10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 2010

-OR-

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-33145

SALLY BEAUTY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-2257936
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3001 Colorado Boulevard Denton, Texas	76210
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (940) 898-7500

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  x   NO  o

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   NO  o

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 x	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  o  NO  x

As of January 27, 2011, there were 183,209,861 shares of the issuer’s common stock outstanding.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4. CONTROLS AND PROCEDURES	42
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	44
ITEM 1A. RISK FACTORS	45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4. REMOVED AND RESERVED	45
ITEM 5. OTHER INFORMATION	45
ITEM 6. EXHIBITS	46

2

In this Quarterly Report, references to the “Company,” “Sally Beauty,” “our company,” “we,” “our,” “ours” and “us” refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries for periods after the separation from Alberto-Culver Company (“Alberto-Culver”) and to Sally Holdings, Inc. and its consolidated subsidiaries for periods prior to the separation from Alberto-Culver unless otherwise indicated or the context otherwise requires.

Cautionary Notice Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q 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 beauty supply products by our manufacturers;

·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;

·product diversion to mass retailers;

·the operational and financial performance of our Armstrong McCall, L.P. (“Armstrong McCall”) franchised-based business;

·the success of our internet-based business;

·successfully identifying acquisition candidates or successfully completing desirable acquisitions;

·integrating businesses acquired in the future;

·opening and operating new stores profitably;

·the impact of a downturn in the economy upon our business;

·the success of our cost control plans;

·protecting our intellectual property rights, particularly our trademarks;

·conducting business outside the United States;

·disruption in our information technology systems;

·natural disasters or acts of 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 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;

3

·changes in interest rates increasing the cost of servicing our debt or increasing our interest expense due to our interest rate swap agreements;

·the potential impact on us if the financial institutions we deal with become impaired;

·the representativeness of our historical consolidated financial information with respect to our future financial position, results of operations or cash flows;

·our reliance upon Alberto-Culver for the accuracy of certain historical services and information;

·the share distribution of Alberto-Culver common stock in our separation from Alberto-Culver not constituting a tax-free distribution;

·actions taken by certain large stockholders adversely affecting the tax-free nature of the share distribution of Alberto-Culver common stock;

·the voting power of our largest stockholder discouraging third party acquisitions of us at a premium; and

·the interests of our largest stockholder differing from the interests of other holders of our common stock.

Additional factors that could cause actual events or results to differ materially from the events or results described in the forward-looking statements can be found in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as filed with the Securities and Exchange Commission. 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.

4

WHERE YOU CAN FIND MORE INFORMATION

Sally Beauty’s quarterly financial results and other important information are available by calling the Investor Relations Department at (940) 297-3877.

Sally Beauty maintains a website at www.sallybeauty.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC. The information contained on this website does not constitute part of this Quarterly Report on Form 10-Q.

5

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

The following are the Company’s consolidated balance sheets as of December 31, 2010 and September 30, 2010, and its consolidated statements of earnings and consolidated statements of cash flows for the three months ended December 31, 2010 and 2009.

The Company was formed in June 2006 and became the accounting successor company to Sally Holdings, Inc. (which was, until November 2006, a wholly-owned subsidiary of Alberto-Culver) upon the completion of our separation from Alberto-Culver. In these financial statements and elsewhere in this Quarterly Report on Form 10-Q we refer to these transactions as the Separation Transactions. Please see the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information about the Separation Transactions.

6

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	December 31,
	2010		2009
Net sales	$	793,564	$	704,851
Cost of products sold and distribution expenses	414,173		371,637
Gross profit	379,391		333,214
Selling, general and administrative expenses	272,908		250,771
Depreciation and amortization	14,111		11,889
Operating earnings	92,372		70,554
Interest expense	29,523		28,480
Earnings before provision for income taxes	62,849		42,074
Provision for income taxes	21,900		15,948
Net earnings	$	40,949	$	26,126
Net earnings per share:
Basic	$	0.22	$	0.14
Diluted	$	0.22	$	0.14
Weighted average shares:
Basic	182,462		181,889
Diluted	187,201		183,841

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, are an integral part of these financial statements.

7

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except par value data)

	December 31,2010			September 30,2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	38,381		$	59,494
Trade accounts receivable, less allowance for doubtful accounts of $2,781 at December 31, 2010 and $2,756 at September 30, 2010	54,326			54,989
Other receivables	36,465			29,510
Inventory	632,043			604,357
Prepaid expenses	24,112			23,486
Deferred income tax assets, net	23,000			22,939
Total current assets	808,327			794,775
Property and equipment, net of accumulated depreciation of $300,197 at December 31, 2010 and $291,186 at September 30, 2010	176,957			168,119
Goodwill	504,075			478,240
Other intangible assets, net of accumulated amortization of $36,098 at December 31, 2010 and $33,031 at September 30, 2010	140,243			109,352
Other assets	40,838			38,926
Total assets	$	1,670,440		$	1,589,412
Liabilities and Stockholders’ Deficit
Current liabilities:
Current maturities of long-term debt	$	48,299		$	3,045
Accounts payable	225,716			224,931
Accrued liabilities	134,914			167,496
Income taxes payable	28,275			12,180
Total current liabilities	437,204			407,652
Long-term debt	1,557,144			1,559,591
Other liabilities	39,063			40,692
Deferred income tax liabilities, net	43,115			41,803
Total liabilities	2,076,526			2,049,738
Stock options subject to redemption	808			946
Stockholders’ deficit:
Common stock, $0.01 par value. Authorized 500,000 shares; 183,223 and 182,592 shares issued and 182,727 and 182,230 shares outstanding at December 31, 2010 and September 30, 2010, respectively	1,827			1,822
Preferred stock, $0.01 par value. Authorized 50,000 shares; none issued	—			—
Additional paid-in capital	661,519			650,315
Accumulated deficit	(1,052,081		)	(1,093,030		)
Treasury stock, 15 shares at December 31, 2010 and September 30, 2010, at cost	(103		)	(103		)
Accumulated other comprehensive loss, net of tax	(18,056		)	(20,276		)
Total stockholders’ deficit	(406,894		)	(461,272		)
Total liabilities and stockholders’ deficit	$	1,670,440		$	1,589,412

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, are an integral part of these financial statements.

8

SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months EndedDecember 31,
	2010			2009
Cash Flows from Operating Activities:
Net earnings	$	40,949		$	26,126
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	14,111			11,889
Share-based compensation expense	7,838			4,988
Amortization of deferred financing costs	1,773			2,043
Excess tax (benefit) shortfall from share-based compensation	(531		)	(8		)
Net loss (gain) on disposal of leaseholds and other property	38			(20		)
Net loss on extinguishment of debt	1,585			—
Deferred income taxes	392			1,342
Changes in (exclusive of effects of acquisitions):
Trade accounts receivable	4,439			11,995
Other receivables	(6,757		)	(12,558		)
Inventory	(9,925		)	(7,279		)
Prepaid expenses	(612		)	(1,156		)
Other assets	(87		)	(210		)
Accounts payable and accrued liabilities	(42,557		)	(29,095		)
Income taxes payable	16,747			11,324
Other liabilities	867			409
Net cash provided by operating activities	28,270			19,790
Cash Flows from Investing Activities:
Capital expenditures	(15,230		)	(12,112		)
Proceeds from sale of property and equipment	124			45
Acquisitions, net of cash acquired	(78,819		)	(30,389		)
Net cash used by investing activities	(93,925		)	(42,456		)
Cash Flows from Financing Activities:
Change in book cash overdraft	2,818			—
Proceeds from issuance of long-term debt	222,404			98,000
Repayments of long-term debt	(179,343		)	(98,357		)
Debt issuance costs	(4,667		)	—
Proceeds from exercises of stock options	2,874			2
Excess tax benefit (shortfall) from share-based compensation	531			8
Purchases of treasury stock	—			(56		)
Net cash provided (used) by financing activities	44,617			(403		)
Effect of foreign exchange rate changes on cash and cash equivalents	(75		)	411
Net decrease in cash and cash equivalents	(21,113		)	(22,658		)
Cash and cash equivalents, beginning of period	59,494			54,447
Cash and cash equivalents, end of period	$	38,381		$	31,789
Supplemental Cash Flow Information:
Interest paid	$	42,855		$	48,303
Income taxes paid, net	$	4,891		$	3,278

The accompanying condensed notes, together with the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, are an integral part of these financial statements.

9

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

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 in the U.S., Canada, Mexico, Puerto Rico, Chile, Belgium, France, the United Kingdom and certain other countries in Europe. Additionally, the Company distributes professional beauty products to salons and professional cosmetologists through its Beauty Systems Group (“BSG”) store operations and a commissioned direct sales force that calls on salons primarily in the U.S., Puerto Rico, Canada, the United Kingdom and certain other countries in Europe, and to franchises in the southern and southwestern U.S. and in Mexico through the operations of its subsidiary Armstrong McCall. Certain beauty products sold by BSG and Armstrong McCall are sold under exclusive territory agreements with the manufacturers of the products.

Sally Beauty was formed in June 2006 and became the accounting successor company to Sally Holdings, Inc. (which was, until November 2006, a wholly-owned subsidiary of Alberto-Culver) upon the completion of the Separation Transactions. Please see the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for more information about the Separation Transactions.

Basis of Presentation

The consolidated interim financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. In the opinion of management, these consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the Company’s consolidated financial position as of December 31, 2010 and September 30, 2010, and its consolidated results of operations and consolidated cash flows for the three months ended December 31, 2010 and 2009.

All references in these notes to “management” are to the management of Sally Beauty. All references in these notes to the “Company” are to Sally Beauty.

2.   Significant Accounting Policies

The consolidated interim financial statements included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These consolidated interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010. The Company adheres to the same accounting policies in the preparation of its int erim financial statements. As permitted under GAAP, interim accounting for certain expenses, including income taxes, is based on full year assumptions. Such amounts are expensed in full in the year incurred.  For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income tax rates.

The results of operations for these interim periods are not necessarily indicative of the results that may be expected for any future interim period or the entire fiscal year.

The Company’s financial instruments consist of cash and cash equivalents, trade and other accounts receivable, accounts payable, interest rate swap agreements, foreign currency option and forward agreements, and long-term debt. There were no significant changes in the methods and assumptions used to estimate the fair value of the Company’s financial instruments since September 30, 2010.

The carrying amounts of cash and cash equivalents, trade and other accounts receivable, and accounts payable approximate fair value due to the short-term nature of these financial instruments.

The aggregate fair value of the interest rate swap agreements held at December 31, 2010 was a net liability of $13.0 million included in other liabilities in the Company’s consolidated balance sheet. Fair value amounts reported for these agreements are based on third-party information and were determined using proprietary models based upon well-

10

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

recognized financial principles and reasonable estimates about relevant future market conditions. Please see Note 10 for more information about the Company’s interest rate swaps.

The aggregate fair value of all the foreign currency option and forward agreements held at December 31, 2010 was a net asset of $0.3 million, consisting of $0.4 million included in prepaid expenses and $0.1 million included in accrued liabilities in the Company’s consolidated balance sheet. Fair value amounts reported for these agreements are based on third-party information and were determined using proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Please see Note 10 for more information about the Company’s foreign currency option and forward agreements.

At December 31, 2010, the fair value of the Company’s long-term debt (including capital leases) was approximately $1,652.5 million, while the carrying amount in the Company’s consolidated balance sheet was $1,605.4 million. Fair value amounts reported for long-term borrowings are based on quoted market prices where available or, if not available, based on discounted future cash flows using current market interest rates.

3.   Recent Accounting Pronouncements and Accounting Changes

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) revised the accounting standards for business combinations. This new standard, currently contained in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, (“ASC 805”), among other things, generally requires that an acquirer recognize the assets acquired and liabilities assumed measured at their “full fair values” on the acquisition date. This practice replaced the practice, under predecessor accounting standards, of allocating the cost of an acquisition to the individual assets acquired and liabilities assumed based on their relative estimated fair values. This new standard further requires that acquisition-related costs be recognized separately from the related acquisition. The Company adopted this standard effective October 1, 2009. Expenses related to acquisition s are included in selling, general and administrative expenses and, for the three months ended December 31, 2010 and 2009, were $0.1 million and $0.4 million, respectively.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 which amended ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) as it relates to certain disclosures of fair value measurements. This amendment requires, among other things, (a) disclosure of the sensitivity of an entity’s fair value measurements using Level 3 inputs to changes in such inputs, (b) a reconciliation of changes in such fair value measurements and (c) disclosure of transfers between Level 1 and Level 2 of the hierarchy, if any, and the reasons for such transfers. The Company adopted this amendment during the second quarter of its fiscal year 2010 and its adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

We have not yet adopted and are currently assessing any potential effect of the following pronouncements on our consolidated financial statements:

In December 2010, the FASB issued ASU No. 2010-28 which amended ASC Topic 350, Intangibles-Goodwill and Other. This amendment modifies the goodwill impairment test for reporting units with a zero or negative carrying amount, by requiring that Step 2 of the goodwill impairment test be performed for such reporting units if it is more likely than not that an impairment of goodwill exists. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early application is not permitted.

In December 2010, the FASB issued ASU No. 2010-29 which amended ASC 805. This amendment requires that a public company that enters into business combinations that are material on an individual or aggregate basis disclose certain pro forma information for the current and the immediately preceding fiscal year. This amendment also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to such business combination or business combinations. This amendment is effective prospectively for business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2010. Early application is permitted.

Accounting Changes

The Company made no accounting changes during the three months ended December 31, 2010.

11

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

4.   Fair Value Measurements

The Company measures on a recurring basis and discloses certain financial instruments (including interest rate swap agreements, and foreign currency option and forward agreements) under the provisions of ASC 820, as amended.  The Company defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability 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.

Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at December 31, 2010 (in thousands):

	As of December 31, 2010
	Total		Level 1		Level 2		Level 3
Assets
Foreign currency forwards (a)	$	251	—		$	251	—
Foreign currency options (a)	203		—		203		—
Total assets	$	454			$	454
Liabilities
Long-term debt (b)	$	1,652,487	$	752,044	$	900,443	—
Hedged interest rate swaps (a)	13,031		—		13,031		—
Foreign currency forwards (a)	144		—		144		—
Total liabilities	$	1,665,662	$	752,044	$	913,618

(a)Foreign currency forwards and options and interest rate swaps are valued using internal models based on market observable inputs, including market interest rates and foreign currency exchange rates, as appropriate. Please see Note 10 for more information about the Company’s foreign currency forwards and options and interest rate swaps.

(b)Long-term debt, which is carried at amortized cost in the Company’s consolidated financial statements, is valued for purposes of this disclosure using internal models based on market observable inputs, except for the senior and senior subordinated notes. The senior and senior subordinated notes are valued using quoted market prices for such debt securities.

12

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Consistent with this hierarchy, the Company categorized certain of its financial assets and liabilities as follows at September 30, 2010 (in thousands):

	As of September 30, 2010
	Total		Level 1		Level 2		Level 3
Assets
Foreign currency forwards (a)	$	20	—		$	20	—
Foreign currency options (a)	99		—		99		—
Total assets	$	119			$	119
Liabilities
Long-term debt (b)	$	1,596,228	$	751,250	$	844,978	—
Hedged interest rate swaps (a)	15,530		—		15,530		—
Foreign currency forwards (a)	328		—		328		—
Total liabilities	$	1,612,086	$	751,250	$	860,836

(a)Foreign currency forwards and options and interest rate swaps are valued using internal models based on market observable inputs, including market interest rates and foreign currency exchange rates, as appropriate.

(b)Long-term debt, which is carried at amortized cost in the Company’s consolidated financial statements, is valued for purposes of this disclosure using internal models based on market observable inputs, except for the senior and senior subordinated notes. The senior and senior subordinated notes are valued using quoted market prices for such debt securities.

5.  Net Earnings Per Share

Basic net earnings per share, is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted net earnings per share, is calculated similarly but includes potential dilution from the exercise of all outstanding stock options and stock awards, except when the effect would be anti-dilutive.

The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended December 31,
	2010		2009
Net earnings	$	40,949	$	26,126
Total weighted-average basic shares	182,462		181,889
Dilutive securities:
Stock option and stock award programs	4,739		1,952
Total weighted-average diluted shares	187,201		183,841
Earnings per share:
Basic	$	0.22	$	0.14
Diluted	$	0.22	$	0.14

At December 31, 2010 and 2009, options to purchase 2,999,200 shares and 9,234,891 shares, respectively, 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 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 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 unrecognized compensation expense, exceeds the average price per share for the period.

13

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

6.   Comprehensive Income and Accumulated Other Comprehensive (Loss) Income

Comprehensive income consists of net earnings, foreign currency translation adjustments and deferred gain on interest rate swaps as follows (in thousands):

	Three Months EndedDecember 31,
	2010		2009
Net earnings	$	40,949	$	26,126
Other comprehensive income adjustments:
Foreign currency translation adjustments (a)	691		1,558
Deferred gain on interest rate swaps (b)	1,529		833
Comprehensive income	$	43,169	$	28,517

(a)There were no income tax amounts related to foreign currency translation adjustments recorded in other comprehensive income for the three months ended December 31, 2010 and 2009.

(b)Amounts are net of an income tax expense of $1.0 million and $0.5 million for the three months ended December 31, 2010 and 2009, respectively.

