and
(g)
consummated.
any merger, dissolution, amalgamation or consolidation to effectuate a Disposition permitted hereunder may be
7.05
Dispositions . Make any Disposition or enter into any agreement to make any Disposition, unless no Default or Event of
Default then exists or would arise therefrom and the Net Proceeds thereof are applied to the Loans in accordance with Section 2.05 hereof.
7.06
Restricted Payments . Declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or
otherwise) to do so, except that, so long as no Default or Event of Default shall have occurred and be continuing prior to or immediately after
giving effect to any action described below or would result therefrom:
(a)
each Subsidiary of Parent may make Restricted Payments to any other Subsidiary or to Parent;
(b)
the Parent and each Subsidiary thereof may declare and make dividend payments or other distributions payable
solely in the common stock or other common Equity Interests of such Person;
(c)
the Parent may pay cash dividends, payments and distributions in an amount sufficient to allow Holdings and
Intermediate Holdco to pay expenses (other than taxes) incurred in the ordinary course of business, provided that, if Holdings or
Intermediate Holdco shall own any material assets (other than the Equity Interests of Intermediate Holdco or the Parent or other assets
relating to the Equity Interests of such Intermediate Holdco or the Parent), such cash dividends, payments and distributions made by the
Parent with respect to Holdings and such Intermediate Holdco shall be limited to the reasonable and proportional share, as determined
by the Parent in its reasonable discretion, of such expenses incurred by Holdings and the Intermediate Holdco solely relating or
allocable to its Equity Interests in the Parent;
(d)
the Parent may pay cash dividends, payments and distributions in an amount sufficient to cover reasonable and
necessary expenses (including professional fees and expenses)
(134)
(other than taxes) incurred by Holdings in connection with (i) registration, public offerings and exchange listing of equity or debt
securities and maintenance of the same, (ii) reporting obligations under, or in connection with compliance with, applicable laws or
applicable rules of any governmental, regulatory or self-regulatory body or stock exchange, this Agreement , the Senior Term Facility ,
either Notes Indenture or any other agreement or instrument relating to Indebtedness of any Loan Party or any of their Subsidiaries, and
(iii) indemnification and reimbursement of directors, officers and employees in respect of liabilities relating to their serving in any such
capacity, or obligations in respect of director and officer insurance (including premiums therefor), provided that, if Holdings or
Intermediate Holdco shall own any material assets (other than the Equity Interests of Intermediate Holdco or the Parent or other assets
relating to the Equity Interests of such Intermediate Holdco or the Parent), such cash dividends, payments and distributions made by the
Parent with respect to Holdings and such Intermediate Holdco shall be limited to the reasonable and proportional share, as determined
by the Parent in its reasonable discretion, of such expenses incurred by Holdings solely relating or allocable to its Equity Interests in the
Parent;
the Parent may pay, without duplication, cash dividends, payments and distributions (A) pursuant to the Tax Sharing
(e)
Agreement; and (B) to pay or permit Holdings or Intermediate Holdco to pay any Related Taxes; and
(f)
the Parent may pay cash dividends, payments and distributions to Intermediate Holdco for distribution to Holdings,
to enable the Holdings to pay cash dividends and repurchase its Equity Interests (i) in an amount not to exceed $30,000,000 in any
Fiscal Year as long as, after giving pro forma effect to such dividend, payment and distribution, the RP Availability Condition is
satisfied, and (ii) without limitation as to amount if after giving pro forma effect to such distribution or dividend, the Payment
Conditions are satisfied.
7.07
Prepayments of Indebtedness . Prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity
thereof in any manner any Indebtedness, or make any payment in violation of any subordination terms of any Subordinated Indebtedness, except
(a) voluntary prepayments, repurchases, redemptions or defeasances of Consolidated Funded Indebtedness as long as the RP Availability
Condition is satisfied (and, in the case of Subordinated Indebtedness, so long as such prepayment of such Indebtedness is permitted by the
subordination terms thereof) (i) no Default or Event of Default then exists or would arise as a result of the making of such payment, and
(ii) if after giving pro forma effect to such payment, Excess Availability for the 45 day period immediately preceding, and on the date of,
such payment was equal to or greater than 20% of the Loan Cap. If after giving pro forma effect to such payment, Excess Availability
would be equal to or less than 40% of the Loan Cap, the Parent shall furnish the Administrative Agent with prior notice of any such
payment, together with supporting documentation evidencing the satisfaction of the Excess Availability requirements, no less than five
(5) Business Days prior to the consummation of any such payment; and (b) as long as no Event of Default then exists, Permitted
Refinancings of any such Indebtedness.
Change in Nature of Business . Engage in any line of business substantially different from the Business conducted by the
7.08
Loan Parties and their Subsidiaries on the date hereof or any business substantially related or incidental thereto or a reasonable extension thereof.
7.09
Use of Proceeds. Use the proceeds of any Credit Extension, whether directly or indirectly, and whether immediately,
incidentally or ultimately, (a) to purchase or carry margin stock (within the meaning of Regulation U of the FRB) or to extend credit to others for
the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose, or (b) for any purposes other
than (i) the refinancing of the Indebtedness under the Existing Credit Agreement,
(135)
(ii) the financing of the acquisition of working capital assets, including the purchase of Inventory and Equipment in the ordinary course of
business, ( iii ii ) to finance Capital Expenditures and Permitted Acquisitions (except to the extent restricted under the definition of Permitted
Acquisitions) of the Loan Parties, and ( iv iii ) for general corporate purposes, in each case to the extent permitted under Law and the Loan
Documents.
7.10
Amendment of Material Documents .