The components of accumulated other comprehensive (loss) income, net of tax, as of December 31, 2010 and September 30, 2010 are as follows (in thousands):

	As of December 31, 2010								As of September 30, 2010
	Amount Before Tax			Deferred Tax		Net Amount			Amount Before Tax			Deferred Tax		Net Amount
Cumulative foreign currency translation adjustments	$	(10,081	)	—		$	(10,081	)	$	(10,772	)	—		$	(10,772	)
Deferred (losses) gains on interest rate swaps (a)	(13,031		)	5,056		(7,975		)	(15,530		)	6,026		(9,504		)
Total accumulated other comprehensive (loss) income, net of tax	$	(23,112	)	$	5,056	$	(18,056	)	$	(26,302	)	$	6,026	$	(20,276	)

(a)Please see Note 10 for more information about our interest rate swaps.

7.   Share-Based Payments

The Company measures the cost of employee and consultant services received in exchange for an award of equity instruments based on the fair value of the award on the grant date 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. In January 2010, the Company adopted 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. After the adoption of the 2010 Plan, the Company’s equity awards have been made under the 2010 Plan and all future awards are currently expected to be made under such plan.

The Company granted approximately 3.0 million and 2.9 million stock options to its employees and consultants during the three months ended December 31, 2010 and 2009, respectively. Upon issuance of such grants, the Company recognized accelerated share-based compensation expense of $5.0 million and $2.5 million in the three months ended December 31, 2010 and 2009, respectively, in connection with certain retirement eligible employees who are eligible to 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”).

14

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the total compensation cost charged against income and included in selling, general and administrative expenses for all share-based compensation arrangements and the related tax benefits recognized in our consolidated statements of earnings (in thousands):

	Three Months Ended December 31,
	2010		2009
Share-based compensation expense	$	7,838	$	4,988
Income tax benefit related to share-based compensation expense	$	2,127	$	1,838

Stock Options

Each option has an exercise price that equals 100% of 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 plans for the three months ended December 31, 2010:

	Number of Outstanding Options (in Thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in Thousands)
Outstanding at September 30, 2010	12,738		$	7.53	7.3	$	46,789
Granted	3,009		11.39
Exercised	(446	)	6.44
Forfeited or expired	(77	)	7.59
Outstanding at December 31, 2010	15,224		$	8.32	7.4	$	94,507
Exercisable at December 31, 2010	8,203		$	7.87	6.1	$	54,600

The following table summarizes information about stock options under the Company’s option plans at December 31, 2010:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2010 (in Thousands)	Weighted Average Remaining Contractual Term (in Years)	Weighted Average Exercise Price		Number Exercisable at December 31, 2010 (in Thousands)	Weighted Average Exercise Price
$2.00 – 5.24	3,261	6.4	$	4.45	1,998	$	3.96
$7.42 – 11.39	11,963	7.6	9.38		6,205	9.13
Total	15,224	7.4	$	8.32	8,203	$	7.87

15

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

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 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:

	Three Months EndedDecember 31,
	2010		2009
Expected lives (in years)	5.0		5.0
Expected volatility	59.0	%	64.4	%
Risk-free interest rate	1.1	%	2.4	%
Dividend yield	0.0	%	0.0	%

The expected life of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience of employees of the Company who have been granted stock options, including grants under stock option plans of Alberto-Culver prior to the Separation Transactions. Expected volatility is derived using the average volatility of both the Company and similar companies (based on industry sector) since it is 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 issue as of the date of the grant. Since the Company does not currently expect to pay dividends, the dividend yield is 0%.

The weighted average fair value of the stock options issued to the Company’s grantees at the date of grant in the three months ended December 31, 2010 and 2009 was $5.74 and $4.13 per option, respectively. The total intrinsic value of options exercised during the three months ended December 31, 2010 was $2.9 million. Cash proceeds from these option exercises were $2.9 million and the tax benefit realized for the tax deductions related to these option exercises was $1.1 million.

At December 31, 2010, approximately $18.3 million of total unrecognized compensation costs related to unvested stock option awards are expected to be recognized over the weighted average period of 3.3 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.

The Company expenses the cost of the restricted stock awards, which is determined to equal the fair value of the restricted stock award at the date of grant, on a straight-line basis over the period (the “vesting period”) in which the restrictions on these stock awards lapse (“vesting”) 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.

16

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

The following table presents a summary of the activity for the Company’s restricted stock awards for the three months ended December 31, 2010:

Restricted Stock Awards	Number of Shares (in Thousands)		Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2010	362		$	7.38	3.2
Granted	199		11.39
Vested	(64	)	7.15
Forfeited	(1	)	5.24
Unvested at December 31, 2010	496		$	9.02	3.6

At December 31, 2010, approximately $3.3 million of total unrecognized compensation costs related to unvested restricted stock awards are expected to be recognized over the weighted average period of 3.6 years.

Restricted Stock Units

The Company currently grants Restricted Stock Unit awards (“RSU” or “RSUs”), 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, such RSUs are generally retained by the Company as deferred stock units that are not distributed until six months after the independent director’s service as a director terminates. RSUs are independent of stock option grants and are generally subject to forfeiture if service terminates prior to the vesting of the units. Participants have no voting rights with respect to 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 less than 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.

The following table presents a summary of the activity for the Company’s RSUs for the three months ended December 31, 2010:

Restricted Stock Units	Number of Shares (in Thousands)	Weighted Average Fair Value Per Share		Weighted Average Remaining Vesting Term (in Years)
Unvested at September 30, 2010	—	$	—	—
Granted	43	11.39
Vested	—	—
Forfeited	—	—
Unvested at December 31, 2010	43	$	11.39	0.8

At December 31, 2010, approximately $0.4 million of total unrecognized compensation costs related to unvested RSUs are expected to be recognized over the weighted average period of 0.8 years.

17

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

8.   Goodwill and Other Intangibles

The change in the carrying amounts of goodwill by operating segment for the three months ended December 31, 2010 is as follows (in thousands):

	Sally Beauty Supply			Beauty Systems Group		Total
Balance at September 30, 2010	$	76,299		$	401,941	$	478,240
Additions and purchase price adjustments (a)	333			25,038		25,371
Foreign currency translation	(705		)	1,169		464
Balance at December 31, 2010	$	75,927		$	428,148	$	504,075

(a)   Please see Note 12 for additional information about businesses acquired.

The following table provides the carrying value for intangible assets with indefinite lives and the gross carrying value and accumulated amortization for intangible assets subject to amortization (which we refer to, in the aggregate, as “other intangible assets”) by operating segment at December 31, 2010 (in thousands):

	Sally Beauty Supply			Beauty Systems Group			Total
Balance at December 31, 2010
Intangible assets with indefinite lives:
Trade names	$	27,710		$	33,725		$	61,435
Other intangibles	—			5,700			5,700
Total	27,710			39,425			67,135
Intangible assets subject to amortization:
Gross carrying amount	14,325			94,881			109,206
Accumulated amortization	(4,821		)	(31,277		)	(36,098		)
Net value	9,504			63,604			73,108
Total other intangible assets, net	$	37,214		$	103,029		$	140,243

As described in Note 12, during the three months ended December 31, 2010, intangible assets subject to amortization in the amount of $34.4 million were recorded in connection with the October 1, 2010 acquisition of Aerial Company, Inc. (“Aerial”) based on their preliminary estimated fair values.

Amortization expense was $3.1 million and $1.9 million for the three months ended December 31, 2010 and 2009, respectively. As of December 31, 2010, future amortization expense related to intangible assets subject to amortization is estimated to be as follows (in thousands):

Fiscal Year:
2011	$	8,844
2012	10,455
2013	8,685
2014	8,367
2015	7,936
Thereafter	28,821
	$	73,108

18

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

9.   Long-Term Debt

Details of long-term debt are as follows (in thousands):

	As of December 31, 2010			Maturity Dates	Interest Rates
ABL facility	$	43,200		Nov. 2015	(i) Prime plus (1.25% to 1.75%) or;
					(ii) LIBOR plus (2.25% to 2.75%)
Term Loan B	843,856			Nov. 2013	(i) Prime plus (1.25% to 1.50%) or;
					(ii) LIBOR plus (2.25% to 2.50%) (a)
Other (b)	6,212			2011-2014	4.05% to 6.75%
Total	$	893,268
Senior notes	$	430,000		Nov. 2014	9.25%
Senior subordinated notes	275,000			Nov. 2016	10.50%
Total	$	705,000
Capitalized leases and other	$	7,175
Less: current portion	(48,299		)
Total long-term debt	$	1,557,144

(a)At December 31, 2010, the interest rate for the term loan B is 2.51%.

(b)Represents pre-acquisition debt of Pro-Duo NV and Sinelco Group BVBA (“Sinelco”).

In connection with the Separation Transactions in November 2006, the Company, through its subsidiaries (Sally Investment Holdings LLC and Sally Holdings, LLC (“Sally Holdings”)), incurred $1,850.0 million of indebtedness by (i) drawing on a revolving (asset-based lending (“ABL”)) facility in the amount of $70.0 million, (ii) entering into two term loan facilities (term loans A and B) in an aggregate amount of $1,070.0 million and (iii) together (jointly and severally) with another of the Company’s indirect subsidiaries, Sally Capital Inc., issuing senior notes in an aggregate amount of $430.0 million and senior subordinated notes in an aggregate amount of $280.0 million. Borrowings under the term loan A facility were repaid in the fiscal year 2010.

In November 2010, the Company entered into a new $400 million, five-year revolving credit facility (the “new ABL facility” or the “ABL facility”) and replaced its prior ABL facility (the “prior ABL facility”). The new ABL facility contains restrictions and limitations similar to those contained in the prior ABL facility and, similar to the prior ABL facility, borrowings under the new ABL facility are secured by substantially all of the Company’s assets. The terms of the new ABL facility contain a commitment fee of 0.50% on the unused portion of the facility. During the three months ended December 31, 2010, in connection with the Company’s termination of its prior ABL facility, the Company expensed approximately $1.6 million in unamortized deferred financing costs. Such amount is included in interest expense in the Company’s consolidated statements of earnin gs.

Borrowings under the term loan facilities and the ABL facility are secured by substantially all of our assets, those of Sally Investment Holdings LLC, a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings, those of our domestic subsidiaries and, in the case of the ABL facility, those of our Canadian subsidiaries and a pledge of certain intercompany notes. Borrowings under the term loan B facility may be prepaid at the option of Sally Holdings at any time without premium or penalty and are subject to mandatory prepayment in an amount equal to 50% of excess cash flows (as defined in the agreement governing the senior term loan facilities) for any fiscal year unless a specified leverage ratio is met. No such prepayment is expected to be due in the fiscal year 2011. Amounts paid pursuant to said provision may be applied, at the option of the Company, against minimum loan repayments other wise required of us over the twelve-month period following any such payment under the terms of the loan agreement. Additionally, borrowings under such term loan facility would be subject to mandatory prepayment in an amount equal to 100% of the proceeds of specified asset sales that are not reinvested in the business or applied to repay borrowings under the ABL facility.

19

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

The senior notes and senior subordinated notes are unsecured obligations of the issuers and are jointly and severally guaranteed on a senior basis (in the case of the senior notes) and on a senior subordinated basis (in the case of the senior subordinated notes) by each material domestic subsidiary of the Company. Furthermore, the agreements underlying the Company’s credit facilities contain terms which significantly restrict the ability of Sally Beauty’s subsidiaries to pay dividends or otherwise transfer assets to Sally Beauty. Please see the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, for additional information about the Company’s long-term debt.

Maturities of the Company’s long-term debt are as follows as of December 31, 2010 (in thousands):

Fiscal Year:
2011	$	45,499
2012	10,251
2013	10,121
2014	827,286
2015	430,111
Thereafter	275,000
	$	1,598,268
Capital leases and other	7,175
Less: current portion	(48,299		)
Total	$	1,557,144

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.

Under the agreements and/or indentures governing the term loan facilities and the notes, Sally Holdings may not make certain restricted payments to us if a default then exists under the credit agreement or the indentures or if its consolidated interest coverage ratio is less than 2.0 to 1.0 at the time of the making of such restricted payment. As of December 31, 2010, its consolidated interest coverage ratio exceeded 2.0 to 1.0.  Further, the aggregate amount of restricted payments it is able to make is limited pursuant to various baskets as calculated pursuant to the credit agreement and indentures.

Under our new ABL facility, we may pay dividends and make other equity distributions if availability under the facility exceeds certain thresholds. For dividends and distributions up to $30.0 million during each fiscal year, borrowing availability must exceed the lesser of $80.0 million or 20% of the borrowing base for 45 days prior to such dividend and distribution. For dividends in excess of that amount, we must maintain that same availability and our fixed charge coverage ratio must exceed 1.10 to 1.00. As of December 31, 2010, we met all of these conditions. As of December 31, 2010, the net assets of our consolidated subsidiaries that were unrestricted from transfer under our credit arrangements totaled $335.3 million, subject to certain adjustments. The ABL facility and the senior term loan facilities, as well as the Company’s 9.25% Senior Notes indenture and its 10.5% Senior Subordinated Notes indenture contain customary cross-default and/or cross-acceleration provisions.

10.    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 interest rates) primarily (a) by closely managing its cash flows from operating and investing activities and the amounts and sources of its debt obligations; (b) by assessing periodically the creditworthiness of its business partners; and (c) through the use of interest rate swaps by Sally Holdings. The Company uses interest rate swaps as part of its overall economic risk management strategy to add stability to the interest payments due in connection with its term loan obligations. Interest payments related to the term loan facility are impacted by changes in LIBOR. Interest rate swap agreements involve the periodic receipt by Sally Holdings of amounts based on a variable rate in ex change for Sally Holdings making

20

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

payments based on a fixed rate over the term of the interest rate swap agreements, without exchange of the underlying notional amount. As of December 31, 2010, the Company did not purchase or hold any derivative instruments for trading or speculative purposes.

Designated Cash Flow Hedges

In May 2008, Sally Holdings entered into two interest rate swap agreements with an aggregate notional amount of $300 million (each agreement with a notional amount of $150 million). These agreements expire in May 2012 and are designated and qualify as effective cash flow hedges, in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). Accordingly, changes in the fair value of these derivative instruments are recorded quarterly, net of income tax, in accumulated other comprehensive (loss) income (“OCI”) until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any hedge ineffectiveness, as this term is used in ASC 815, is recognized in interest expense in our consolidated statements of earnings. No hedge ineffectiveness on cash flow h edges was recognized during the three months ended December 31, 2010 or 2009. Please see the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information about the Company’s interest rate swap agreements.

Amounts reported in OCI related to interest rate swaps are reclassified into interest expense, as a yield adjustment, in the same period in which interest on the Company’s hedged variable-rate debt obligations affect earnings. Interest expense resulting from such reclassifications was $2.5 million and $2.6 million during the three months ended December 31, 2010 and 2009, respectively. During the twelve months ending December 31, 2011, the Company estimates that an additional $9.6 million, before income tax, of the amount reported in OCI will be reclassified into interest expense.

Non-designated Cash Flow Hedges

In November 2006, Sally Holdings entered into four interest rate swap agreements with an aggregate notional amount of $500 million. Interest rate swap agreements with an aggregate notional amount of $150 million expired in November 2008 and interest rate swap agreements with a notional amount of $350 million expired in November 2009. These interest rate swap agreements were not designated as hedges and, accordingly, the changes in fair value of these interest rate swap agreements, which were adjusted quarterly, were recorded in interest expense in our consolidated statements of earnings. Interest expense includes non-cash income of $2.4 million of marked-to-market adjustments related to these interest rate s waps for the three months ended December 31, 2009 with no comparable amount for the three months ended December 31, 2010.

The Company uses foreign currency options, including, at December 31, 2010, options with an aggregate notional amount of €8.1 million ($10.8 million, at the December 31, 2010 exchange rate) to manage the exposure to certain non-Euro currencies resulting from our Sinelco subsidiary’s purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro. These foreign currency option agreements expire ratably through September 2011.

In addition, at December 31, 2010, Sally Holdings held six foreign currency forward agreements which expired in January 2011. These derivative instruments were intended to mitigate our exposure to changes in foreign currency exchange rates in connection with certain intercompany balances not permanently invested. Three foreign currency forward agreements enabled Sally Holdings to sell, in the aggregate, approximately €6.7 million ($9.0 million, at the December 31, 2010 exchange rate) at the weighted average forward exchange rate of 1.3146. The other three foreign currency forward agreements enabled Sally Holdings to buy, in the aggregate, approximately $9.0 million Canadian dollars ($9.0 million, at the December 31, 2010 exchange rate) at the weighted average forward exchange rate of 1.0233.

The Company’s foreign currency option and forward agreements 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. For the three months ended December 31, 2010, selling, general and administrative expenses reflect net gains of $0.6 million related to these foreign currency options and forwards, including marked-to-market adjustments, with no comparable amount for the three months ended December 31, 2009.

21

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of December 31, 2010 (in thousands):

Tabular Disclosure of Fair Values of Derivative Instruments

	Asset Derivatives As of December 31, 2010			Liability Derivatives As of December 31, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Interest Rate Swaps	Other assets	$	—	Other liabilities	$	13,031
Total derivatives designated as hedging instruments		$	—		$	13,031
Derivatives not designated as hedging instruments:
Foreign Currency Options and Forwards	Prepaid expenses	$	454	Accrued liabilities	$	144
Total derivatives not designated as hedging instruments		$	454		$	144

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of September 30, 2010 (in thousands):

Tabular Disclosure of Fair Values of Derivative Instruments

	Asset Derivatives As of September 30, 2010			Liability Derivatives As of September 30, 2010
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Interest Rate Swaps	Other assets	$	—	Other liabilities	$	15,530
Total derivatives designated as hedging instruments		$	—		$	15,530
Derivatives not designated as hedging instruments:
Foreign Currency Options and Forwards	Prepaid expenses	$	119	Accrued liabilities	$	328
Total derivatives not designated as hedging instruments		$	119		$	328

22

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

The tables below present the effect of the Company’s derivative financial instruments on the statements of earnings for the three months ended December 31, 2010 and 2009 (in thousands):

Tabular Disclosure of the Effect of Derivative Instruments on the Statement
of Earnings for the

Three Months Ended December 31, 2010

Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion), net of tax		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	1,529	Interest expense	$	(2,545	)	Interest expense	$	—

Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Foreign Currency Options and Forwards	Selling, general and administrative expenses	$	609
Interest Rate Swaps	Interest expense	—
Total derivatives not designated as hedging instruments		$	609

Tabular Disclosure of the Effect of Derivative Instruments on the Statement of
Earnings for the

Three Months Ended December 31, 2009

Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion), net of tax		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Interest Rate Swaps	$	833	Interest expense	$	(2,559	)	Interest expense	$	—

Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Foreign Currency Options and Forwards	Selling, general and administrative expenses	$	—
Interest Rate Swaps	Interest expense	(24		)
Total derivatives not designated as hedging instruments		$	(24	)

23

Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Credit-risk-related Contingent Features

The agreements governing the Company’s interest rate swaps contain provisions pursuant to which the Company could be declared in default on its interest rate swap obligations in the event the Company defaulted under certain terms of the loan documents governing the Company’s ABL facility. As of December 31, 2010, the fair value of interest rate swaps in a liability position related to these agreements was $13.0 million and the Company was under no obligation to post and had not posted any collateral related to these agreements. If the Company breached any of these provisions, it would be required to settle its obligations under the agreements at their termination value of $13.3 million, including accrued interest and other termination costs.

The Company’s foreign operations expose the Company to fluctuations in foreign currency exchange rates and foreign interest rates. These fluctuations may impact, among other things, the amount of the Company’s future cash flows in terms of the functional currencies of the Company and certain of its foreign subsidiaries. The Company currently uses foreign currency options to manage the exposure to certain non-Euro currencies resulting from our Sinelco subsidiary’s purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro.

In addition, at December 31, 2010, Sally Holdings held six foreign currency forward agreements which expired in January 2011. These derivative instruments were intended to mitigate the Company’s exposure to changes in foreign currency exchange rates in connection with certain non-U.S.-dollar denominated intercompany balances not permanently invested. The Company’s functional currency is the U.S. dollar.

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 recent financial crisis affecting the banking systems and financial markets resulted in many well-known financial institutions becoming less creditworthy or having diminished liquidity which could expose us to an increased level of counterparty 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.

11.   Income Taxes

The Company and its subsidiaries file consolidated income tax returns in the U.S. federal jurisdiction and most state jurisdictions, as well as in various foreign jurisdictions.

The transactions separating us from Alberto-Culver were intended to qualify as a reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”) and a distribution eligible for non-recognition under Sections 355(a) and 361(c) of the Code. In connection with the share distribution of Alberto-Culver common stock in the Separation Transactions, we received: (i) a private letter ruling from the IRS; and (ii) an opinion of Sidley Austin LLP, counsel to Alberto-Culver, in each case, to the effect that the transactions qualify as a reorganization under Section 368(a)(1)(D) of the Code and a distribution eligible for non-recognition under Sections 355(a) and 361(c) of the Code. Please see the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information about the Separation Transactions.

The Company and Alberto-Culver entered into a tax allocation agreement as part of the Separation Transactions. The agreement provides generally that the Company is responsible for its pre-separation income tax liabilities, calculated on a stand-alone basis, and Alberto-Culver is responsible for the remainder. In the event additional U.S. federal income tax liability related to the period prior to the Separation Transactions was determined, the Company will be jointly and severally liable for these taxes, and there can be no assurance that Alberto-Culver would be able to fulfill its indemnification obligations to the Company under the tax allocation agreement if Alberto-Culver was determined to be responsible for these taxes thereunder.

The IRS has initiated an examination of the Company’s consolidated federal income tax returns for the fiscal years ended September 30, 2008 and 2007. The IRS had previously audited the Company’s consolidated federal income tax returns through the tax year ended September 30, 2006, thus our statute of limitations remains open from the year ended September 30, 2007 forward. Our foreign subsidiaries are impacted by various statutes of limitations, which are generally open from 2004 forward. Generally, states’ statutes in the United States are open for tax reviews from 2005 forward.

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Sally Beauty Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited)

12.   Business Combinations

On October 1, 2010, the Company acquired Aerial Company, Inc. (“Aerial”), an 82-store professional-only distributor of beauty products operating in 11 states in the midwestern United States, for approximately $79.0 million, subject to certain adjustments. The acquisition was accounted for using the purchase method of accounting and the results of operations of Aerial 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 $25.0 million (which is expected to be deductible for tax purposes) and intangible assets subject to amortization of $34.4 million were recorded as a result of this acquisition based on their preliminary estimated fair values. The acquisition was funded with borrowings in the amount of $78.0 million under the prior ABL facility and with cash from operations.

13.   Business Segments

The Company’s business is organized into two separate segments: (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to both salon professionals and retail customers and (ii) BSG, including its franchise-based business Armstrong McCall, a full service beauty supply distributor which offers professional brands of beauty products directly to salons through its own sales force and professional-only stores (including franchise stores) in generally exclusive geographical territories in North America, Puerto Rico and parts of Europe.

Sales between segments, which were eliminated in consolidation, were not material during the three months ended December 31, 2010 and 2009.  Segment data for the three months ended December 31, 2010 and 2009 is as follows (in thousands):

	Three Months Ended December 31,
	2010			2009
Net sales:
Sally Beauty Supply	$	481,006		$	438,315
BSG	312,558			266,536
Total net sales	$	793,564		$	704,851
Earnings before provision for income taxes:
Segment operating profit:
Sally Beauty Supply	$	83,551		$	71,106
BSG	35,142			25,597
Total segment operating profit	118,693			96,703
Unallocated corporate expenses (a)	(18,483		)	(21,161		)
Share-based compensation expense	(7,838		)	(4,988		)
Interest expense	(29,523		)	(28,480		)
Earnings before provision for income taxes	$	62,849		$	42,074

(a)   Unallocated expenses consist of corporate and shared costs.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section discusses management’s view of the financial condition, results of operations and cash flows of Sally Beauty and its consolidated subsidiaries. This section should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as well as the Risk Factors section contained in that Annual Report, and information contained elsewhere in this Quarterly Report, including the consolidated interim financial statements and condensed notes to those statements. 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,” included at the beginning of this Quarterly Report 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 For the Three Months Ended December 31, 2010:

·Our consolidated same store sales increased by 6.8% for the three months ended December 31, 2010;

·Our consolidated net sales for the three months ended December 31, 2010, increased by $88.7 million, or 12.6%, to $793.6 million compared to $704.9 million for the three months ended December 31, 2009;

·Our consolidated gross profit for the three months ended December 31, 2010, increased by $46.2 million, or 13.9%, to $379.4 million compared to $333.2 million for the three months ended December 31, 2009. As a percentage of net sales, gross profit increased by 50 basis points to 47.8% for the three months ended December 31, 2010 compared to 47.3% for the three months ended December 31, 2009;

·Our consolidated operating earnings for the three months ended December 31, 2010, increased by $21.8 million, or 30.9%, to $92.4 million compared to $70.6 million for the three months ended December 31, 2009. As a percentage of net sales, operating earnings increased by 160 basis points to 11.6% for the three months ended December 31, 2010 compared to 10.0% for the three months ended December 31, 2009;

·Net earnings increased by $14.8 million, or 56.7%, to $40.9 million for the three months ended December 31, 2010 compared to $26.1 million for the three months ended December 31, 2009. As a percentage of net sales, net earnings increased by 150 basis points to 5.2% for the three months ended December 31, 2010 compared to 3.7% for the three months ended December 31, 2009;

·Cash provided by operations increased by $8.5 million to $28.3 million for the three months ended December 31, 2010 compared to $19.8 million for the three months ended December 31, 2009; and

·On October 1, 2010, we acquired Aerial Company, Inc. (“Aerial”), an 82-store professional-only distributor of beauty products operating in 11 states in the midwestern United States, for approximately $79.0 million, subject to certain adjustments.

Overview

Description of Business

Through Sally Beauty Supply and BSG (which operates stores under the CosmoProf service mark), we operated a multi-channel platform of 3,993 stores and supplied 185 franchised stores as of December 31, 2010, principally in North America, South America and selected European countries. We are 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, with approximately 1,141 professional distributor sales consultants who sell directly to salons and salon professionals. We provide our customers with a wide variety of leading third-party branded and exclusive-label professional beauty supplies, including hair care products, styling appliances, skin and nail care products and other beauty items. Sally Beauty Supply stores target retail consumers and salon professiona ls, while BSG exclusively targets salons and salon professionals. For the three months ended December 31, 2010, our consolidated net sales and operating earnings were $793.6 million and $92.4 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 December 31, 2010, Sally Beauty Supply operated 3,034 company-operated retail stores, 2,438 of which are located in the U.S. (with the remainder in Canada, Mexico, Puerto Rico, Chile, Belgium, France, the United Kingdom and certain other countries in Europe) and supplied 27 franchised stores located outside the U.S. Sally Beauty Supply stores in the U.S. and Canada range in size between 1,500 square feet and 1,700 square feet and are primarily located in strip shopping centers. The product selection in Sally Beauty Supply stores ranges between 4,000 and 8,000 SKUs of beauty products and includes products for hair care, skin and nail care, beauty sundries and electrical appliances that target retail consumers and salon professionals. Sally Beauty Supply s tores 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

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outside the U.S. and Canada vary by marketplace. For the three months ended December 31, 2010, Sally Beauty Supply’s net sales and segment operating profit were $481.0 million and $83.6 million, respectively.

We believe BSG is the largest full-service distributor of professional beauty supplies in the U.S. As of December 31, 2010, BSG had 959 company-operated stores, supplied 158 franchised stores and had a sales force of approximately 1,141 professional distributor sales consultants selling exclusively to salons and salon professionals in all states in the U.S. and in portions of Canada, Puerto Rico, Mexico and certain European countries. BSG stores average approximately 2,700 square feet and are primarily located in secondary strip shopping centers. Through BSG’s large store base and sales force, BSG is able to access a significant portion of the highly fragmented U.S. salon channel. The product selection in BSG stores, ranging between 5,000 and 10,000 SKUs of beauty products, includes hair care and color, skin and nail care, beauty sundries and electrical appliances, and targets salons and salon professionals. BSG carries leading professional beauty product brands, intended for use in salons and for resale by the salon to consumers. Certain BSG products are sold under exclusive distribution agreements with suppliers, whereby BSG is designated as the sole distributor for a product line within certain geographic territories. For the three months ended December 31, 2010, BSG’s net sales and segment operating profit were $312.6 million and $35.1 million, respectively.

Industry and Business Trends

We operate within the large and growing U.S. professional beauty supply industry. Potential growth in the industry is expected to be driven by increases in hair color, hair loss prevention and hair styling products. 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 over 250,000 hair salons. 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 s upply 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 products.  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 than the leading third-party branded products and, accordingly, 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” i n Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·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 produ cts. We continuously adapt our marketing and merchandising initiatives for Sally Beauty Supply in an effort to expand our market reach or to respond to changing consumer preferences.  If we are unable to anticipate and respond to trends in the marketplace for beauty products and changing consumer demands, our business could suffer.

·International growth strategies.  A key element of our growth strategy depends on our ability to capitalize on growth in the international marketplace and to grow our current level of non-U.S. operations. For example, in December 2009, we acquired Sinelco Group BVBA (“Sinelco”), a wholesale distributor of professional beauty products located in Belgium with sales throughout Europe. In addition, in September

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2009, we acquired Intersalon, a leading distributor of premier beauty supply products with 16 stores located in Chile. These acquisitions furthered our expansion plans in Europe and Latin America, key targets of Sally Beauty Supply’s international growth initiative. We intend to continue to identify and evaluate non-U.S. acquisition and/or organic growth targets. 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 growth targets may be affected by business, legal, regulatory and economic risks. Please see “Risk Factors - We may not be able to successfully identify acquisition candidates and 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& #148; and “Our ability to conduct business in international marketplaces may be affected by legal, regulatory and economic risks” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·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 reviewing opportunities to shift business within the professional beauty products channel 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 wel l 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, as we announced in the fiscal year 2007, our largest supplier, L’Oreal, moved a material amount of revenue out of the BSG nationwide distribution network and into competitive regional distribution networks. More recently, L’Oreal acquired distributors competing with BSG in the southeastern and west coast of the U.S. and, as a result, directly competes with BSG in certain geographic areas. If L’Oreal acquired other distributors or suppliers that conduct significant business with BSG, we could lose related revenue. There can be no assurance that there will not be further loss of rev enue over time by BSG (including within its franchise-based business) due to potential losses of additional products (both from L’Oreal and from other suppliers) as well as from the increased competition from L’Oreal-affiliated distribution networks. 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” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·Relationships with suppliers.  Sally Beauty Supply/BSG and their 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, these relationships are subject to change from time to time (including the expansion or loss of distribution rights in various geographies and the addition or loss of product lines). Since we purchase products from many manufacturers on an at-will basis, under contracts which can generally be terminated without cause upon 90& nbsp;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. For example, in 2007 Farouk Systems, Inc. filed an action seeking a declaratory judgment that it was entitled to terminate a long-term distribution agreement with Armstrong McCall. In 2010 that matter was settled and BSG now sells Farouk products in some territories. Changes in our relationships with suppliers occur often and could positively or negatively impact our net sales and operating profits. Although we focus o n developing new revenue and cost management initiatives to mitigate the negative effects resulting from unfavorable changes in our supplier relationships, there can be no assurance that our efforts will continue to completely offset the loss of these or other distribution rights. Please see “Risk Factors — We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

We expect to continue to expand our product line offerings and to gain additional distribution rights over time through either further negotiation with suppliers or by strategic acquisitions of existing distributors.

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Although we are focused on developing new revenue and cost management initiatives, there can be no assurance that our efforts will partially or completely offset any potential loss of distribution rights in the future. Please see “Risk Factors —We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·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, salons, mass merchandisers, drug stores and supermarkets, as well as sellers on the internet and 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 interne t 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” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·Economic conditions. We appeal to a wide demographic consumer profile and offer a broad selection of beauty products sold directly to retail consumers and salons and salon professionals. 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 i ncreases 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” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·Controlling expenses. Another important aspect of our business is our ability to control costs, especially in our BSG business segment, by right-sizing the business and maximizing the efficiency of our structure. In 2009, we completed implementation of an approximately $22.0 million capital spending program to consolidate warehouses and reduce administrative expenses related to BSG’s distribution network which has resulted in annualized cost savings of at least $14.0 million beginning in the fiscal year 2010. Please see “Risk Factors — We are not certain that our ongoing cost control plans will continue to be successful” in It em 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·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. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for international stores costing less or substantially more depending upon the marketplace. 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 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” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

·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 have recently upgraded our financial reporting systems in the U.S. and are in the process of designing and implementing a standardized ERP system internationally over the next few years. In addition, we are currently implementing a three-year point-of-sale system upgrade program in a number of our divisions (including 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),

29

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. There can be no assurance that the time and resources our management will need to devote to these upgrades, service outages or delays due to the installation of any new or upgraded technology (and customer issues therewith), or the impact on the reliability of our data from any new or upgraded technology will not have a material adverse effect on our 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” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

Significant Recent Acquisitions

On October 1, 2010, we acquired Aerial, an 82-store professional-only distributor of beauty products operating in 11 states in the midwestern United States, for approximately $79.0 million, subject to certain adjustments. The acquisition was accounted for using the purchase method of accounting and the results of operations of Aerial 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 $25.0 million (which is expected to be deductible for tax purposes) and intangible assets subject to amortization of $34.4 million were recorded as a result of this acquisition based on their preliminary estimated fair values. The acquisition was funded with borrowings in the amount of $78.0 million under our ABL facility and with cash from operatio ns. Please see Note 2 of the “Notes to Consolidated Financial Statements” in Item 8 - “Financial Statements and Supplementary Data” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information about the Company’s accounting policies in connection with business combinations.

Our Separation from Alberto-Culver

In November 2006, Sally Holdings, Inc. was converted to a Delaware limited liability company, was renamed “Sally Holdings LLC” and became an indirect wholly-owned subsidiary of Sally Beauty in connection with our separation from Alberto-Culver. In this Quarterly Report on Form 10-Q, we refer to these transactions as the Separation Transactions. Sally Beauty was formed in June 2006 and became the accounting successor company to Sally Holdings, Inc. upon the completion of the Separation Transactions.  Please see the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for more information about the Separation Transactions.