(a) Except in connection with Permitted Refinancings thereof, amend, supplement, waive or otherwise modify any of the provisions of
either Notes Indenture:
(i) which, in the case of the Senior Subordinated Notes Indenture, amends, supplements, waives, or otherwise
modifies any subordination provisions contained therein;
(i)
(ii) which shortens the fixed maturity or increases the principal amount of, or increases the rate or shortens
the time of payment of interest on, or increases the amount or shortens the time of payment of any principal or premium
payable whether at maturity, at a date fixed for prepayment or by acceleration or otherwise of the Indebtedness evidenced by
the Notes Indentures, or increases the amount of, or accelerates the time of payment of, any fees or other amounts payable in
connection therewith (except to the extent permitted by Section 7.07 hereof); or
(iii) which relates to any material affirmative or negative covenants or any events of default or remedies thereunder
and the effect of which is to subject the Parent or any of its Subsidiaries to any more onerous or more restrictive provisions; or
(ii)
(iv) which otherwise adversely affects the interests of the Lenders as senior secured creditors with respect
to the Notes Indentures or the interests of the Lenders under this Agreement or any other Loan Document in any material
respect.
(b) Amend, supplement, waive or otherwise modify any of the provisions of any Senior Term Loan Document (including
pursuant to an extension, renewal, replacement or refinancing thereof) which shortens the average weighted maturity or the fixed
maturity or increases the principal amount of the Indebtedness evidenced by the Senior Term Loan Documents; or effect any extension,
refinancing, refunding, replacement or renewal of Indebtedness under the Senior Term Loan Documents, except for Permitted
Refinancings.
7.11
Fiscal Year .
Change the Fiscal Year of Holdings, or the accounting policies or reporting practices of the Loan Parties which would in any way
materially change the reporting or calculation of any component of the Combined Borrowing Base, except as required by GAAP; provided that
(a) the Parent may, upon written notice to the Administrative Agent, change its fiscal year to any other fiscal year reasonably acceptable to the
Administrative Agent, in which case, the Parent and the Administrative Agent will, and will be authorized by the Lenders to, make any
adjustments to the Loan Documents that are necessary to reflect such change in Fiscal Year, and (b) the Loan Parties may change such
accounting policies if such change is reasonably acceptable to the Administrative Agent.
(136)
7.12
Deposit Accounts; Credit Card Processors .
Open new DDAs or Blocked Accounts unless the Loan Parties shall promptly thereafter have delivered to the Administrative Agent or
the Canadian Agent, as applicable, appropriate Blocked Account Agreements consistent with the provisions of Section 6.12. No Loan Party
shall maintain any bank accounts or enter into any agreements with credit card processors other than the ones expressly contemplated herein or
in Section 6.12 hereof.
7.13
Consolidated Fixed Charge Coverage Ratio . During the continuance of a Covenant Compliance Event, permit the
Consolidated Fixed Charge Coverage Ratio, calculated as of the last day of each month, on a trailing twelve (12) month basis to be less than 1.1
1.0 :1.0.
Limitations on Currency, Commodity and Other Hedging Transactions . Enter into, purchase or otherwise acquire
7.14
agreements or arrangements relating to currency, commodity or other hedging except, to the extent and only to the extent that, such agreements
or arrangements are entered into, purchased or otherwise acquired in the ordinary course of business of the Parent or any of its Subsidiaries with
reputable financial institutions or vendors and not for purposes of speculation (any such agreement or arrangement permitted by this subsection,
a “ Permitted Hedging Arrangement ”).
ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES
8.01
Events of Default. Any of the following shall constitute an Event of Default:
(a)
Non-Payment . The Borrowers or any other Loan Party fails (i) to pay when and as required to be paid herein, any
amount of principal of any Loan or any L/C Obligation, or deposit any funds as Cash Collateral in respect of L/C Obligations, or (ii) to
pay any amount of interest on any Loan or any L/C Obligation, or pay any fee or other amount payable hereunder or under any other
Loan Documents within three (3) Business Days of when due; or
Specific Covenants . (i) Any Loan Party fails to perform or observe any term, covenant or agreement contained in
(b)
any of Section 6.01 , 6.02 (except Section 6.02(c) ), 6.03 , 6.05 , 6.07 , 6.10 , 6.11 , or 6.12 or Article VII ; or (ii) fails to perform its
obligations under Section 6.02(c) within one Business Day after the date required for performance; or
(c)
Other Defaults . Any Loan Party fails to perform or observe any other covenant or agreement (not specified in
subsection (a) or (b) above) contained in any Loan Document on its part to be performed or observed and such failure continues for a
period ending on the earlier of (i) the date thirty (30) days after a Responsible Officer of a Loan Party shall have discovered or should
have discovered such default and (ii) the date fifteen (15) days after written notice has been given to the Parent by the Administrative
Agent; or
(d)
Representations and Warranties . Any representation, warranty, certification or statement of fact made or deemed
made by or on behalf of any Borrower or any other Loan Party herein, in any other Loan Document, or in any document delivered in
connection herewith or therewith (including, without limitation, any Borrowing Base Certificate) shall be incorrect or misleading in any
material respect when made or deemed made; or
(e)
Cross-Default . (i) Any Loan Party (A) fails to make any payment when due (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise) in respect of any Material Indebtedness, or (B) fails to observe or perform
any other agreement or condition relating to any such Material Indebtedness or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event occurs, the effect of which default or
(137)
other event is to cause, or to permit the holder or holders of such Material Indebtedness or the beneficiary or beneficiaries of any
Guarantee thereof (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of
notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed
(automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated
maturity, or such Guarantee to become payable or cash collateral in respect thereof to be demanded, and such event has not been
waived or the holder of such Indebtedness has agreed and continues to forbear from exercising its rights on account thereof; or (ii) there
occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (A) any event of default
under such Swap Contract as to which a Loan Party or any Subsidiary thereof is the Defaulting Party (as defined in such Swap
Contract) or (B) any Termination Event (as so defined) under such Swap Contract as to which a Loan Party or any Subsidiary thereof is
an Affected Party (as so defined) and, in either event, the Swap Termination Value owed by the Loan Party or such Subsidiary as a