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.

Interest Rate Swap Agreements

The Company is exposed to a wide variety of economic risks, including risks arising from changing market interest rates. The Company manages its exposure to certain economic risks (including liquidity, credit risk and changes in interest rates) primarily (a) by closely managing its cash flows from operating and investing activities and the amounts and sources of its debt obligations; (b) by assessing periodically the creditworthiness of its business partners; and (c) through the use of interest rate swaps by Sally Holdings. The Company uses interest rate swaps as part of its overall economic risk management strategy to add stability to the interest payments due in connection with its term loan obligations. Interest payments related to our term loan are impacted by changes in LIBOR. Interest rate swap agreements involve the periodic receipt by Sally Holdings of amounts based on a variable rate in exchange for Sally Holdings making payments based on a fixed rate over the term of the agreements without exchange of the underlying notional amount.

In November 2006, Sally Holdings entered into four interest rate swap agreements with an aggregate notional amount of $500 million. Interest rate swap agreements with an aggregate notional amount of $150 million expired in November 2008 and agreements with a notional amount of $350 million expired in November 2009. These interest rate swap agreements were not designated and did not qualify as hedges and, therefore, the changes in fair value of

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these agreements, which were adjusted quarterly, were recorded in interest expense in our consolidated statements of earnings.

Additionally, in May 2008, Sally Holdings entered into two interest rate swap agreements with an aggregate notional amount of $300 million. These interest rate swap agreements expire in May of 2012 and are designated and qualify as effective cash flow hedges, consistent with ASC 815. Accordingly, adjustments to reflect the change in the fair values of these interest rate swap agreements, which are adjusted quarterly, are recorded in accumulated other comprehensive (loss) income, net of tax, until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any ineffectiveness is recognized in interest expense in the Company’s consolidated statements of earnings. Please see “Item 3 — Quantitative and Qualitative Disclosures about Market Risk—Interest rate risk 8; contained elsewhere in this Quarterly Report and Note 15 of the “Notes to Consolidated Financial Statements” in Item 8 - “Financial Statements and Supplementary Data” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information about the Company’s interest swap agreements.

Foreign Currency Option and Forward Contracts

The Company is exposed to potential gains or losses from foreign currency fluctuations affecting its net investments in subsidiaries and earnings denominated in foreign currencies. The Company’s primary exposures are to changes in exchange rates for the U.S. dollar versus the British pound sterling, the Canadian dollar, the Euro, the Mexican peso, and the Chilean peso. The Company’s various foreign currency exposures at times offset each other providing a natural hedge against foreign currency risk. In connection with our remaining exposure to foreign currency fluctuations, we may from time to time use foreign currency derivative instruments, such as foreign currency option contracts and foreign currency forward contracts, to manage such risk.

At December 31, 2010, Sally Holdings held six foreign currency forward agreements which expired in January of 2011. Three foreign currency forward agreements enabled Sally Holdings to sell, in the aggregate, approximately €6.7 million ($9.0 million, at the December 31, 2010 exchange rate) at the weighted average forward exchange rate of 1.3146. The other three foreign currency forward agreements enabled Sally Holdings to buy, in the aggregate, approximately $9.0 million Canadian dollars ($9.0 million, at the December 31, 2010 exchange rate) at the weighted average forward exchange rate of 1.0233. These foreign currency forward agreements were not designated as hedges and did not meet the hedge accounting requirements of ASC 815. Accordingly, the changes in the fair value of these derivative instruments, which were adjusted quarterly, were recorded in selling, general and administrative expenses in our consolidated statements of earnings.

In October 2010, the Company entered into certain foreign currency option agreements to manage the exposure to certain non-Euro currencies resulting from our Sinelco subsidiary’s purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro. As such, at December 31, 2010, the Company held foreign currency options with an aggregate notional amount of €8.1 million ($10.8 million, at the December 31, 2010 exchange rate). These foreign currency options expire ratably through September 2011, are not designated as hedges and do not meet the hedge accounting requirements of ASC 815. Accordingly, the changes in the fair value of these derivative instruments, which are adjusted quarterly, are recorded in selling, general and administrative expenses in our consolidated statements of earnings.

Please see “Item 3 — Quantitative and Qualitative Disclosures about Market Risk—Interest rate risk” contained elsewhere in this Quarterly Report and Note 15 of the “Notes to Consolidated Financial Statements” in Item 8 - “Financial Statements and Supplementary Data” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information about the Company’s foreign currency option and forward agreements.

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Results of Operations

The following table shows the condensed results of operations of our business for the three months ended December 31, 2010 and 2009 (in thousands):

	Three Months Ended December 31,
	2010				2009
Net sales	$	793,564	100.0	%	$	704,851	100.0	%
Cost of products sold and distribution expenses	414,173		52.2	%	371,637		52.7	%
Gross profit	379,391		47.8	%	333,214		47.3	%
Total other operating costs and expenses	287,019		36.2	%	262,660		37.3	%
Operating earnings	92,372		11.6	%	70,554		10.0	%
Interest expense	29,523		3.7	%	28,480		4.0	%
Earnings before provision for income taxes	62,849		7.9	%	42,074		6.0	%
Provision for income taxes	21,900		2.7	%	15,948		2.3	%
Net earnings	$	40,949	5.2	%	$	26,126	3.7	%

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):

	Three Months Ended December 31,
	2010			2009
Net sales:
Sally Beauty Supply	$	481,006		$	438,315
BSG	312,558			266,536
Consolidated	$	793,564		$	704,851
Gross profit	$	379,391		$	333,214
Gross profit margin	47.8		%	47.3		%
Selling, general and administrative expenses	$	272,908		$	250,771
Depreciation and amortization	$	14,111		$	11,889
Earnings before provision for income taxes:
Segment operating profit:
Sally Beauty Supply	$	83,551		$	71,106
BSG	35,142			25,597
Segment operating profit	118,693			96,703
Unallocated expenses	(18,483		)	(21,161		)
Share-based compensation expense	(7,838		)	(4,988		)
Operating earnings	92,372			70,554
Interest expense	(29,523		)	(28,480		)
Earnings before provision for income taxes	$	62,849		$	42,074
Segment operating profit margin:
Sally Beauty Supply	17.4		%	16.2		%
BSG	11.2		%	9.6		%
Consolidated operating profit margin	11.6		%	10.0		%
Number of stores at end-of-period (including franchises):
Sally Beauty Supply	3,061			2,938
BSG	1,117			997
Consolidated	4,178			3,935
Same store sales growth(a)
Sally Beauty Supply	6.4		%	3.7		%
BSG	7.8		%	4.3		%
Consolidated	6.8		%	3.8		%

(a)Same stores are defined as company-operated stores that have been open for at least 14 months as of the last day of a month. Our same store sales calculation includes internet-based sales and store expansions, if applicable, but does not generally include sales from sores relocated.

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The Three Months Ended December 31, 2010 compared to the Three Months Ended December 31, 2009

The table below presents net sales, gross profit and gross profit margin data for each reportable segment (dollars in thousands).

	Three Months Ended December 31,
	2010			2009			Increase
Net sales:
Sally Beauty Supply	$	481,006		$	438,315		$	42,691		9.7	%
BSG	312,558			266,536			46,022			17.3	%
Consolidated net sales	$	793,564		$	704,851		$	88,713		12.6	%
Gross profit:
Sally Beauty Supply	$	255,780		$	230,264		$	25,516		11.1	%
BSG	123,611			102,950			20,661			20.1	%
Consolidated gross profit	$	379,391		$	333,214		$	46,177		13.9	%
Gross profit margin:
Sally Beauty Supply	53.2		%	52.5		%	0.7		%
BSG	39.5		%	38.6		%	0.9		%
Consolidated gross profit margin	47.8		%	47.3		%	0.5		%

Net Sales

Consolidated net sales increased by $88.7 million, or 12.6%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. Company-operated stores that have been open for at least 14 months contributed an increase in consolidated net sales of approximately $54.9 million, or 7.8%, sales from stores that have been open for less than 14 months contributed an increase of approximately $6.9 million, or 1.0%, and sales through our BSG distributor sales consultants contributed an increase of approximately $10.5 million, or 1.5%. In addition, incremental sales from businesses acquired in the preceding 12 months were approximately $13.4 million, or 1.9%, more for the three months ended December 31, 2010, than for the three months ended December 31, 2009. Other sales channels (including sales through our BSG franchise-based businesses and our Sally Beauty Supply n on-store sales), in the aggregate, contributed an increase of $3.1 million, or 0.4%, compared to the three months ended December 31, 2009. Consolidated net sales for the three months ended December 31, 2010, are inclusive of approximately $2.1 million in net negative impact from changes in foreign exchange rates.

Sally Beauty Supply.  Net sales for Sally Beauty Supply increased by $42.7 million, or 9.7%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009.  In the Sally Beauty Supply segment, company-operated stores that have been open for at least 14 months contributed an increase in segment net sales of approximately $32.2 million, or 7.3%. In addition, incremental sales from businesses acquired in the preceding 12 months were approximately $9.0 million, or 2.1%, more for the three months ended December 31, 2010, than for the three months ended December 31, 2009. Other sales channels (including sales from stores that have been open for less than 14 months and non-store sales), in the aggregate, contributed an increase of $1.5 million, or 0.3%, compared to the three month s ended December 31, 2009. Net sales for Sally Beauty Supply for the three months ended December 31, 2010, are inclusive of approximately $3.2 million in net negative impact from changes in foreign exchange rates.

Beauty Systems Group.  Net sales for BSG increased by $46.0 million, or 17.3%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. In the BSG segment, company-operated stores that have been open for at least 14 months contributed an increase in segment net sales of

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approximately $22.7 million, or 8.5%, sales from stores that have been open for less than 14 months contributed an increase of approximately $6.4 million, or 2.4%, and sales through our distributor sales consultants contributed an increase of approximately $10.5 million, or 3.9%. Other sales channels (including sales through our franchise-based businesses and incremental sales from businesses acquired in the preceding 12 months), in the aggregate, contributed an increase of $6.4 million, or 2.4%, compared to the three months ended December 31, 2009. Net sales for BSG for the three months ended December 31, 2010, are inclusive of approximately $1.1 million in net positive impact from changes in foreign exchange rates.

Gross Profit

Consolidated gross profit increased by $46.2 million, or 13.9%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009, principally due to higher sales volume and improved gross margins in both business segments as more fully described below.

Sally Beauty Supply. Sally Beauty Supply’s gross profit increased by $25.5 million, or 11.1%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009, principally as a result of higher sales volume and improved gross margins.  Sally Beauty Supply’s gross profit as a percentage of net sales increased to 53.2% for the three months ended December 31, 2010, compared to 52.5% for the three months ended December 31, 2009. This increase was the result of a shift in product and customer mix (including a year-over-year increase in sales of exclusive-label products and other higher-margin products) and continued benefits from low-cost sourcing initiatives.

Beauty Systems Group.  BSG’s gross profit increased by $20.7 million, or 20.1%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009, principally as a result of higher sales volume and improved gross margins. BSG’s gross profit as a percentage of net sales increased to 39.5% for the three months ended December 31, 2010, compared to 38.6% for the three months ended December 31, 2009. This increase was principally the result of a favorable change in the sales mix across the business.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses increased by $22.1 million, or 8.8%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. This increase was 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, as well as higher share-based compensation expense ($2.9 million) and higher advertising expenses in the Sally Beauty Supply segment ($2.1 million), partially offset by lower corporate costs as more fully discussed in “Unallocated Expenses” below. Selling, general and administrative expenses, as a percentage of net sales, were 34.4% for the three months ended December 31, 2010, compared to 35.6% for the three months ended December 31, 2009.

Depreciation and Amortization

Consolidated depreciation and amortization was $14.1 million for the three months ended December 31, 2010, compared to $11.9 million for the three months ended December 31, 2009. This increase reflects the incremental depreciation and amortization expenses associated with businesses acquired in the preceding 12 months and related to capital expenditures made during that period (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):

	Three Months Ended December 31,
	2010			2009			Increase (Decrease)
Operating Earnings:
Segment operating profit:
Sally Beauty Supply	$	83,551		$	71,106		$	12,445		17.5	%
BSG	35,142			25,597			9,545			37.3	%
Segment operating profit	118,693			96,703			21,990			22.7	%
Unallocated expenses	(18,483		)	(21,161		)	(2,678		)	(12.7	)%
Share-based compensation expense	(7,838		)	(4,988		)	2,850			57.1	%
Operating earnings	$	92,372		$	70,554		$	21,818		30.9	%

Consolidated operating earnings increased by $21.8 million, or 30.9%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The increase in consolidated operating earnings was due primarily to an increase in the operating profits of both segments and lower unallocated corporate expenses, partially offset by higher share-based compensation expense, as more fully discussed below. Operating earnings, as a percentage of net sales, increased to 11.6% for the three months ended December 31, 2010, compared to 10.0% for the three months ended December 31, 2009.

Sally Beauty Supply.  Sally Beauty Supply’s segment operating earnings increased by $12.4 million, or 17.5%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009.  The increase in Sally Beauty Supply’s segment operating earnings was primarily a result of increased sales volume and improved gross margins, partially offset by higher advertising costs of approximately $2.1 million and the incremental costs related to approximately 123 additional company-operated stores (stores opened or acquired during the past twelve months) operating during the three months ended December 31, 2010. Segment operating earnings, as a percentage of net sales, were 17.4% for the three months ended December 31, 2010, compared to 16.2% for the three months ended December 31, 2009. The increase in Sally Beauty Supply’s operating earnings as a percentage of segment net sales, was primarily a result of gross margin improvements.

Beauty Systems Group.  BSG’s segment operating earnings increased by $9.5 million, or 37.3%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. Segment operating earnings, as a percentage of net sales, increased to 11.2% for the three months ended December 31, 2010, compared to 9.6% for the three months ended December 31, 2009. The increase in BSG operating earnings was primarily a result of gross margin improvements, the incremental operating earnings of businesses acquired and stores opened, and to ongoing cost reduction initiatives.

Unallocated Expenses. Unallocated expenses, which represent corporate costs (such as payroll, employee benefits and travel expenses for corporate staff, certain professional fees and corporate governance expenses) that have not been charged to our operating segments, decreased by $2.7 million, or 12.7%, for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. This decrease was due primarily to lower employee compensation-related expenses, professional fees and other corporate expenses of approximately $2.0 million. This decrease also reflects a favorable change in foreign currency transactions of approximately $0.7 million, resulting principally from intercompany notes not permanently invested and related foreign currency hedges.

Share-based Compensation Expense.Total compensation cost charged against income for share-based compensation arrangements increased by $2.9 million to $7.8 million for the three months ended December 31, 2010, compared to $5.0 million for the three months ended December 31, 2009. This increase was mainly due to the incremental expenses related to, as well as the higher fair value at the grant date of, stock option awards during the three months ended December 31, 2010, compared to stock option awards during the three months ended December 31, 2009.

Interest Expense

Interest expense increased by $1.0 million to $29.5 million for the three months ended December 31, 2010, compared to $28.5 million for the three months ended December 31, 2009.  The increase in interest expense was primarily attributable to non-cash income of $2.4 million of marked-to-market adjustments for certain interest rate swaps (please see Note 10 of the Condensed Notes to Consolidated Financial Statements contained elsewhere in this

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Quarterly Report on Form 10-Q) in the three months ended December 31, 2009 with no comparable amount in the three months ended December 31, 2010, and unamortized deferred financing costs of approximately $1.6 million expensed in connection with our November 2010 termination of our previous ABL facility, partially offset by lower losses from interest rate swaps and lower outstanding principal balances on our senior term loans (please see “Liquidity and Capital Resources” below).

Provision for Income Taxes

The provision for income taxes was $21.9 million and $15.9 million, and the effective income tax rate was 34.8% and 37.9%, for the three months ended December 31, 2010 and 2009, respectively. The decrease in the effective tax rate was primarily due to tax benefits associated with certain intercompany transactions that resulted in the release of a valuation allowance during the period ended December 31, 2010, compared to the period ended December 31, 2009.

The annual effective tax rate for the fiscal year 2011 is currently expected to be approximately 38%, versus a comparable actual tax rate for the full fiscal year 2010 of 36.9%.

Net Earnings

As a result of the foregoing, consolidated net earnings increased by $14.8 million, or 56.7%, to $40.9 million for the three months ended December 31, 2010, compared to $26.1 million for the three months ended December 31, 2009. Net earnings, as a percentage of net sales, were 5.2% for the three months ended December 31, 2010, compared to 3.7% for the three months ended December 31, 2009.

Financial Condition

December 31, 2010 Compared to September 30, 2010

Working capital (current assets less current liabilities) decreased by $16.0 million to $371.1 million at December 31, 2010, compared to $387.1 million at September 30, 2010. The ratio of current assets to current liabilities was 1.85 to 1.00 at December 31, 2010, compared to 1.95 to 1.00 at September 30, 2010. The decrease in working capital reflects an increase of $13.6 million in current assets and an increase of $29.6 million in current liabilities.  The increase in current assets as of December 31, 2010, includes an increase of $27.7 million in inventory levels and an increase of $7.0 million in other receivables as discussed below, partially offset by a reduction of $21.1 million in cash and cash equivalents (please see “Liquidity and Capital Resources” below).  The increase in current liabilities includes an increase of $45.3 million in current maturities of l ong-term debt and an increase of $16.1 million in income taxes payable, partially offset by a decrease of $32.6 million in accrued liabilities as discussed below.