result thereof is greater than $20,000,000, unless such event described in (A) or (B) has been waived or the counterparty has agreed and
continues to forbear from exercising its rights on account thereof; or
(f)
Insolvency Proceedings, Etc. Any Borrower or any Material Subsidiary that is a Loan Party institutes or consents to
the institution of any proceeding or makes any filing under any Debtor Relief Law, or makes an assignment for the benefit of creditors;
or applies for or consents to the appointment of any receiver, interim receiver, monitor, trustee, custodian, conservator, liquidator,
rehabilitator or similar officer for it or for all or any material part of its property; or a proceeding shall be commenced or a petition filed,
without the application or consent of such Person, seeking or requesting the appointment of any receiver, interim receiver, monitor,
trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed and the appointment continues undischarged,
undismissed or unstayed for sixty (60) calendar days or an order or decree approving or ordering any of the foregoing shall be entered;
or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property is instituted
without the consent of such Person and continues undismissed or unstayed for sixty (60) calendar days, or an order for relief is entered
in any such proceeding; or
(g)
Inability to Pay Debts; Attachment . (i) Any Loan Party or any Material Subsidiary thereof becomes unable or
admits in writing its inability or fails generally to pay its debts as they become due in the ordinary course of business, or (ii) any writ or
warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such
Person, which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, and is not released,
vacated or fully bonded within thirty (30) days after its issuance or levy; or
(h)
Judgments . There is entered against any Loan Party or any Subsidiary thereof (i) one or more judgments or orders
for the payment of money in an aggregate amount (as to all such judgments and orders) exceeding $20,000,000 (to the extent not
covered by independent third-party insurance as to which the insurer is rated at least “A” by A.M. Best Company, has been notified of
the potential claim and does not dispute coverage), or (ii) any one or more non-monetary judgments that have, or would reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are
commenced by any creditor upon such judgment or order, or (B) there is a period of 30 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal, bonding or otherwise, is not in effect; or
(138)
(i)
ERISA . Any Person shall engage in any “prohibited transaction” (as defined in Section 406 of ERISA or
Section 4975 of the Code) involving any Plan, (ii) any “accumulated funding deficiency” (as defined in Section 302 of ERISA),
whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of either
of the Parent or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence
to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable
Event or commencement of proceedings or appointment of a trustee is in the reasonable opinion of the Administrative Agent likely to
result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of
Title IV of ERISA other than a standard termination pursuant to Section 4041(b) of ERISA, (v) either of the Parent or any Commonly
Controlled Entity shall, or in the reasonable opinion of the Administrative Agent is reasonably likely to, incur any liability in
connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan, or (vi) any other event or condition
shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all
other such events or conditions, if any, would be reasonably expected to result in a Material Adverse Effect; or
(j)
Canadian Pension Plan . Any event or condition shall occur or exist with respect to a Canadian Pension Plan that
would reasonably be expected to subject any Canadian Loan Party to any tax, penalty or other liabilities under the Pension Benefits Act
(Ontario) or any other applicable pension benefits standards legislation or other applicable Laws, or if a Canadian Loan Party is in
default with respect to required payments to a Canadian Pension Plan or any Lien arises on the assets of a Canadian Loan Party (save
for contribution amounts not yet due) in connection with any Canadian Pension Plan, where any of the foregoing events, conditions,
defaults or Liens would reasonably be expected to result in a Material Adverse Effect.
(k)
Invalidity of Loan Documents . (i) Any provision of any Loan Document, at any time after its execution and
delivery and for any reason, ceases to be in full force and effect; or any Loan Party or any other Person contests in any manner the
validity or enforceability of any provision of any Loan Document; or any Loan Party denies that it has any or further liability or
obligation under any provision of any Loan Document, or purports to revoke, terminate or rescind any provision of any Loan Document
or seeks to avoid, limit or otherwise adversely affect any Lien purported to be created under any Security Document; or (ii) any Lien
purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party or any other Person not
to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document; or
(l)
Change of Control . There occurs any Change of Control; or
(m)
Cessation of Business . Except as otherwise expressly permitted hereunder, Holdings and/or the Borrowers shall take
any action to liquidate all or substantially all of its “Sally Beauty Supply” or “Beauty Systems Group” divisions in the United States or,
unless the Canadian Borrower has terminated the Canadian Facility, Canada; or
Guaranty . The termination or attempted termination of any Facility Guaranty except as expressly permitted
(n)
hereunder or under any other Loan Document ; or .
(o) Subordination . (i) Any outstanding Senior Subordinated Notes, for any reason, shall not be or shall cease to be validly
subordinated as provided therein and in the applicable Notes Indenture to the obligations of the Parent under this Agreement and the
other Loan Documents, or
(139)
the obligations of any other Loan Party under any outstanding guarantee of the Senior Subordinated Notes, for any reason, shall not be
or shall cease to be validly subordinated as provided therein and in the applicable Notes Indenture, to the obligations of the Borrowers
hereunder, of the Guarantors under the Facility Guaranty, or under any other Loan Document, as the case may be, or (ii) the
subordination provisions of the documents evidencing or governing any other Subordinated Indebtedness (the “ Subordinated
Provisions ”) shall, in whole or in part, terminate, cease to be effective or cease to be legally valid, binding and enforceable against any
holder of the applicable Subordinated Indebtedness; or (iii) any Borrower or any other Loan Party shall, directly or indirectly, disavow
or contest in any manner (A) the effectiveness, validity or enforceability of any of the Subordination Provisions or of the applicable
Notes Indenture, (B) that the Subordination Provisions or the applicable Notes Indenture exist for the benefit of the Credit Parties, or
(C) that all payments of principal of or premium and interest on the applicable Subordinated Indebtedness, or realized from the
liquidation of any property of any Loan Party, shall be subject to any of the Subordination Provisions.
Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Agents, may, or, at the request of the
8.02
Required Lenders shall, take any or all of the following actions:
(a)
declare the Commitments of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit
Extensions to be terminated, whereupon such Commitments and obligation shall be terminated;
(b)
declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other
amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly waived by the Loan Parties;
(c)
require that the Domestic Borrowers Cash Collateralize the Domestic L/C Obligations (other than L/C Borrowings),
and require that the Canadian Loan Parties Cash Collateralize the Canadian L/C Obligations (other than L/C Borrowings); and
(d)
whether or not the maturity of the Obligations shall have been accelerated pursuant hereto, proceed to protect,
enforce and exercise all rights and remedies of the Credit Parties under this Agreement, any of the other Loan Documents or Law,
including, but not limited to, by suit in equity, action at law or other appropriate proceeding, whether for the specific performance of
any covenant or agreement contained in this Agreement and the other Loan Documents or any instrument pursuant to which the
Obligations are evidenced, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment
thereof or any other legal or equitable right of the Credit Parties;
provided , however , that upon the entry of an order for relief (or similar order) with respect to any Loan Party or any Subsidiary thereof under
any Debtor Relief Laws, the obligation of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions shall
automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically
become due and payable, and the obligation of the Loan Parties to Cash Collateralize the L/C Obligations as aforesaid shall automatically
become effective, in each case without further act of the Administrative Agent, the Canadian Agent, the L/C Issuer or any Lender.
No remedy herein is intended to be exclusive of any other remedy and each and every remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or any other provision of Law.
(140)
8.03
Application of Funds
(a)
After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become
immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to
Section 8.02 ), any amounts received from any Domestic Loan Party, from the liquidation of any Collateral of any Domestic Loan Party, or on
account of the Obligations (other than the Canadian Liabilities), shall be applied by the Administrative Agent against the Obligations in the
following order:
First , to payment of that portion of the Obligations (excluding the Other Liabilities and the Canadian Liabilities) constituting
fees, indemnities, Credit Party Expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative
Agent and amounts payable under Article III ) payable to the Administrative Agent, in its capacity as such;
Second , to payment of that portion of the Obligations (excluding the Other Liabilities and the Canadian Liabilities)
constituting indemnities, Credit Party Expenses, and other amounts (other than principal, interest and fees) payable to the Domestic
Lenders and the L/C Issuer (on account of Domestic Letters of Credit) (including fees, charges and disbursements of counsel to the
respective Domestic Lenders and the L/C Issuer (on account of Domestic Letters of Credit) and amounts payable under Article III ),
ratably among them in proportion to the amounts described in this clause Second payable to them;
Third , to the extent not previously reimbursed by the Domestic Lenders, to payment to the Domestic Lenders of that portion
of the Obligations constituting principal and accrued and unpaid interest on any Permitted Domestic Overadvances, ratably among the
Domestic Lenders in proportion to the amounts described in this clause Third payable to them;
Fourth , to the extent that Swing Line Loans made to the Domestic Borrowers have not been refinanced by a Domestic
Committed Loan, payment to the Swing Line Lender of that portion of the Obligations constituting accrued and unpaid interest on the
Swing Line Loans made to the Domestic Borrowers;
Fifth , to the extent that Swing Line Loans made to the Domestic Borrowers have not been refinanced by a Domestic
Committed Loan, payment to the Swing Line Lender of that portion of the Obligations constituting unpaid principal on the Swing Line
Loans made to the Domestic Borrowers;
Sixth , to payment of that portion of the Obligations constituting accrued and unpaid interest on the Domestic Loans, Domestic
L/C Borrowings and other Obligations (other than the Canadian Liabilities), and fees (including Letter of Credit Fees, other than any
fees due on account of any Canadian Letter of Credit), ratably among the Domestic Lenders and the L/C Issuer in proportion to the
respective amounts described in this clause Sixth payable to them;
Seventh , to payment of that portion of the Obligations constituting unpaid principal of the Domestic Loans and Domestic L/C
Borrowings, and to the Administrative Agent for the account of the L/C Issuer, to Cash Collateralize that portion of Domestic L/C
Obligations comprised of the aggregate undrawn amount of Domestic Letters of Credit, ratably among the Domestic Lenders and the
L/C Issuer in proportion to the respective amounts described in this clause Seventh held by them;
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Eighth , subject to Section 8.03(c) , to the Canadian Agent to be held by the Canadian Agent, for the ratable benefit of the
Canadian Lenders as cash collateral to payment of that portion of the Canadian Liabilities (excluding the Other Canadian Liabilities)
constituting fees, indemnities, Credit Party Expenses and other amounts (including fees, charges and disbursements of counsel to the
Canadian Agent and amounts payable under Article III ) payable to the Canadian Agent, in its capacity as such;
Ninth , subject to Section 8.03(c) , to the Canadian Agent to be held by the Canadian Agent, for the ratable benefit of the
Canadian Lenders and the L/C Issuer as cash collateral to payment of that portion of the Canadian Liabilities (excluding the Other
Canadian Liabilities) constituting indemnities, Credit Party Expenses, and other amounts (other than principal, interest and fees)
payable to the Canadian Lenders and the L/C Issuer (on account of Canadian Letters of Credit) (including fees, charges and
disbursements of counsel to the respective Domestic Lenders and the L/C Issuer (on account of Canadian Letters of Credit) and
amounts payable under Article III ), ratably among them in proportion to the amounts described in this clause Tenth Ninth payable to
them;
Tenth , to the extent not previously reimbursed by the Canadian Lenders and subject to Section 8.03(c) , to the Canadian Agent
to be held by the Canadian Agent, for the ratable benefit of the Canadian Lenders as cash collateral to payment to the Canadian Lenders
of that portion of the Canadian Liabilities constituting principal and accrued and unpaid interest on any Permitted Canadian
Overadvances, ratably among the Canadian Lenders in proportion to the amounts described in this clause Tenth payable to them;
Eleventh , to the extent that Swing Line Loans made to the Canadian Borrower have not been refinanced by a Canadian
Committed Loan and subject to Section 8.03(c) , to the Canadian Agent to be held by the Canadian Agent, for the ratable benefit of the
Canadian Lenders and the Swing Line Lender as cash collateral to payment to the Swing Line Lender of that portion of the Canadian
Liabilities constituting accrued and unpaid interest on the Swing Line Loans made to the Canadian Borrower;
Twelfth , to the extent that Swing Line Loans made to the Canadian Borrower have not been refinanced by a Canadian
Committed Loan and subject to Section 8.03(c) , to the Canadian Agent to be held by the Canadian Agent, for the ratable