Inventory increased by $27.7 million to $632.0 million at December 31, 2010, compared to $604.4 million at September 30, 2010 due primarily to the effect of stores opened and businesses acquired in the preceding 12 months, and the effect of foreign currency translation adjustments. Other receivables increased by $7.0 million to $36.5 million at December 31, 2010, compared to $29.5 million at September 30, 2010 due primarily to vendor rebates accrued and the effect of businesses acquired.

Income taxes payable increased by $16.1 million to $28.3 million at December 31, 2010, compared to $12.2 million at September 30, 2010, due primarily to increased earnings and the effect of businesses acquired. Accrued liabilities decreased by $32.6 million to $134.9 million at December 31, 2010, compared to $167.5 million at September 30, 2010, due primarily to the timing of payments of interest on our long-term debt and employee compensation and compensation-related expenses.

Long-term debt, including current portion, increased by $42.8 million to $1,605.4 million at December 31, 2010, compared to $1,562.6 million at September 30, 2010 due primarily to borrowings under our ABL facility in connection with the October 1, 2010 acquisition of Aerial (Please see “Liquidity and Capital Resources” below).

Total stockholders’ deficit, for the three months ended December 31, 2010, decreased by $54.4 million primarily as a result of net earnings of $40.9 million, an increase in additional paid-in capital of $11.2 million, principally resulting from share-based compensation expense and the exercise of stock options, and a decrease in accumulated other comprehensive loss of $2.2 million, net of income tax.

Liquidity and Capital Resources

We broadly define liquidity as our ability to generate sufficient cash flow from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity

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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. Please see our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information on our liquidity and capital resources.

Following the completion of the Separation Transactions, we are highly leveraged and a substantial portion of our liquidity needs will arise from debt service on indebtedness incurred primarily in connection with the Separation Transactions and from funding the costs of operations, working capital and capital expenditures. As a holding company, we depend on our subsidiaries, including Sally Holdings, to distribute funds to us so that we may pay our obligations and expenses. Please see “Risk Factors—Risks Relating to Our Business,” and “—Risks Relating to Our Substantial Indebtedness” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

During the fiscal year 2010, the Company prepaid in full the borrowings under the term loan A facility. Borrowings under the term loan B facility may be prepaid at the option of Sally Holdings at any time without premium or penalty and are subject to mandatory prepayment in an amount equal to 50% of excess cash flow (as defined in the agreement governing the term loan facilities) for any fiscal year unless a specified leverage ratio is met. No such prepayment is expected to be due in the fiscal year 2011. Amounts paid pursuant to said provision may be applied, at the option of Sally Holdings, against minimum loan repayments otherwise required of it over the twelve-month period following any such payment under the terms of the loan agreement.

In November 2010, we entered into a new $400 million, five-year revolving credit facility (the “new ABL facility” or the “ABL facility”) and replaced our prior ABL facility (the “prior ABL facility”). The new ABL facility contains restrictions and limitations similar to those contained in the prior ABL facility and, similar to the prior ABL facility, borrowings under the new ABL facility are secured by substantially all of our assets. The terms of the new ABL facility contain a commitment fee of 0.50% on the unused portion of the facility. Borrowings under the term loan facilities and the ABL facility are secured by substantially all of our assets, those of Sally Investment Holdings LLC, a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings, those of our domestic subsidiaries and, in the case of the ABL facility, those of our Canadian subsidiaries a nd a pledge of certain intercompany notes. During the three months ended December 31, 2010, in connection with our termination of our prior ABL facility, we expensed approximately $1.6 million in unamortized deferred financing costs.

Based upon the current level of operations and anticipated growth, we anticipate that existing cash balances, funds expected to be generated by operations and funds available under the ABL facility will be sufficient to meet our working capital requirements and to finance anticipated capital expenditures and potential acquisitions over the next 12 months.

There can be no assurance that our business will generate sufficient cash flows from operations, that anticipated net sales growth 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 our Annual Report on Form 10-K for the year ended September 30, 2010.

We utilize our ABL facility for the issuance of letters of credit, as well as to manage normal fluctuations in operational cash flow. In that regard, we may from time to time draw funds under the revolving credit facility for general corporate purposes including acquisitions and interest payments due on our indebtedness.  The funds drawn on individual occasions during the three months ended December 31, 2010 have varied in amounts of up to $78.0 million, with total amounts outstanding ranging from $43.2 million up to $102.5 million. During the three months ended December 31, 2010, the weighted average interest rate on our borrowings under the ABL facility was 3.2%. The amounts drawn are generally paid down with cash provided by our operating activities.

As of December 31, 2010, borrowings outstanding under our ABL facility were $43.2 million and Sally Holdings had $290.4 million available for additional borrowings under the ABL facility, subject to borrowing base limitations, as reduced by outstanding letters of credit.

We may from time to time repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases of our notes, prepayments of our term loans or other retirements or refinancing of outstanding debt. The amount of debt that may be repurchased or otherwise retired, if any, would be decided upon at the sole discretion of our Board of Directors and

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will depend on market conditions, trading levels of the Company’s debt from time to time, the Company’s cash position and other considerations.

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. The agreements and instruments governing the debt of Sally Holdings and its subsidiaries contain material limitations on their ability to pay dividends and other restricted payments to us which, in turn, constitute material limitations on our ability to pay dividends and other payments to our stockholders.

Under the agreements and indentures governing the term loan facilities and the notes, Sally Holdings may not make certain restricted payments to us if a default then exists under the credit agreement or the indentures or if its consolidated interest coverage ratio is less than 2.0 to 1.0 at the time of the making of such restricted payment.  As of December 31, 2010, its consolidated interest coverage ratio exceeded 2.0 to 1.0.  Further, the aggregate amount of restricted payments it is able to make is limited pursuant to various baskets as calculated pursuant to the credit agreement and indentures.

Under our new ABL facility, we may pay dividends and make other equity distributions if availability under the facility exceeds certain thresholds.  For dividends and distributions up to $30.0 million during each fiscal year, borrowing availability must exceed the lesser of $80.0 million or 20% of the borrowing base for 45 days prior to such dividend and distribution.  For dividends in excess of that amount, we must maintain that same availability and our fixed charge coverage ratio must exceed 1.10 to 1.00. As of December 31, 2010, we met all of these conditions. As of December 31, 2010, the net assets of our consolidated subsidiaries that were unrestricted from transfer under our credit arrangements totaled $335.3 million, subject to certain adjustments. The ABL facility and the senior term loan facilities, as well as the Company’s 9.25% Senior Notes indenture and its 10.5 % Senior Subordinated Notes indenture contain customary cross-default and/or cross-acceleration provisions.

On October 1, 2010, we acquired Aerial, an 82-store professional-only distributor of beauty products operating in 11 states in the midwestern United States, for approximately $79.0 million, subject to certain adjustments. The acquisition was accounted for using the purchase method of accounting and the results of operations of Aerial 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 preliminary estimated fair values at the acquisition date. The acquisition was funded with borrowings in the amount of $78.0 million under our ABL facility and with cash from operations. At December 31, 2010, borrowings under our ABL facility were $43.2 million and we currently intend to repay these funds in the normal course of business in the next 12 months.

Historical Cash Flows

Our primary source of cash has been from funds provided by operating activities and borrowings under our ABL facility for the three months ended December 31, 2010 and 2009. Historically, our primary use of cash has been for acquisitions, capital expenditures and repayments of debt. The following table shows our sources and uses of funds for the three months ended December 31, 2010 and 2009 (in thousands):

	Three Months Ended December 31,
	2010			2009
Net cash provided by operating activities	$	28,270		$	19,790
Net cash used by investing activities	(93,925		)	(42,456		)
Net cash provided (used) by financing activities	44,617			(403		)
Effect of foreign exchange rates on cash and cash equivalents	(75		)	411
Net decrease in cash and cash equivalents	$	(21,113	)	$	(22,658	)

Net Cash Provided by Operating Activities

Net cash provided by operating activities (which excludes cash used for acquisitions completed during the period) during the three months ended December 31, 2010 increased by $8.5 million to $28.3 million, compared to $19.8 million during the three months ended December 31, 2009. The increase was primarily due to an improvement in earnings of approximately $14.8 million for the three months ended December 31, 2010 compared to the three months ended December 31, 2009, changes in income taxes payable of approximately $5.4 million and changes in other receivables of approximately $5.8 million, partially offset by changes in accounts payable and accrued liabilities of approximately $13.5 million and changes in accounts receivable of approximately $7.6 million.

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Net Cash Used by Investing Activities

Net cash used by investing activities during the three months ended December 31, 2010 increased by $51.5 million to $93.9 million, compared to $42.5 million during the three months ended December 31, 2009.  This increase was primarily due to an increase of $48.4 million in cash used for acquisitions, net of cash acquired.

Net Cash Provided (Used) by Financing Activities

Net cash provided (used) by financing activities changed by $45.0 million to cash provided of $44.6 million during the three months ended December 31, 2010, compared to cash used of $0.4 million during the three months ended December 31, 2009. This change was primarily due to net borrowings under our ABL facility primarily in connection with the October 1, 2010 acquisition of Aerial (please see “Liquidity and Capital Resources” above), a change in proceeds from exercises of stock options of $2.9 million and a change in book cash overdraft of $2.8 million, partially offset by debt issuance costs of $4.7 million paid during the three months ended December 31, 2010.

Capital Requirements

During the three months ended December 31, 2010, capital expenditures were $15.2 million. For fiscal year 2011, we anticipate total capital expenditures in the range of approximately $50.0 million to $55.0 million, excluding acquisitions. We expect that capital expenditures will be primarily for the addition of new stores and the remodeling, expansion or relocation of existing stores in the ordinary course of our business as well as certain corporate projects.

Contractual Obligations

There have been no material changes outside the ordinary course of business in any of our contractual obligations since September 30, 2010.

Off-Balance Sheet Financing Arrangements

At December 31, 2010 and September 30, 2010, 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 $16.3 million and $14.5 million at December 31, 2010 and September 30, 2010, respectively.

Inflation

We believe that inflation currently does not have a material effect on our results of operations.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements. Actual results may differ from these estimates. We believe these estimates and assumptions are reasonable. We consider accounting policies to be critical when they require us to make assumptions about matters that are highly uncertain at the time the accounting estimate is made and when different estimates that our management reasonably could have used have a material effect on the presentation of our financial condition, changes in financial condition or results of operations.

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, include but are not limited to the valuation of inventory, vendor concessions, retention of risk, income taxes, assessment of long-lived assets and certain intangible assets for impairment and share-based payments. There have been no material changes to our critical accounting policies, estimates or assumptions since September 30, 2010.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) revised the accounting standards for business combinations. This new standard, currently contained in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, (“ASC 805”), among other things, generally requires that an acquirer recognize the assets acquired and liabilities assumed measured at their “full fair values” on the acquisition date. This practice replaced the practice, under predecessor accounting standards, of allocating the cost of an acquisition to the individual assets acquired and liabilities assumed based on their relative estimated fair values. This new standard further requires that acquisition-related costs be recognized separately from the related acquisition. The Company adopted this standard effective October 1, 2009. Expenses related to acquisition s are included in selling, general and

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administrative expenses and, for the three months ended December 31, 2010 and 2009, were $0.1 million and $0.4 million, respectively.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 which amended ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) as it relates to certain disclosures of fair value measurements. This amendment requires, among other things, (a) disclosure of the sensitivity of an entity’s fair value measurements using Level 3 inputs to changes in such inputs, (b) a reconciliation of changes in such fair value measurements and (c) disclosure of transfers between Level 1 and Level 2 of the hierarchy, if any, and the reasons for such transfers. The Company adopted this amendment during the second quarter of its fiscal year 2010 and its adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

We have not yet adopted and are currently assessing any potential effect of the following pronouncements on our consolidated financial statements:

In December 2010, the FASB issued ASU No. 2010-28 which amended ASC 350, Intangibles-Goodwill and Other. This amendment modifies the goodwill impairment test for reporting units with a zero or negative carrying amount, by requiring that Step 2 of the goodwill impairment test be performed for such reporting units if it is more likely than not that an impairment of goodwill exists. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early application is not permitted.

In December 2010, the FASB issued ASU No. 2010-29 which amended ASC 805. This amendment requires that a public company that enters into business combinations that are material on an individual or aggregate basis disclose certain pro forma information for the current and the immediately preceding fiscal years. This amendment also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to such business combination or business combinations. This amendment is effective prospectively for business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2010. Early application is permitted.

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Item 3.  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.

Foreign currency exchange rate risk

We are exposed to potential gains or losses from foreign currency fluctuations affecting our net investments in subsidiaries and earnings denominated in foreign currencies. Our primary exposures are to changes in exchange rates for the U.S. dollar versus the British pound sterling, the Canadian dollar, the Euro, the Chilean peso, and the Mexican peso. Our various foreign currency exposures at times offset each other providing a natural hedge against foreign currency risk. For the fiscal years 2010, 2009 and 2008, approximately 18%, 16% and 18%, respectively, of our net sales were made in currencies other than the U.S. dollar. For the three months ended December 31, 2010, our consolidated net sales reflect approximately $2.1 million in negative impact from changes in foreign currency exchange rates and other comprehensive income reflects $0.7 million in foreign currency translation adjustments. Fluctua tions 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 consolidated net sales by approximately 1.8% in the three months ended December 31, 2010 and would have impacted consolidated net assets by 2.4% at December 31, 2010, without considering the effect of any foreign currency option or forward agreements we may have from time to time.

We use foreign currency options, including, at December 31, 2010, options with an aggregate notional amount of €8.1 million ($10.8 million, at the December 31, 2010 exchange rate), to manage the exposure to certain non-Euro currencies resulting from Sinelco’s purchases of merchandise from third-party suppliers. Sinelco’s functional currency is the Euro. These foreign currency option agreements expire ratably through September of 2011.

In addition, at December 31, 2010, Sally Holdings held six foreign currency forward agreements which expired in January of 2011. These agreements were intended to mitigate our exposure to changes in foreign currency exchange rates in connection with certain intercompany balances not permanently invested. Three foreign currency forward agreements enabled Sally Holdings to sell, in the aggregate, approximately €6.7 million ($9.0 million, at the December 31, 2010 exchange rate) at the weighted average forward exchange rate of 1.3146. The other three foreign currency forward agreements enabled Sally Holdings to buy, in the aggregate, approximately $9.0 million Canadian dollars ($9.0 million, at the December 31, 2010 exchange rate) at the weighted average forward exchange rate of 1.0233.

Our foreign currency option and forward agreements 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. For the three months ended December 31, 2010, selling, general and administrative expenses reflect net gains of $0.6 million related to these foreign currency options, including marked-to-market adjustments, with no comparable amount for the three months ended December 31, 2009.

Interest rate risk

As a result of the debt financing incurred in connection with the Separation Transactions, we are subject to interest rate market risk in connection with our long-term debt. The principal interest rate exposure relates to amounts borrowed under the term loans and the ABL facility.

Based on the approximately $887.1 million of aggregate borrowings under our term loan B and ABL facility as of December 31, 2010, a change in the estimated interest rate up or down by 1/8% would increase or decrease earnings before provision for income taxes by approximately $1.1 million on an annual basis, without considering the effect of any interest rate swap agreements we may have from time to time.

We and certain of our subsidiaries are sensitive to interest rate fluctuations. In order to enhance our ability to manage risk relating to cash flow and interest rate exposure, we and/or our other subsidiaries who are borrowers under the ABL facility may from time to time enter into and maintain derivative instruments, such as interest rate swap agreements, for periods consistent with the related underlying exposures. We do not purchase or hold any derivative instruments for speculative or trading purposes.

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In May 2008, we entered into two interest rate swap agreements with an aggregate notional amount of $300 million (each agreement with a notional amount of $150 million). These agreements expire on May 31, 2012 and enable us to convert a portion of our variable interest rate obligations to fixed rate obligations with interest ranging from 5.818% to 6.090%. These agreements are designated as effective cash flow hedges, in accordance with ASC 815. Accordingly, changes in the fair value of these derivative instruments are recorded quarterly, net of income tax, in accumulated other comprehensive (loss) income (“OCI”) until the hedged obligation is settled or the swap agreements expire, whichever is earlier. Any hedge ineffectiveness, as this term is used in ASC 815, is recognized in interest expense in our consolidated statements of earnings.

Credit risk

We are exposed to credit risk on certain assets, primarily cash equivalents, short-term investments and accounts receivable. We believe that the credit risk associated with cash equivalents and short-term investments, if any, is largely mitigated by our policy of investing in a diversified portfolio of securities with high credit ratings.

We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by our broad customer base. We believe our allowance for doubtful accounts, as of December 31, 2010, is sufficient to cover customer credit risks.

Item 4.  Controls and Procedures.

Controls Evaluation and Related CEO and CFO Certifications.  Our management, with the participation of our principal executive officer (“CEO”) and principal financial officer (“CFO”), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. 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.

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 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, have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost - -effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

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 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, our legal department and by personnel in our finance organization. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures on an ongoing basis and to maintain them as dynamic systems that change as conditions warrant.