benefit of the Canadian Lenders and the Swing Line Lender as cash collateral to payment to the Swing Line Lender of that portion of
the Canadian Liabilities constituting unpaid principal of the Swing Line Loans made to the Canadian Borrower;
Thirteenth , subject to Section 8.03(c) , to the Canadian Agent to be held by the Canadian Agent, for the ratable benefit of the
Canadian Lenders and the L/C Issuer as cash collateral to payment of that portion of the Canadian Liabilities constituting accrued and
unpaid interest on the Canadian Loans, Canadian L/C Borrowings and other Canadian Liabilities, and fees (including Letter of Credit
Fees not paid pursuant to clause Fifth above ), ratably among the Canadian Lenders and the L/C Issuer in proportion to the respective
amounts described in this clause Thirteenth payable to them;
Fourteenth , subject to Section 8.03(c) , to the Canadian Agent to be held by the Canadian Agent, for the ratable benefit of the
Canadian Lenders and the L/C Issuer as cash collateral to payment of that portion of the Canadian Liabilities constituting unpaid
principal of the Canadian Loans, Canadian L/C Borrowings to the Canadian Agent to be held by the Canadian Agent, for the ratable
benefit of the Canadian Lenders and the L/C Issuer, to Cash Collateralize that portion
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of Canadian L/C Obligations comprised of and the aggregate undrawn amount of Canadian Letters of Credit, ratably among the
Canadian Lenders and the L/C Issuer in proportion to the respective amounts described in this clause Fourteenth held by them;
Fifteenth , to payment of all other Obligations (including without limitation the cash collateralization of unliquidated
indemnification obligations for which a claim has been made as provided in Section 10.04 , but excluding any Other Domestic
Liabilities and Other Canadian Liabilities), ratably among the Credit Parties in proportion to the respective amounts described in this
clause Fifteenth held by them;
Sixteenth , to payment of that portion of the Obligations arising from Cash Management Services, ratably among the Credit
Parties in proportion to the respective amounts described in this clause Sixteenth held by them;
Seventeenth , to payment of all other Obligations arising from Bank Products, ratably among the Credit Parties in proportion to
the respective amounts described in this clause Seventeenth held by them; and
Last , the balance, if any, after the indefeasible Payment in Full of all of the Obligations have been indefeasibly paid in full
and the termination of the Aggregate Total Commitments , to the Domestic Loan Parties or as otherwise required by Law.
Subject to Section 2.03(c) , amounts used to Cash Collateralize the aggregate undrawn amount of Domestic Letters of Credit pursuant
to clause Seventh above shall be applied to satisfy drawings under such Domestic Letters of Credit as they occur. If any amount
remains on deposit as Cash Collateral after all Domestic Letters of Credit have either been fully drawn or expired, such remaining
amount shall be applied to the other Obligations, if any, in the order set forth above.
Any amounts received by the Canadian Agent pursuant to clauses Eighth through Fifteenth Seventeenth of Section 8.03(a) shall be
held as cash collateral for the applicable Canadian Liabilities until the earlier of (i) the Substantial Liquidation of the Collateral granted
by the Canadian Loan Parties to secure the Canadian Liabilities, or (ii) such date that the Canadian Agent and the Administrative Agent
shall otherwise determine.
After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become
(b)
immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to
Section 8.02 ), any amounts received from any Canadian Loan Party, from the liquidation of any Collateral of any Canadian Loan Party, or on
account of the Canadian Liabilities, shall be applied by the Canadian Agent against the Canadian Liabilities in the following order:
First , to payment of that portion of the Canadian Liabilities (excluding the Other Canadian Liabilities) constituting fees,
indemnities, Credit Party Expenses and other amounts (including fees, charges and disbursements of counsel to the Canadian Agent and
amounts payable under Article III ) payable to the Canadian Agent, in its capacity as such;
Second , to payment of that portion of the Canadian Liabilities (excluding the Other Canadian Liabilities) constituting
indemnities, Credit Party Expenses, and other amounts (other than principal, interest and fees) payable to the Canadian Lenders and the
L/C Issuer (on account of Canadian Letters of Credit) (including fees, charges and disbursements of counsel to the respective Domestic
Lenders and the L/C Issuer (on account of Canadian Letters of Credit) and
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amounts payable under Article III ), ratably among them in proportion to the amounts described in this clause Second payable to them;
Third , to the extent not previously reimbursed by the Canadian Lenders, to the Canadian Agent to be applied to that portion of
the Canadian Liabilities constituting principal and accrued and unpaid interest on any Permitted Canadian Overadvances, ratably among
the Canadian Lenders in proportion to the amounts described in this clause Third payable to them;
Fourth , to the extent that Swing Line Loans made to the Canadian Borrower have not been refinanced by a Canadian
Committed Loan, to payment to the Swing Line Lender of that portion of the Canadian Liabilities constituting accrued and unpaid
interest on the Swing Line Loans made to the Canadian Borrower;
Fifth , to the extent that Swing Line Loans made to the Canadian Borrower have not been refinanced by a Canadian
Committed Loan, payment to the Swing Line Lender of that portion of the Canadian Liabilities constituting unpaid principal on the
Swing Line Loans made to the Canadian Borrower;
Sixth , to payment of that portion of the Canadian Liabilities constituting accrued and unpaid interest on the Canadian Loans,
Canadian L/C Borrowings and other Canadian Liabilities, and fees (including Letter of Credit Fees due on account of Canadian Letters
of Credit), ratably among the Canadian Lenders and the L/C Issuer in proportion to the respective amounts described in this clause
Sixth payable to them;
Seventh , to payment of that portion of the Canadian Liabilities constituting unpaid principal of the Canadian Loans, Canadian
L/C Borrowings, and to the Canadian Agent for the account of the L/C Issuer, to Cash Collateralize that portion of Canadian L/C
Obligations comprised of the aggregate undrawn amount of Canadian Letters of Credit, ratably among the Canadian Lenders and the
L/C Issuer in proportion to the respective amounts described in this clause Seventh held by them;
Eighth , to payment of all other Canadian Liabilities (including without limitation the cash collateralization of unliquidated
indemnification obligations as provided in Section 10.04 , but excluding, except as provided above, any Other Canadian Liabilities),
ratably among the Credit Parties in proportion to the respective amounts described in this clause Eighth held by them;
Ninth , to payment of that portion of the Canadian Liabilities arising from Cash Management Services to the extent secured
under the Security Documents, ratably among the Credit Parties in proportion to the respective amounts described in this clause Ninth
held by them;
Tenth , to payment of all other Canadian Liabilities arising from Bank Products to the extent secured under the Security
Documents, ratably among the Credit Parties in proportion to the respective amounts described in this clause Tenth held by them; and
Last , the balance, if any, after the indefeasible Payment in Full of all of the Canadian Liabilities have been indefeasibly paid
in full and the termination of the Canadian Total Commitments , to the Canadian Loan Parties or as otherwise required by Law.
Subject to Section 2.03(c) , amounts used to Cash Collateralize the aggregate undrawn amount of Canadian Letters of Credit pursuant to clause
Seventh above shall be applied to satisfy drawings under such Canadian Letters of Credit as they occur. If any amount remains on deposit as
Cash Collateral after
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all Canadian Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Canadian Liabilities,
if any, in the order set forth above.
(c)
After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become
immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to
Section 8.02 ), any amounts received from the Foreign Borrower, from the liquidation of any Collateral of the Foreign Borrower, or on account
of the Obligations, shall be applied by the Agents against the Obligations and the Canadian Liabilities in the order set forth in clauses (a) and
(b) above as the Agents shall determine.
8.04
Waivers By Loan Parties. Except as otherwise provided for in this Agreement or by applicable Law, each Loan Party
waives (a) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, and hereby ratifies and confirms whatever any Agent may do in this regard,
(b) all rights to notice and a hearing prior to any Agent’s taking possession or control of, or to any Agent’s replevy, attachment or levy upon, the
Collateral or any bond or security that might be required by any court prior to allowing either Agent to exercise any of its remedies, and (c) the
benefit of all valuation, appraisal, marshaling and exemption Laws.
ARTICLE IX
ADMINISTRATIVE AGENT
9.01
Appointment and Authority .
(a)
Each of the Credit Parties hereby irrevocably appoints Bank of America to act on its behalf as the Administrative
Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise
such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably
incidental thereto.
(b)
Each of the Credit Parties hereby irrevocably appoints Bank of America-Canada Branch to act on its behalf as the
Canadian Agent hereunder and under the other Loan Documents and authorizes the Canadian Agent to take such actions on its behalf and to
exercise such powers as are delegated to the Canadian Agent by the terms hereof or thereof, together with such actions and powers as are
reasonably incidental thereto.
(c)
Each of the Lenders (in its capacities as a Lender), the Swing Line Lender and the L/C Issuer hereby irrevocably
appoints Bank of America as Collateral Agent and authorizes the Collateral Agent to act as the agent of such Lender, Swing Line Lender and the
L/C Issuer for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Loan Parties to secure any of
the Obligations, together with such powers and discretion as are reasonably incidental thereto. In this connection, the Collateral Agent and any
co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent pursuant to Section 9.05 for purposes of holding or enforcing
any Lien on the Collateral (or any portion thereof) granted under the Security Documents, or for exercising any rights and remedies thereunder at
the direction of the Administrative Agent), shall be entitled to the benefits of all provisions of this Article IX and Article X , as though such coagents, sub-agents and attorneys-in-fact were the “collateral agent” under the Loan Documents, as if set forth in full herein with respect thereto.
(d)
Each of the Lenders (in its capacities as a Lender), the Swing Line Lender and the L/C Issuer hereby irrevocably
appoints Bank of America Canada-Branch as Canadian Agent and
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authorizes the Canadian Agent to act as the agent of such Lender, Swing Line Lender and the L/C Issuer for purposes of acquiring, holding and
enforcing any and all Liens on Collateral granted by any of the Loan Parties to secure any of the Canadian Liabilities, together with such powers
and discretion as are reasonably incidental thereto. In this connection, the Canadian Agent and any co-agents, sub-agents and attorneys-in-fact
appointed by the Canadian Agent pursuant to Section 9.05 for purposes of holding or enforcing any Lien on the Collateral (or any portion
thereof) granted under the Security Documents, or for exercising any rights and remedies thereunder at the direction of the Canadian Agent),
shall be entitled to the benefits of all provisions of this Article IX and Article X, as though such co-agents, sub-agents and attorneys- in-fact were
the “collateral agent” under the Loan Documents, as if set forth in full herein with respect thereto
(e)
Without limiting the generality of the foregoing Section 9.01(c), for the purposes of creating a solidarité active in
accordance with article 1541 of the Civil Code of Québec between each Credit Party that is owed any Canadian Liabilities, taken individually,
on the one hand, and the Canadian Agent, on the other hand, each Canadian Loan Party and each such Credit Party acknowledge and agree with
the Canadian Agent that such Credit Party and the Canadian Agent are hereby conferred the legal status of solidary creditors of the Canadian
Loan Parties in respect of all Canadian Liabilities, present and future, owed by any Canadian Loan Party to each such Credit Party and the
Canadian Agent (collectively, for the purposes of this paragraph, the “solidary claim”). Accordingly, but subject (for the avoidance of doubt) to
article 1542 of the Civil Code of Québec, the Canadian Loan Parties are irrevocably bound towards the Canadian Agent and each such Credit
Party in respect of the entire solidary claim of the Canadian Agent and such Credit Party. As a result of the foregoing, the Canadian Loan Parties
confirm and agree that subject to Section 9.01(b), above, the rights of the Canadian Agent and each of the Credit Parties who are owed Canadian
Liabilities from time to time a party to this Agreement or any of the other Loan Documents by way of assignment or otherwise are solidary and,
as regards the Canadian Liabilities owing from time to time to each such Credit Party, each of the Canadian Agent and such Credit Party is
entitled, when permitted pursuant to Section 9.01, to: (i) demand payment of all outstanding amounts from time to time in respect of the
Canadian Liabilities; (ii) exact the whole performance of such Canadian Liabilities from the Canadian Loan Parties; (iii) benefit from the
Canadian Agent’s Liens in the Collateral in respect of such Canadian Liabilities; (iv) give a full acquittance of such Canadian Liabilities (each
Credit Party that is owed Canadian Liabilities hereby agreeing to be bound by any such acquittance); and (v) exercise all rights and recourses
under the Loan Documents with respect to those Canadian Liabilities. The Canadian Liabilities of the Canadian Loan Parties will be secured by
the Canadian Agent’s Liens in the Collateral and the Canadian Agent and the Credit Parties who are owed Canadian Liabilities will have a
solidary interest therein.