Conclusions regarding Disclosure Controls.  Based on the required evaluation of our disclosure controls and procedures, our CEO and CFO have concluded that, as of December 31, 2010, 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

42

our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

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.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings.

There were no material legal proceedings pending against us or our subsidiaries as of December 31, 2010. We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and that may or may not cover any or all of our liabilities in respect of claims and lawsuits. We do not believe that the ultimate resolution of these matters will have a material adverse impact on our consolidated financial position, cash flows or results of operations.

We are subject to a number of federal, state and local laws and regulations, as well as the laws and regulations applicable in each other marketplace in which we do business. These laws and regulations govern, among other things, the composition, packaging, labeling and safety of the products we sell, the methods we use to sell these products and the methods we use to import these products. We believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward.

On February 25, 2008, we disclosed in a Current Report on Form 8-K that on February 21, 2008, L’Oreal filed a lawsuit in the Superior Court of the State of California in and for the County of San Diego — Central Division naming, among others, SD Hair, Ltd. and Hair of Nevada, LLC (collectively, “SD Hair”), franchisees of our subsidiary Armstrong McCall division (“AMLP”) of our BSG business unit, as defendants.  The suit alleged, among other things, that SD Hair breached its franchise agreement with AMLP by diverting (selling) Matrix branded products to unauthorized buyers, and that L’Oreal is entitled to make claims against SD Hair under the franchise agreement as a third-party beneficiary of that agreement. On March 24, 2008, SD Hair filed a cross-complaint in the same case naming AMLP and BSG as cross-defendants, seeking, among other things , i) declaratory relief from BSG and AMLP in the form of a judicial finding that SD Hair is not in breach of its franchise agreement and that L’Oreal has no rights as a third-party beneficiary to SD Hair’s franchise agreement, and ii) injunctive relief in the form of a judicial order compelling AMLP and BSG to take appropriate legal action against L’Oreal to enforce SD Hair’s claimed rights under AMLP’s Matrix distribution agreement. We have answered the cross-complaint.

On July 30, 2009, we disclosed in a Current Report on Form 8-K that L’Oreal filed a Second Amended Complaint in connection with the previously disclosed lawsuit described above.  The Second Amended Complaint alleges, among other things, that AMLP, certain of its employees and others were involved in selling Matrix branded products to unauthorized buyers and that certain of its employees (and others) engaged in improper business transactions for personal benefit during 2005 through 2007. L’Oreal seeks money damages, certain injunctive relief and a declaration that L’Oreal is entitled to terminate the 1981 Matrix Distributor Agreement now in effect between L’Oreal and AMLP. None of the employees involved in the allegations are executive officers of the Company.  Substantially all of these allegations were made known by L’Oreal to the Company pr ior to the filing of the Second Amended Complaint. L’Oreal also provided the Company with documents allegedly supporting the allegations.

As a result of these allegations made by L’Oreal, many of which are incorporated into the Second Amended Complaint, the Audit Committee of the Board of Directors of the Company engaged independent special counsel to investigate whether certain employees engaged in improper business transactions for personal benefit. After extensive review, the Audit Committee and independent special counsel found insufficient evidence to support a conclusion that Company employees entered into improper transactions for personal benefit.

On September 8, 2009, AMLP and BSG filed a cross-complaint against L’Oreal. In the cross-complaint, AMLP and BSG allege that L’Oreal does not have a genuine interest in stopping diversion, and that L’Oreal’s anti-diversion policies have been discriminatorily applied to AMLP and BSG. AMLP further alleges that L’Oreal is using diversion as a pretext to attempt to terminate the 1981 Matrix Distributor Agreement. L’Oreal has answered the cross-complaint and the matter is currently set for jury trial in May of 2011.

On November 10, 2010, L’Oreal was granted leave to file an amended complaint which adds a former executive of AMLP as a defendant in a lawsuit previously filed in United States District Court for the District of Nevada. The two initial defendants were Hair Casino Venture, LLC and Nevada Hair Ventures, LLC, entities alleged to have common ownership with Hair of Nevada, LLC. The First Amended Complaint in this lawsuit alleges, among other matters, many of the same improper business transactions alleged in the above-referenced San Diego lawsuit. L’Oreal seeks money damages, certain injunctive relief and an order enforcing L’Oreal’s rights with respect to “prohibiting certain conduct with its products.” AMLP has certain indemnity obligations with respect to the former executive.

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Item 1A.  Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors contained in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report. The risks described in that report are not the only risks facing our company.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Not applicable

(b) Not applicable

(c) Not applicable

Item 3.  Defaults Upon Senior Securities.

Not applicable

Item 4.  Removed and Reserved.

Item 5.  Other Information.

(a) Not applicable

(b) Not applicable

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Item 6. Exhibits

Exhibit No.	Description
2.1	Investment Agreement, dated as of June 19, 2006, among Alberto-Culver Company, New Aristotle Company, Sally Holdings, Inc., New Sally Holdings, Inc. and CDRS Acquisition LLC, which is incorporated herein by reference from Exhibit 2.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006†
2.2	First Amendment to the Investment Agreement, dated as of October 3, 2006, among Alberto-Culver Company, New Aristotle Company, Sally Holdings, Inc., New Sally Holdings, Inc. and CDRS Acquisition LLC, which is incorporated herein by reference from Exhibit 2.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006†
2.3	Second Amendment to the Investment Agreement, dated as of October 26, 2006, among Alberto-Culver Company, New Aristotle Company, Sally Holdings, Inc., New Sally Holdings, Inc. and CDRS Acquisition LLC, which is incorporated herein by reference from Exhibit 2.02 to the Company’s Current Report on Form 8-K filed on October 30, 2006†
2.4	Separation Agreement, dated as of June 19, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.3 to Amendment No. 3 to the Company’s Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006†
2.5	First Amendment to the Separation Agreement, dated as of October 3, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.4 to Amendment No. 3 to the Company’s Registration Statement on Form S-4 (File No. 333-136259) filed on October 10, 2006†
2.6	Second Amendment to the Separation Agreement, dated as of October 26, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.01 to the Company’s Current Report on Form 8-K filed on October 30, 2006†
2.7	Stock Purchase Agreement entered into on October 1, 2010 by and among Beauty Systems Group LLC, Aerial Company, Inc. and the stockholders named therein*†
3.1	Amended and Restated Certificate of Incorporation of Sally Beauty Holdings, Inc., dated November 16, 2006, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed on November 20, 2006
3.2	Third Amended and Restated Bylaws of Sally Beauty Holdings, Inc., dated October 23, 2008, which is incorporated herein by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 23, 2008
4.1	Stockholders Agreement, dated as of November 16, 2006, by and among the Company, CDRS Acquisition LLC, CD&R Parallel Fund VII, L.P. and the other stockholders party thereto, which is incorporated herein by reference from Exhibit 4.8 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.2	First Amendment to the Stockholders Agreement, dated as of December 13, 2006, between the Company and CDRS Acquisition LLC and Carol L. Bernick, as representative of the other stockholders, which is incorporated herein by reference from Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed on December 22, 2006
4.3	Indenture, dated as of November 16, 2006, by and among Sally Holdings LLC and Sally Capital Inc., as Co-Issuers, the Subsidiary Guarantors from time to time parties thereto, and Wells Fargo Bank, National Association, as trustee, governing the 9.25% Senior Notes due 2014, which is incorporated herein by reference from Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.4	First Supplemental Indenture, dated as of May 30, 2007, by and among Sally Holdings LLC and Sally Capital Inc., as co-Issuers, the Subsidiary Guarantors named therein, and Wells Fargo Bank, National Association, as trustee, governing the 9.25% Senior Notes due 2014, which is incorporated herein by reference from Exhibit 4.2 from the Registration Statement on Form S-4 (File No. 333-144427) of Sally Holdings LLC and Sally Capital Inc. filed on July 9, 2007

46

4.5	Indenture, dated as of November 16, 2006, by and among Sally Holdings LLC and Sally Capital Inc., as Co-Issuers, the Subsidiary Guarantors from time to time parties thereto, and Wells Fargo Bank, National Association, as Trustee, governing the 10.5% Senior Subordinated Notes due 2016, which is incorporated herein by reference from Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.6	First Supplemental Indenture, dated as of May 30, 2007, by and among Sally Holdings LLC and Sally Capital Inc., as co-Issuers, the Subsidiary Guarantors named therein, and Wells Fargo Bank, National Association, as trustee, governing the 10.5% Senior Subordinated Notes due 2016, which is incorporated herein by reference from Exhibit 4.4 from the Registration Statement on Form S-4 (File No. 333-144427) of Sally Holdings LLC and Sally Capital Inc. filed on July 9, 2007
4.7	Exchange and Registration Rights Agreement, dated as of November 16, 2006, by and among Sally Holdings LLC, Sally Capital Inc., the Subsidiary Guarantors parties thereto, Merrill Lynch, Pierce, Fenner & Smith, Incorporated and the other financial institutions named therein, relating to the 9.25% Senior Notes due 2014, which is incorporated herein by reference from Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.8	Exchange and Registration Rights Agreement, dated as of November 16, 2006, by and among Sally Holdings LLC, Sally Capital Inc., the Subsidiary Guarantors parties thereto, Merrill Lynch, Pierce, Fenner & Smith, Incorporated and the other financial institutions named therein, relating to the 10.5% Senior Subordinated Notes due 2016, which is incorporated herein by reference from Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.9	Credit Agreement, dated November 16, 2006, with respect to a Term Loan Facility, by and among Sally Holdings LLC, the several lenders from time to time parties thereto, and Merrill Lynch Capital Corporation, as Administrative Agent and Collateral Agent, which is incorporated herein by reference from Exhibit 4.5.1 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.10	Guarantee and Collateral Agreement, dated as of November 16, 2006, made by Sally Investment Holdings LLC, Sally Holdings LLC and certain subsidiaries of Sally Holdings LLC in favor of Merrill Lynch Capital Corporation, as Administrative Agent and Collateral Agent, which is incorporated herein by reference from Exhibit 4.5.2 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.11	Intercreditor Agreement, dated as of November 16, 2006, by and between Merrill Lynch Capital Corporation, as Administrative Agent and Collateral Agent under the Term Loan Facility, and Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., as Administrative Agent and Collateral Agent under the Asset-Based Loan Facility, which is incorporated herein by reference from Exhibit 4.7 to the Company’s Current Report on Form 8-K filed on November 22, 2006
4.12	Assignment and Acceptance of that certain Credit Agreement, dated as of November 16, 2006, among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, the Canadian Borrowers (as defined in the Credit Agreement), the several banks and other financial institutions from time to time parties thereto, Merrill Lynch Capital, a division of’ Merrill Lynch Business Financial Services Inc., as administrative agent and collateral agent for the Lenders and Merrill Lynch Capital Canada, Inc., as Canadian agent and Canadian collateral agent for the Lenders, which is incorporated herein by reference from Exhibit 4.15 to the Company’s Annual Report on Form 10-K filed on November 19, 2009
4.13	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*†
4.14	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 November 12, 2010*†
4.15	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 November 12, 2010*†
10.1	Amended and Restated Letter Agreement between Clayton, Dubilier & Rice, LLC (“CD&R”) and the Company with respect to the provision of services by CD&R to the Company’s Board of Directors dated as of February 24, 2010, which is incorporated herein by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 4, 2010

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10.2	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
10.3	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
10.4	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 10.35 to the Company’s Annual Report on Form 10-K filed on November 18, 2010
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 Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2010, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Statements of Earnings; (ii) the Consolidated Balance Sheets; (iii) the Consolidated Statements of Cash Flows; and (iv) the Condensed Notes to Consolidated Financial Statements, tagged as blocks of text.

* Included herewith

† Certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  The Company 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 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.

SALLY BEAUTY HOLDINGS, INC.
(Registrant)
Date:   February 3, 2011
By:	/s/ Mark J. Flaherty
	Mark J. Flaherty
	Senior Vice President and Chief Financial Officer
	For the Registrant and as its Principal Financial Officer

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EX-2.7

Exhibit 2.7

Execution Copy

SUBJECT TO CONFIDENTIALITY AGREEMENT

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT, made and entered into as of this 1st day of October, 2010, by and among Beauty Systems Group LLC, a Delaware limited liability company (the “Purchaser”), Aerial Company, Inc., a Wisconsin corporation (the “Corporation”), and Ryan J. Hmielewski, Laura J. Hmielewski, the Laura Hmielewski Irrevocable Trust of 1992, the Ryan J. and Laura J. Hmielewski Descendants Trust u/a/d December 31, 2004 f/b/o Jeffrey Hmielewski, the Ryan J. and Laura J. Hmielewski Descendants Trust u/a/d December 31, 2004 f/b/o Scott Hmielewski, and the Ryan J. and Laura J. Hmielewski Descendants Trust u/a/d December 31, 2004 f/b/o Kristin Kolaszewski (collectively, the “Shareholders” and individually, a “Shareholder”).

W I T N E S S E T H:

WHEREAS, the Shareholders own all of the issued and outstanding capital stock of Corporation; and

WHEREAS, each Shareholder desires to sell all of the shares of capital stock of Corporation owned by such Shareholder, and Purchaser desires to purchase all of the outstanding shares of capital stock of Corporation owned by the Shareholders.

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein set forth, and subject to the conditions herein set forth, the parties hereby agree as follows:

1.

Definitions

1.1The following terms shall have the meanings set forth below for the purpose of this Agreement:

“Accounting Firm” is defined in paragraph 14.12 hereof.

“Aerial Beauty Supply Business” shall mean the entire businesses and operations of Corporation as conducted on the date hereof, consistent with customary past practices, including, without limitation, the warehousing and sale, through Corporation’s stores and salespeople, of beauty supply products, small electrical appliances and equipment to beauty salons, barber shops, licensed hairdressers, barbers and beauticians, conducted in part out of 84 store locations located in 11 states (82 of which are currently active stores), as well as the Internet Business.

“Affiliate” shall mean, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by or is under common control with, such Person, with the term “control” meaning the power, directly or indirectly, either to: (i) vote 50% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of a Person; or (ii) direct or cause the direction of the management and policies of a Person, whether through the ability to exercise voting power or otherwise. In addition, with respect to the Corporation, the term “Affiliate” also includes any

1

Person capable of being controlled by any combination of Shareholders, members of one or more Shareholder’s family, Corporation and their respective Affiliates.

“Affiliate Transaction” is defined in paragraph 5.33.2 hereof.

“Agreement” shall mean this Stock Purchase Agreement, including all Schedules and Exhibits hereto.

“Allocation Schedule” is defined in paragraph 15.1.2 hereof.

“Assets” shall mean, as to a Person, all of the assets, properties, businesses and rights of such Person of every kind, nature, character and description, whether real, personal (including cash) or mixed, tangible or intangible, accrued or contingent, or otherwise relating to or utilized in such Person’s business, directly or indirectly, in whole or in part, whether or not carried on the books and records of such Person, and whether or not owned in the name of such Person or any Affiliate of such Person and wherever located.

“Beauty Supply Business” shall mean the business of selling beauty supplies, including but not limited to the warehousing and sale, through stores and salespeople, of beauty supply products, small electrical appliances and equipment to beauty salons, barber shops, licensed hairdressers, barbers and beauticians and the general public.

“Capitalized Leases” shall mean all lease obligations which are capitalized on the financial statements of Corporation.

“Claiming Party” is defined in paragraph 10.8.1 hereof.

“Claim Notice” is defined in paragraph 10.5.2 hereof.

“Claims” is defined in paragraph 10.1 hereof.

“Closing” shall mean the act of completion of the closing of the transactions contemplated by this Agreement on the Closing Date as set forth in Article 3 hereof.

“Closing Balance Sheet” is defined in paragraph 4.1.1 hereof.

“Closing Combined Net Assets” is defined in paragraph 4.1.1 hereof.

“Closing Date” shall mean the date on which the Closing takes place as set forth in paragraph 3.1 hereof.

“Closing  Debt” shall mean: (i) all obligations of Corporation for borrowed money, including all accrued and unpaid interest and any prepayment fees or penalties; (ii) all other obligations of Corporation evidenced by bonds, debentures, notes or similar instruments, including all accrued and unpaid interest and any prepayment fees or penalties; (iii)  any indebtedness under title retention agreements; (iv) obligations under currency, interest rate or other hedging arrangements or swaps;  (v) Guaranteed Indebtedness; and, (vi) Indebtedness.

“Closing Payment” is defined in paragraph 3.2.1 hereof.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Company Benefit Plans” shall mean each written or oral employee benefit plan, scheme, program, policy, arrangement and contract (including, but not limited to, any “employee benefit plan,” as defined in Section 3(3) of ERISA, whether or not subject to ERISA, and any bonus, deferred compensation, stock bonus, stock purchase, restricted stock, stock option or other equity-based arrangement, and any employment, termination, retention, bonus, change in control or

2

severance plan, program, policy, arrangement or contract) for the benefit of any current or former officer, employee or director of Corporation that is maintained or contributed to by the Corporation or any Related Person of Corporation, or with respect to which Corporation or a Related Person of Corporation could incur material liability under the Code or ERISA or any similar non-U.S. law.