In addition, and without limiting any of the foregoing, for the purposes of holding any security granted by any
(f)
Loan Party pursuant to the laws of the Province of Quebec to secure payment of any bond issued by any Loan Party, each of the Credit
Parties hereby irrevocably appoints and authorizes the Canadian Agent and, to the extent necessary, ratifies the appointment and
authorization of the Canadian Agent, to act as the person holding the power of attorney (i.e. “ fondé de pouvoir ”) (in such capacity, the
“Attorney”) of the Credit Parties as contemplated under Article 2692 of the Civil Code of Québec, and to enter into, to take and to hold
on its behalf, and for its benefit, any hypothec, and to exercise such powers and duties that are conferred upon the Attorney under any
hypothec. Moreover, without prejudice to such appointment and authorization to act as the person holding the power of attorney as
aforesaid, each of the Credit Parties hereby irrevocably appoints and authorizes the Canadian Agent (in such capacity, the “Custodian”)
to act as agent and custodian for and on behalf of the Credit Parties to hold and be the sole registered holder of any bond which may be
issued under any hypothec, the whole notwithstanding Section 32 of An Act respecting the special powers of legal persons (Quebec) or any
other applicable law, and to execute all related documents. Each of the Attorney and the Custodian shall: (a) have the sole and exclusive
right and authority to exercise, except as may be otherwise
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specifically restricted by the terms hereof, all rights and remedies given to the Attorney and the Custodian (as applicable) pursuant to
any hypothec, bond, pledge, applicable laws or otherwise, (b) benefit from and be subject to all provisions hereof with respect to the
Canadian Agent mutatis mutandis , including, without limitation, all such provisions with respect to the liability or responsibility to and
indemnification by the Credit Parties, and (c) be entitled to delegate from time to time any of its powers or duties under any hypothec,
bond, or pledge on such terms and conditions as it may determine from time to time. Any person who becomes a Credit Party shall, by
its execution of an Assignment and Assumption, be deemed to have consented to and confirmed: (i) the Attorney as the person holding
the power of attorney as aforesaid and to have ratified, as of the date it becomes a Credit Party, all actions taken by the Attorney in such
capacity, and (ii) the Custodian as the agent and custodian as aforesaid and to have ratified, as of the date it becomes a Credit Party, all
actions taken by the Custodian in such capacity. The substitution of the Canadian Agent pursuant to the provisions of this Article 9
shall also constitute the substitution of the Attorney and the Custodian.
(f) The provisions of this Section 9.01 are for the benefit of the Agents, the Domestic Lenders and the L/C Issuer,
(g)
and no Loan Party or any Subsidiary thereof shall have rights as a third party beneficiary of any of such provisions (other than the provisions of
Section 9.06 ).
9.02
Rights as a Lender. The Persons serving as the Agents hereunder shall have the same rights and powers in their capacity as a
Lender as any other Lender and may exercise the same as though they were not the Administrative Agent, the Canadian Agent or the Collateral
Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the
Person serving as the Administrative Agent, the Canadian Agent or the Collateral Agent hereunder in its individual capacity. Such Person and
its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in
any kind of business with the Loan Parties or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent, the
Canadian Agent or the Collateral Agent hereunder and without any duty to account therefor to the Lenders.
Exculpatory Provisions. The Agents shall not have any duties or obligations except those expressly set forth herein and in
9.03
the other Loan Documents. Without limiting the generality of the foregoing, the Agents:
(a)
continuing;
shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is
(b)
shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent, the Canadian Agent
or the Collateral Agent, as applicable, is required to exercise as directed in writing by the Required Lenders (or such other number or
percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that no Agent shall be
required to take any action that, in its respective opinion or the opinion of its counsel, may expose such Agent to liability or that is
contrary to any Loan Document or applicable Law; and
(c)
shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall
not be liable for the failure to disclose, any information relating to the Loan Parties or any of its Affiliates that is communicated to or
obtained by the Person serving as the Administrative Agent, the Canadian Agent, the Collateral Agent, the Arranger or any of their
Affiliates in any capacity.
(147)
No Agent shall be liable to any Credit Party for any action taken or not taken by it (i) with the Consent or at the request of the Required Lenders
(or such other number or percentage of the Lenders as shall be necessary, or as such Agent shall believe in good faith shall be necessary, under
the circumstances as provided in Sections 10.01 and 8.02 ) or (ii) in the absence of its own gross negligence or willful misconduct as determined
by a final and non-appealable judgment of a court of competent jurisdiction.
The Agents shall not be deemed to have knowledge of any Default unless and until notice describing such Default is given to such
Agent by the Loan Parties, a Lender or the L/C Issuer. In the event that the Agents obtains such actual knowledge or receives such a notice, the
Agents shall give prompt notice thereof to each of the other Lenders. Upon the occurrence of an Event of Default, the Agents shall take such
action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders. Unless and until the Agents
shall have received such direction, the Agents may (but shall not be obligated to) take such action, or refrain from taking such action, with
respect to any such Default or Event of Default as they shall deem advisable in the best interest of the Credit Parties. In no event shall the
Agents be required to comply with any such directions to the extent that any Agent believes that its compliance with such directions would be
unlawful.