“Contracts” shall mean any contract, agreement, obligation, commitment, indenture, instrument, lease, license, plan, practice, course of conduct, understanding, promise, arrangement or undertaking (whether written or oral and whether express or implied) to which any Person is a party or that is legally binding on any Person or its equity interests, Assets or business, but shall exclude all Store Leases.

“Corporation Securities” shall mean: (i) shares of capital stock of, or other voting or equity interests in, the Corporation; (ii) securities of the Corporation convertible into or exercisable or exchangeable for shares of capital stock of, or other voting or equity interests in, the Corporation; and (iii) options or other rights or agreements, commitments or understandings of any kind to acquire from, or to require the Corporation to issue, transfer or sell, any capital stock of, or other voting or equity interests in, the Corporation or securities convertible into or exercisable or exchangeable for capital stock of, or other voting or equity interests in, the Corporation.

“Diversion” shall mean knowing sale of merchandise to customers who will resell the merchandise in a territory or to a customer outside the channel of trade established by the manufacturer.

“Environmental Laws” shall mean any and all Laws relating to: (i) facility siting, land use and environmental matters; (ii) the control, use, management, treatment, storage, disposal or transportation of any pollutant or other regulated substance, or protection of the air, water, or land (including, without limitation, ambient air, indoor air, surface water, ground water, land surface, or subsurface strata); (iii) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation; (iv) exposure to or releases of hazardous, toxic or other harmful substances; (v) the protection, remediation, and enhancement of human health, safety, or the environment (including, without limitation, ambient air, indoor air, surface water, ground water, land surface, or subsurface strata).  Environmental Laws shall include, without limitation, the Clean Air Act, 42 U.S.C. §7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq., the National Environmental Policy Act, 42 U.S.C. § 4321 et seq., the Endangered Species Act, 16 U.S.C. § 1531 et seq., the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C. §6901 et seq. (“RCRA”), the Safe Drinking Water Act. 42 U.S.C. §300f et seq., the Comprehensive Environmental Response, Compensation, and Liability Act as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. §9601 et seq. (“CERCLA”), the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. § 136 et seq., the Oil Pollution Act of 1990, 33 U.S.C. §2701 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. §1801 et seq., the Toxic Substances Control Act, 15 U.S.C. §2601 et seq., the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. §11001 et seq., the Occupational Safety and Health A ct, 29 U.S.C. §651, et seq., any state or local Laws similar or analogous to or implementing the foregoing requirements, and any state or local Laws relating to Environmental Permits and local land use control ordinances or similar Laws.

“Environmental Matters” shall mean any and all matters and/or circumstances related in any manner whatsoever to the Corporation, the Aerial Beauty Supply Business or any Assets

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(including real property), Stores or Warehouses currently or formerly owned, leased, operated, or used by the Corporation or the Aerial Beauty Supply Business, or any predecessors in interest, and: (i) the emission, discharge, disposal, Release or threatened release of any Hazardous Substance into the environment; (ii) the transportation, treatment, storage, recycling, distribution, use or other handling of any Hazardous Substance; (iii) the placement of structures or materials into waters of the United States; (iv) above-ground or underground storage tanks, oil/water separators, and septic systems; (v) the presence of any Hazardous Substance in any building or other improvement, equipment, structure or workplace; and/or (vi) any violation of or noncompliance with an Environmental Law; in each case which exists on or before the Closing Date.

“Environmental Permits” shall mean all Permits and other authorizations issued with respect to applicable Environmental Laws.

“ERISA” shall mean means the Employee Retirement Income Security Act of 1974, as amended.

“Escrow Agent” is defined in paragraph 3.2.3 hereof.

“Escrow Agreement” is defined in paragraph 3.2.3 hereof.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Excluded Contracts” is defined in paragraph 5.11.1 hereof.

“Financial Statements” shall mean the Reviewed Financial Statements and the Unaudited Financial Statements, including in each case, a balance sheet and statements of income or operations, cash flows and retained earnings or shareholders’ equity which are represented to be prepared in accordance with GAAP.

“GAAP” shall mean United States generally accepted accounting principles, applied on a consistent basis with Corporation’s past practices (to the extent consistent with United States generally accepted accounting principles).

“GAAP Liabilities” shall mean all liabilities, obligations or commitments of any nature required to be reflected or reserved against on a balance sheet under GAAP.

“Governmental Authority” shall mean any court, tribunal, arbitrator, authority, agency, commission, official, board or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision.

“Guaranteed Indebtedness” shall mean Indebtedness of a third party that is: (i) guaranteed by Corporation; (ii) secured by a Lien on any Asset of Corporation; or (iii) the subject of any other credit support arrangement provided by Corporation.

“Hazardous Substances”  shall mean: (i) any oil, petroleum or petroleum products or byproducts and any constituents thereof, flammable explosives, radioactive materials, mold, lead in paint or drinking water, radon, pesticides and other agricultural chemicals, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls (PCBs); (ii) any chemicals or other materials or substances which are now or hereafter become defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “hazardous materials,” “extremely hazardous wastes,” “dangerous wastes,” “restricted hazardous wastes,” “toxic substances,” “toxic pollutants,” “hazardou s air pollutants” or words of similar import under any Environmental Law; and (iii) any other chemical, substance, waste, material, pollutant or contaminant defined as or deemed hazardous or toxic, or otherwise regulated under any

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Environmental Law, including, without limitation, RCRA hazardous wastes and CERCLA hazardous substances.

“Hmielewskis” shall mean Ryan Hmielewski and Laura Hmielewski.

“Indebtedness” shall mean: (i) all Corporation obligations for borrowed money, or with respect to deposits or advances of any kind; (ii) all Corporation obligations evidenced by bonds, debentures, notes or similar instruments; (iii) all Corporation obligations upon which interest charges are customarily paid (other than trade payables incurred in the ordinary course of business consistent with past practices); (iv) all Corporation obligations under conditional sale or other title retention agreements relating to any property purchased; (v) all Corporation obligations incurred or assumed as the deferred purchase price of property or services (excluding obligations to creditors for raw materials, inventory, services and supplies incurred in the ordinary course of business consistent with past practices); (vi) Capitalized Leases; (vii) all obligations o f others secured by a Lien on Assets owned or acquired by Corporation, whether or not the obligations secured thereby have been assumed; (viii) all Corporation obligations under interest rate, currency or commodity derivatives or hedging transactions; (ix) all Corporation letters of credit or performance bonds issued (excluding (A) letters of credit issued for the benefit of suppliers to support accounts payable to suppliers incurred in the ordinary course of business consistent with past practices; (B) standby letters of credit relating to workers’ compensation insurance; and, (C) surety bonds; and, customs bonds) and (x) Guaranteed Indebtedness.

“Indemnifying Party” is defined in paragraph 10.8.1 hereof.

“Intellectual Property” shall means trademarks, service marks, trade names, trade dress, including all goodwill associated with the foregoing, domain names, copyrights, Software, Internet web sites, mask works and other semiconductor chip rights, patents and patent applications, Trade Secrets and all similar intellectual property rights, and registrations and applications to register or renew the registration of any of the foregoing.

“Internet Business” shall mean the Beauty Supply Business as operated by Corporation through the Internet, including sales through a professional-only website and distribution relating thereto.

“Inventory” shall mean all goods held by Corporation and intended for resale, in the ordinary course, of the Aerial Beauty Supply Business.

“IRS” shall mean the Internal Revenue Service.

“Laws” shall mean any and all federal, state, local and foreign laws, statutes, ordinances, rules, regulations, judgments, rule of common law, injunctions, orders and decrees and any and all arbitral findings and rulings.

“Legal Proceeding” shall mean any lawsuit, arbitration, administrative proceeding (without limitation, administrative worker’s compensation proceedings) or similar formal or informal adversarial civil or criminal action or proceeding of any kind or nature.

“Liabilities” means any and all liabilities, obligations or commitments of any nature, whether known or unknown, direct or indirect, absolute, accrued, contingent or otherwise, whether due or to become due, and whether or not required to be reflected or reserved against on a balance sheet under GAAP.

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“Lien” shall mean, with respect to any Asset, any mortgage, lien, pledge, charge, security interest, lease, encumbrance or other adverse claim of any kind in respect of such Asset.  For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any Asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such Asset.

“Life Insurance” shall mean those life insurance policies described in Schedule 1.0.

“Look Back Period” is defined in paragraph 7.2.2 hereof.

“Material Adverse Effect” shall mean any circumstance, occurrence of any event, or any change in or effect on Corporation or Aerial Beauty Supply Business that, individually or when taken together with all other circumstances, events and changes in or effects on the Corporation or Aerial Beauty Supply Business, taken as a whole, is or would reasonably be expected to be materially adverse to: (i) the condition (financial or otherwise), results of operations, business, Assets, affairs or prospects of Corporation or Aerial Beauty Supply Business; or (ii) the ability of the Corporation or any Shareholder to perform hers, his or its obligations under this Agreement or to consummate the transactions contemplated by this Agreement; provided, that, “Material Adverse Effect” shall not be deemed to include the impact of any: (i) changes in Laws of general applicability or interpretations thereof by Governmental Authorities; (ii) changes in GAAP; (iii) changes affecting the general economic conditions in the United States, which changes do not disproportionately affect the Corporation in any material respect; or (iv) changes in national or international political or social conditions.

“Net Assets” shall mean the book value of all assets, net of all GAAP Liabilities, determined in accordance with GAAP and determined in a manner consistent with the preparation of the GAAP Adjusted August 2010 Balance Sheet attached hereto as Schedule 4.1.1, net of elimination of all intercompany transactions.

“Officer” shall mean any employee or corporate officer holding the title of Vice President or higher and being employed in such capacity with Corporation at any time within the month of September, 2010.

“Organizational Documents” shall mean the articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, certificate of formation, regulations, operating agreement, certificate of limited partnership, partnership agreements, trust agreements and all other similar documents, instruments or certificates executed, adopted, or filed in connection with the creation, formation, or organization of a Person, including any amendments thereto.

“Owned Intellectual Property” is defined in paragraph 5.18.1 hereof.

“Paragraph 15.1.3 Payment” is defined in paragraph 15.1.3 hereof.

“Permits” shall mean collectively all permits, orders, licenses, variances, certificates, approvals, registrations, franchise rights and other authorizations and all applications thereof, granted or issued by any Governmental Authority having jurisdiction over the Corporation or the Aerial Beauty Supply Business.

“Permitted Liens” shall mean:  (i) Liens for any Taxes not yet due and payable or that are being contested in good faith and for which adequate accruals or reserves have been established; (ii) Liens of carriers, warehousemen, mechanics, materialmen and other like Liens arising in the ordinary course of business but only to the extent the underlying payment obligations are not past

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due; (iii) customary easements, rights of way, zoning ordinances and other similar encumbrances affecting real property; (iv) statutory Liens in favor of lessors arising in connection with any property leased to the Corporation; (v) precautionary liens filed by equipment lessor to Corporation pursuant to operating leases between such lessor and Corporation as lessee, but only to the extent the underlying payment obligations are not past due; (vi) Liens that will be and are released at the Closing, including those released in connection with the satisfaction of the Closing Debt, and which Liens and other encumbrances described in clauses (i) — (vi) do not, individually or in the aggregate, materially interfere with the use by the Corporation of any of the Assets affected thereby.

“Person” means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a Government Authority.

“Pre-Closing Tax Period” shall mean any taxable year or period (or portion thereof) that ends on or before the Closing Date.  For purposes of this Agreement, in the case of any Taxes that are payable with respect to any Tax period beginning before and ending after the Closing Date, such Taxes shall be apportioned between the portion of such period ending on the Closing Date and the portion beginning on the day after the Closing Date: (i) in the case of real and personal property Taxes, on a per diem basis; and, (ii) in the case of all other  Taxes, on the basis of the actual activities of the Corporation as determined from the books and records of the Corporation for such partial period.

“Proprietary Information” is defined in paragraph 7.2.5 hereof.

“Real Property” means all real property owned by Corporation in fee simple and all of Corporation’s right, title and interest in and to the buildings, plants and structures located thereon, together with all rights, licenses, permits, easements and appurtenances belonging thereto.

“Regular Escrow” is defined in paragraph 4.3.1 hereof.

“Related Person” shall mean, with respect to Corporation, any trade or business, whether or not incorporated, which, together with Corporation, is treated as a single employer under Section 414 of the Code.

“Release” shall mean any releasing, disposing, discharging, injecting, spilling, leaking, leaching, pumping, dumping, pouring, emitting, escaping, emptying, seeping, dispersal, migration, transporting, placing and the like, including without limitation, the moving of any materials, including without limitation, Hazardous Substances, through, into or upon, any land or subsurface strata, soil, surface water, groundwater, wetlands, or air or otherwise entering into the indoor or outdoor environment.

“Reviewed Financial Statements” shall mean the reviewed consolidated financial statements of the Corporation at and for the periods ended December 31, 2009 and December 31, 2008; together with the report of the Corporation’s independent accountants, WIPFLi LLP, thereon.

“Section 338(h)(10) Election” is defined in paragraph 15.1.1 hereof.

“Shareholder Losses” is defined in paragraph 10.3 hereof.

“Shareholders’ Representative” is defined in paragraph 14.13 hereof.

“Shareholders Agreement” shall mean that certain Shareholders Agreement of Corporation dated August 19, 2009.

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“Shares” shall mean the 34,882 shares of common stock, $1.00 par value per share, 17,875 of which are voting and 17,007 of which are nonvoting, of Corporation, which constitute all of the issued and outstanding Corporation Securities.

“Software” shall mean all developed or purchased computer software, including but not limited to, application software, system software and firmware, including all source code and object code versions thereof, in any and all forms and media, and all related documentation.

“Stock Purchase Price” is defined in paragraph 2.2 hereof.

“Store Leases” shall mean collectively the 84 real property leases for the Stores and Corporation’s Lincoln, Nebraska warehouse.

“Subject Property” is defined in paragraph 5.3.2 hereof.

“Stockholder Notes and Deferred Compensation Liabilities” shall mean (i) liabilities to the Frederick H. Jaeger III Individual Property Trust u/a/d September 29, 2005; the Frederick H. Jaeger III Irrevocable Trust of 1992, dated July 9, 1992; the Penelope Butman Irrevocable Trust of 1992, dated July 9, 1992; Penelope Butman; the Barbara Kopish Irrevocable Trust of 1992 dated July 9, 1992; Barbara Kopish; the Elisabeth Jaeger Irrevocable Trust of 1992 dated July 9, 1992; and Elisabeth Jaeger in the aggregate amount as of October 4, 2010 of $4,315,199.70 (collectively, the “Former Stockholder Debt”); (ii) amounts owing to Charles Salewsky pursuant to his Employment Agreement dated November 30, 2008 for deferred compensation in the amount of $79,550.00 (plus a discretionary amount of $73,125.00 for the period January 1, 2010 thr ough September 30, 2010) and for severance (if terminated) (the “Salewsky Severance Obligation”) currently estimated in the amount of $292,940.00 (“Salewsky Amount”); (iii) amounts owing to Mark Konrad pursuant to his Employment Agreement dated November 30, 2008 for deferred compensation in the amount of $34,834.00 (plus a discretionary amount of $34,125.00 for the period January 1, 2010 through September 30, 2010) and for severance (the “Konrad Severance Obligation”) currently estimated in the amount of $221,675.00 (“Konrad Amount”); (iv) amounts owing to Charles Salewsky and Mark Konrad pursuant to their change in control letter agreements dated as of August 9, 2009 in the amount of $200,000.00 for each of Mr. Salewsky and Mr. Konrad; (v) payments due Mark Konrad and Charles Salewsky, each in the amount of $60,543.00 in connection with the termination by Corporation of the Aerial Company, Inc. Phantom Stock Unit Plan; and (vi) deferred compensation payments to Frederick H. Jaeger pursuant to that certain Deferred Compensation and Noncompetition Agreement dated May 15, 1992 (the “Jaeger Deferred Compensation Agreement”), which liability has been actuarially calculated to be $735,927.00.

“Stores” shall mean the 84 leased premises operated as sales locations by Corporation, in connection with the operation of the Aerial Beauty Supply Business.

“Target Net Asset Value” is defined in paragraph 4.1.1 hereof.

“Tax” (and with the correlative meaning “Taxable”) shall mean any  federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, intangible, ad valorem, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax or other governmental charge of any kind whatsoever, including any interest, penalty, or addition thereto, and shall also include any fines arising under ERISA or penalties, interest or additions thereto.

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“Tax Return” shall mean any return, report or statement required to be filed with or provided to any Tax authority with respect to any Tax (including any attachments thereto, and any amendment thereof), including any information return, claim for refund, amended return or declaration of estimated Tax.

“Territory” is defined in paragraph 7.2.1 hereof.

“Third Party Claim” shall mean any losses, Liabilities, damages (including special, incidental or consequential), obligations, judgments, damage, diminution in value, actions, demands, suits, proceedings, claims, penalties, interest, costs and expenses alleged to be owed or owed to any Person not a party to this Agreement.

“Threshold Amount” is defined in paragraph 10.5.1 hereof.

“Trade Secrets” shall mean all inventions, processes, designs, formulae, trade secrets, know-how, ideas, research and development, data, databases and confidential information.

“Transaction Documents” shall mean this Agreement and the documents reflecting the transactions contemplated herein.

“Transfer Taxes” is defined in paragraph 15.6 hereof.