The Agents shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made
in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered
hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other
terms or conditions set forth herein or therein or the occurrence of any Default or Event of Default, (iv) the validity, enforceability, effectiveness
or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or the creation, perfection or
priority of any Lien purported to be created by the Security Documents, (v) the value or the sufficiency of any Collateral, or (vi) the satisfaction
of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the
Agents.
9.04
Reliance by Agents .
Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing (including, but not limited to, any electronic message, Internet or intranet website posting or
other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. Each Agent also
may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any
liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance of a Letter of
Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the L/C Issuer, the Administrative Agent and the Canadian Agent may
presume that such condition is satisfactory to such Lender or the L/C Issuer unless the Administrative Agent or the Canadian Agent, as
applicable, shall have received written notice to the contrary from such Lender or the L/C Issuer prior to the making of such Loan or the issuance
of such Letter of Credit. Each Agent may consult with legal counsel (who may be counsel for any Loan Party), independent accountants and
other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel,
accountants or experts.
9.05
Delegation of Duties. Each Agent may perform any and all of its duties and exercise its rights and powers hereunder or under
any other Loan Document by or through any one or more sub-agents appointed by such Agent. Each Agent and any such sub-agent may
perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of
this Article shall apply to any such sub-agent and to the Related Parties of the Agents and
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any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as
well as activities as such Agent.
9.06
Resignation of Agents. Any Agent may at any time give written notice of its resignation to the Lenders, the L/C Issuer and
the Parent. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Parent, to appoint
a successor, which, in the case of any Agent, shall be a bank with an office in the United States, or a Affiliate of any such bank with an office in
the United States and shall, unless an Event of Default has occurred and is continuing at the time of such appointment, be reasonably acceptable
to the Parent (whose consent shall not be unreasonably withheld or delayed), and in the case of the Canadian Agent, shall be a financial
institution that is listed on Schedule I, II or III of the Bank Act (Canada), has received an approval to have a financial establishment in Canada
pursuant to Section 522.21 of the Bank Act (Canada) or is not a foreign bank for purposes of the Bank Act (Canada), and if such financial
institution is not resident in Canada and is not deemed to be resident in Canada for purposes of the Income Tax Act (Canada), then such financial
institution deals at arm’s length with each Canadian Loan Party for purposes of the Income Tax Act (Canada) and shall, unless an Event of
Default has occurred and is continuing at the time of such appointment, be reasonably acceptable to the Canadian Borrower (whose consent shall
not be unreasonably withheld or delayed). If no such successor shall have been so appointed by the Required Lenders and shall have accepted
such appointment within thirty (30) days after the retiring Agent gives notice of its resignation, then the retiring Agent may on behalf of the
Lenders and the L/C Issuer, appoint a successor Administrative Agent or Canadian Agent, as applicable, meeting the qualifications set forth
above; provided that if the Administrative Agent or the Canadian Agent shall notify the Parent and the Lenders that no qualifying Person has
accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (1) the retiring Agent
shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any Collateral held
by such Person on behalf of the Lenders or the L/C Issuer under any of the Loan Documents, the retiring Administrative Agent or Canadian
Agent, as applicable, shall continue to hold such collateral security until such time as a successor Administrative Agent or Canadian Agent, as
applicable, is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Administrative
Agent or Canadian Agent, as applicable, shall instead be made by or to each Lender and the L/C Issuer directly, until such time as the Required
Lenders appoint a successor Administrative Agent or Canadian Agent, as applicable, as provided for above in this Section 9.06 . Upon the
acceptance of a successor’s appointment as Administrative Agent or Canadian Agent, as applicable, hereunder, such successor shall succeed to
and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Agent, and the retiring Agent shall be
discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided
above in this Section 9.06 ). The fees payable by the Borrowers to a successor Administrative Agent or Canadian Agent, as applicable, shall be
the same as those payable to its predecessor unless otherwise agreed between the Parent and such successor. After the retiring Agent’s
resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 10.04 shall continue in effect for the
benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of
them while the retiring Agent was acting as Administrative Agent or Canadian Agent hereunder.
Non-Reliance on Agents and Other Lenders. Each Lender and the L/C Issuer acknowledges that it has, independently and
9.07
without reliance upon the Agents, the Arranger or any other Lender or any of their Related Parties and based on such documents and information
as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and the L/C Issuer also
acknowledges that it will, independently and without reliance upon the Agents, the Arranger or any other Lender or any of their Related Parties
and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking
(149)
or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished
hereunder or thereunder. Except as provided in Section 9.12 , the Agents and the Arranger shall not have any duty or responsibility to provide
any Credit Party with any other credit or other information concerning the affairs, financial condition or business of any Loan Party that may
come into the possession of the Agents or the Arranger.
9.08
No Other Duties, Etc. Anything herein to the contrary notwithstanding, none of the Bookrunners, Arrangers , Syndication
Agent , or Documentation Agent listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of
the other Loan Documents, except in its capacity, as applicable, as an Agent, the Collateral Agent, a Lender or the L/C Issuer hereunder.
9.09
Agents May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law or any other
judicial proceeding relative to any Loan Party, the Agents (irrespective of whether the principal of any Loan or L/C Obligation shall then be due
and payable as herein expressed or by declaration or otherwise and irrespective of whether the Agents shall have made any demand on the Loan
Parties) shall be entitled and empowered, by intervention in such proceeding or otherwise
(a)
to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans,
L/C Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable
in order to have the claims of the Lenders, the L/C Issuer, the Agents and the other Credit Parties (including any claim for the
reasonable compensation, expenses, disbursements and advances of the Lenders, the L/C Issuer, the Agents, such Credit Parties and
their respective agents and counsel and all other amounts due the Lenders, the L/C Issuer the Agents and such Credit Parties under
Sections 2.03(i)