“Trust” shall mean individually, and “Trusts” shall mean collectively, the Laura Hmielewski Irrevocable Trust of 1992, the Ryan J. and Laura J. Hmielewski Descendants Trust u/a/d December 31, 2004 f/b/o Jeffrey Hmielewski, the Ryan J. and Laura J. Hmielewski Descendants Trust u/a/d December 31, 2004 f/b/o Scott Hmielewski, and the Ryan J. and Laura J. Hmielewski Descendants Trust u/a/d December 31, 2004 f/b/o Kristin Kolaszewski.

“Unaudited Financial Statements” shall mean the unaudited interim consolidated financial statements of the Corporation at and for the period ended August 31, 2010.

“Warehouses” shall mean the warehouse locations at Marinette, Wisconsin and Lincoln, Nebraska.

2.

Purchase and Sale of Shares

2.1Acquired Shares.  On the terms and subject to the conditions herein set forth, on the Closing Date, Shareholders shall sell, assign, transfer, convey and deliver to Purchaser, and Purchaser shall purchase, acquire, and take assignment and delivery of, free and clear of all Liens, all of the Shares (which represent in the aggregate 100% of the issued and outstanding Corporation Securities).

2.2Stock Purchase Price.  As full consideration for all of the Shares, Purchaser agrees to pay to the Shareholders (subject to the terms of, and subject to the adjustments set forth in, this Agreement) the sum of $79,000,000.00, plus any and all sums any Shareholder(s) may be entitled to as a Paragraph 15.1.3 Payment (the “Stock Purchase Price”).  The Stock Purchase Price shall be apportioned on a per-share basis, without regard to whether the share is voting or nonvoting.

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3.

Closing and Closing Date

3.1Closing Date.  The Closing hereunder shall take place at the offices of Godfrey & Kahn, Green Bay, Wisconsin on October 1, 2010, at 10:00 a.m. (local time), or at such other date, time and place as shall be fixed in writing by the mutual consent of Purchaser and the Shareholders.  The Closing shall be deemed to be effective as of 12:01 a.m. on the Closing Date (the “Effective Time”).

3.2Purchaser’s Deliveries.  At the Closing, Purchaser shall execute and/or deliver the following:

3.2.1Payment in cash to the order of the Shareholders the sum of $73,075,000 (such portion of the Stock Purchase Price, the “Closing Payment”).  The percentage of the Closing Payment each Shareholder is entitled to receive at Closing, for the Shares held by such Shareholder, is set forth on Schedule 3.2.1.  The Closing Payment shall be paid at the direction of the Shareholders as set forth in a closing statement to be agreed upon and executed by all of the parties hereto (the “Closing Statement”).  The Closing Statement shall set forth the amounts and timing of the Closing Payment.

3.2.2A consulting agreement with Mark Konrad and an amendment to the November 30, 2008 Employment Agreement of Charles S. Salewsky Jr., in the forms executed and delivered by the applicable parties.

3.2.3The Regular Escrow, to be delivered to U.S. Bank, National Association (the “Escrow Agent”), as well as an escrow agreement, (the “Escrow Agreement”) in the form executed by the Purchaser and Escrow Agent relating to the escrowing of said funds.

3.2.4All other documents and instruments required to be executed and/or delivered by the Purchaser pursuant to Article 8, except to the extent that the Shareholders have waived satisfaction or performance thereof as a condition precedent to Closing.

3.3Shareholders’ and Corporation’s Deliveries.  At the Closing, the Shareholders and the Corporation (as applicable) shall execute and/or deliver to Purchaser the following:

3.3.1A certified copy of the appropriate corporate proceedings of the Corporation, its Board of Directors and its shareholders authorizing and approving the Transaction Documents.

3.3.2Written evidence satisfactory to Purchaser’s counsel that all consents and approvals set forth on Schedule 3.3.2 have been obtained, and that all required filings set forth on Schedule 3.3.2 have been made.

3.3.3Opinion of Godfrey & Kahn, pursuant to paragraph 9.11 hereof.

3.3.4Certificate of good standing for Corporation from the State of Wisconsin as well as all of the states in which Corporation is required to be qualified to do business, in each case dated within 15 days of the Closing Date.

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3.3.5Lien search reports from the Wisconsin Department of Financial Institutions showing no financing statements or Lien claims of record with regard to any of the assets of the Corporation, except for Permitted Liens, dated within ten days of the Closing Date.

3.3.6The Escrow Agreement executed by all of the Shareholders, relating to the escrowing of the Regular Escrow.

3.3.7Possession of all of the Assets owned or leased by the Corporation (except as specifically excluded herein) and possession and occupancy of all of the Stores and Warehouses.

3.3.8Certificates evidencing all of the Shares, which certificates shall be duly endorsed in blank or accompanied by duly executed stock powers executed in blank.

3.3.9Payoff letters from all obligees of Closing Debt (other than with respect to the Former Stockholder Debt), showing sums owed and reciting that that all further Closing Debt-type obligations will be extinguished upon payment of the payoff amount.

3.3.10All other documents and instruments required to be executed and/or delivered by the Corporation or any Shareholder pursuant to Article 9, except to the extent that the Purchaser has waived satisfaction or performance thereof as a condition precedent to Closing.

4.

Closing Combined Net Assets;

Establishment of Escrow

4.1Determination of Closing Combined Net Assets.

4.1.1The Stock Purchase Price is premised upon Purchaser receiving an enterprise with Net Assets of $18,424,488.00 (the “Target Net Asset Value”) as of the Effective Time.  Following the financial audit of the Corporation’s balance sheet as of the Effective Time (to be prepared in accordance with the principles and procedures followed in preparing the GAAP Adjusted August 2010 Balance Sheet attached as Schedule 4.1.1) (the “Closing Balance Sheet”) to be performed post-Closing by Corporation’s independent accountants, WIPFLi LLP (“WIPFLi”), and the expenses of which shall be paid half by Purchaser and half by Shareh olders, with best efforts being made for said financial audit being completed within ninety (90) days after Closing, the parties shall attempt to come to an agreement on the Net Assets of the Corporation as of the Effective Time (the “Closing Combined Net Assets”), which Purchaser shall propose in writing to Shareholders (in conformity with the Article 12 notice provisions).  As part of determining the Closing Combined Net Assets, the parties shall:  (i) take a physical inventory of the Inventory at the Stores and Warehouses; and (ii) follow those principals and procedures followed in preparing the GAAP Adjusted August 2010 Balance Sheet attached hereto as Schedule 4.1.1.  In taking such physical counts and in determining the value of the Inventory, the parties shall adhere to the following methods and principles: In taking such physical counts and in determining the value of the Inventory, the parties shall adhere to the following methods and principles: (i)  ;Inventory on hand as of the Effective Time shall be valued  at the lower of cost, determined on the last-in, first-out (LIFO) method, or market, as described in the WIPFLi-

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prepared Notes to Consolidated Financial Statements and Additional Information, Years Ended December 31, 2009 and 2008, dated March 5, 2010; (ii) all Inventory received as free promotional goods shall be valued as outlined in (i) above; and, (iii) damaged, obsolete or out-of-date goods shall be valued at a price to be negotiated by the parties, or if a price cannot be negotiated, shall become the property of Shareholders and not deemed to be Inventory.   Shareholders shall have thirty (30) days to dispute, in writing, the Closing Combined Net Assets as proposed by Purchaser (setting forth a detailed explanation of the items in dispute and in conformity with the Article 12 notice provisions).  If Shareholders do not dispute the amount within thirty (30) days after receipt from Purchaser, the Closing Combined Net Assets shall be deemed to be the amount proposed by Purc haser and such matter shall be deemed settled and resolved.  If Shareholders do dispute the Closing Combined Net Assets proposed by Purchaser, the parties shall meet and confer in an attempt to resolve any disputes.  If the parties fail to reach an accord on the Closing Combined Net Assets within thirty (30) days after the Shareholders provide Purchaser written notice of the dispute, the matter shall be resolved pursuant to the mechanism established in paragraph 14.12.  Within ten (10) days after the parties agree to the Closing Combined Net Asset amount or the matter is otherwise resolved as provided herein: (i) if the Closing Combined Net Assets is less than the Target Net Asset Value, Shareholders shall, jointly and severally, pay or cause the payment of such shortfall to Purchaser (such amount shall be paid directly to Purchaser outside the Regular Escrow or out of the Regular Escrow, at the sole discretion of the Purchaser); or, (ii) if the Closing Combined Net Assets is mo re than the Target Net Asset Value, Purchaser shall pay such overage to Shareholders (in the percentages established in Schedule 3.2.1).  Any such payments due from Shareholders or Purchaser, as the case may be, not paid within such ten (10) day period, shall be accompanied by the payment of interest thereon at the rate of 9% per annum from the due date of such payment. For avoidance of doubt, the Shareholders’ Representative has full power and authority to bind all Shareholders with respect to calculation of, and settlement of the Closing Combined Net Assets.

4.2Excluded Assets.  Expressly excluded from the Closing Combined Net Assets shall be those items enumerated on Schedule 4.2.

4.3Escrow of Part of Stock Purchase Price.  In order to provide additional assurance to Purchaser, the Purchaser and Shareholders shall, at the Closing, execute an escrow agreement, as hereafter described.

4.3.1Regular Escrow.   The primary escrow initially shall be funded at Closing in the sum of $5,925,000 (such portion of the Stock Purchase Price, the “Regular Escrow”).  The Regular Escrow shall be governed by the terms of the Escrow Agreement attached as Exhibit C.

4.3.2Closing Debt and Stockholder Notes and Deferred Compensation Liabilities.   Shareholders hereby represent and warrant that Closing Debt and Stockholder Notes and Deferred Compensation Liabilities will be fully extinguished at or before Closing, except for (i) the Former Stockholder Debt which will be paid (as directed by the Shareholders in the Closing Statement) out of the Closing Payment after the Closing, and (ii) the Konrad Amount and the Salewsky Amount which will be retained by Purchaser out of the Closing Payment to pay the Konrad Severance Obligation and the Salewsky Severance Obligation on behalf of the Corporation after the Closing (subject to any repayment of the Salewsky Amount (only) to the Shareholders in the event that none of the Corporation and its Affiliates are required to pay any of the Salewsky Amount, as and to the extent provided in Paragraph 7.7); provided that if Purchaser

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discovers after Closing that any of the Closing Debt and/or Stockholder Notes and Deferred Compensation Liabilities were not paid in full prior to Closing, (except for the Former Stockholder Debt, the Konrad Amount and the Salewsky Amount to the extent provided above), to the extent such amount(s) were not included as reductions in the amount of the Closing Combined Net Assets (or credited to Corporation on the Closing Statement), Shareholders shall, jointly and severally, pay such amounts to Purchaser immediately on demand (such amount shall be paid directly to Purchaser outside the Regular Escrow or out of the Regular Escrow, at the sole discretion of the Purchaser).  In addition, to the extent Purchaser and its Affiliates (including Corporation) suffer any Losses in connection with the Konrad Severance Obligation in excess of the Konrad Amount or in connection with the Salewsky Severance Obligation in excess of the Salewsky Amount, then the Shareholders shall, jointly and severally, indemnify and hold the Purchaser and its Affiliates harmless from any such excess Losses beyond the Konrad Amount or Salewsky Amount, respectively.

5.

Representations and Warranties of the Shareholders and Corporation

In order to induce Purchaser to enter into this Agreement and to consummate the transactions contemplated hereunder, the Shareholders, jointly and severally, and Corporation, represent and warrant the following statements are true and correct as of the Closing Date:

5.1Organization, Power and Authority.  Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin.  Corporation has full corporate power and authority to own or lease its Assets and to carry on the Aerial Beauty Supply Business as now conducted by it, and to enter into the Transaction Documents and perform its obligations thereunder.  Corporation does not conduct business or own Assets in, and is not licensed or qualified to do business in, any  jurisdiction other than Wisco nsin, Illinois, Minnesota, North Dakota, South Dakota, Nebraska, Iowa, Kansas, Missouri,  Colorado Michigan, Ohio and New Mexico.  Corporation does not have any subsidiaries, direct or indirect, and does not have an equity position (or the option or right to acquire an equity position) in any other entity.  Corporation operates an Internet Business distributing goods through professional-only channels and shipping to all fifty (50) United States and not elsewhere.  Corporation has provided to Purchaser true and complete copies of the current Articles of Incorporation and By-laws and all amendments thereto of Corporation.  The Trusts are each trusts duly organized and validly existing under the laws of the State of Wisconsin.  William J. Plummer, an individual and resident of the State of Wisconsin is the sole trustee of each Trust.  Corporation has provided to Purchaser true and correct copies of the trust agreements and other Organizational Documents of the Trust s.  Each Trust has the full power and authority to own the shares set forth opposite its name on Schedule 5.28.2, and to enter into the Transaction Documents and perform its obligations thereunder.

5.2Authority and Binding Obligations.  The execution and delivery of this Agreement and the other Transaction Documents required to be executed by Corporation, and the performance by Corporation of its respective obligations hereunder, have been duly authorized by all required directors and other corporate approvals.  The execution and delivery of this Agreement and the other Transaction Documents required to be executed by a Trust, and the performance of by the Trust of its respective obligations hereunder, have been duly authorized by

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all required Trust approvals.  The execution and delivery of this Agreement and the other Transaction Documents required to be executed by any Shareholder and/or Corporation, and the performance by each Shareholder and Corporation of their respective obligations hereunder, do not: (i) violate or conflict with any provisions of the Organizational Documents of Corporation or any Law which is applicable to, binding upon or enforceable against Corporation, or its Assets, or the Shareholders; (ii) violate or conflict with any provisions of the trust agreements or other Organizational Documents of the Trusts; (iii) result in the creation of any Lien upon any of the Assets of Corporation; (iv) cause the acceleration of the maturity of any Indebtedness of Corporation or cause any third party rights under, or the performance required by Corporation under, any Contract of Corporation to accelerat e, except for the Closing Debt; or (v) require the consent or approval of any Governmental Authority.  The Transaction Documents have been duly executed and delivered by each of the Shareholders and Corporation and are legal, valid and binding obligations of each of the Shareholders and Corporation, enforceable in accordance with their respective terms.

5.3Compliance With Laws; Environmental, Health and Safety Matters.

5.3.1The Corporation and the Aerial Beauty Supply Business have been and are being conducted in all respects in compliance with all applicable Laws.  Since October 1, 2006, neither the Corporation nor any Shareholder has received any notice, request for information, or other correspondence from any Governmental Authority or any other Person concerning any violation (actual or alleged) of any such Laws.   Except as set forth on Schedule 5.3.1, there is no Legal Proceeding pending or threatened by any Governmental Authority or other Person, against the Corporation or any Shareholder relating to compliance with any such Law, nor is the Corporation or any Shareholder aware of any such unasserted Legal Proceeding or any claim the assertion of which is probable.

5.3.2Except as set forth on Schedule 5.3.2, none of the Assets (including real property), Stores or Warehouses currently or formerly owned, leased, operated, or used by the Corporation or the Aerial Beauty Supply Business, or any predecessor in interest (collectively the “Subject Property”) contains/contained, during such period as the Subject Property has been/was owned, leased, operated, or used by the Corporation or the Aerial Beauty Supply Business, or any predecessor in interest, Hazardous Substances; except for those Hazardous Substances contained in Inventory at the time of manufacture; such Inventory only being purchased and sold in the ordinary course of business and consistent with past practice of Corporation, and otherwise used by Corporation in accordance with all applicable Laws.

5.3.3The Corporation and the Aerial Beauty Supply Business have been and are being conducted in all respects in compliance with all Environmental Laws.  Neither the Corporation nor any Shareholder has caused or taken any action that would reasonably be expected to result in any Liability or obligation relating to: (i) the environmental conditions at, on, above, under, or about any Subject Property; or, (ii) the past or present use, management, handling, transport, treatment, generation, storage, disposal, Release or threatened Release of Hazardous Substances.  There has been no dumping, discharge, spillage, migration, leakage, disposal, burial, placement, or other Release of Hazardous Substances by the Corporation or by any other Person on, in, at, above, under, from or about any Subject Property during the period of ownership, leasing, operation or use by Corporation or any predecessor in interest.

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5.3.4All waste containing any Hazardous Substance generated, used, handled, stored, treated or disposed of by the Corporation or the Aerial Beauty Supply Business, or any predecessor in interest, or sent by the Corporation, the Aerial Beauty Supply Business, or any predecessor in interest, for disposal at an off-site location, has been Released or disposed of in compliance with applicable Environmental Laws and reporting requirements, and there are not any environmental claims, requests for information from a Governmental Authority or demands to take response, removal, corrective, remedial or other responsive action or to pay for the costs of any such action at an y facility or site with respect to any such Release or disposal.

5.3.5Since October 1, 2006, neither the Corporation nor any Shareholder has received any notice, request for information, or other correspondence from any Governmental Authority or any other Person concerning any:  (i) Environmental Laws with respect to the Corporation, the Aerial Beauty Supply Businesses, any Shareholder, or any Subject Property; (ii) Hazardous Substances that have been generated, treated, stored, handled or removed from or disposed of on any Subject Property; or, (iii) Hazardous Substances which have migrated on, in, under, above or to any Subject Property from any adjacent property or which has migrated, emanated or ori ginated from any Subject Property onto any other property.

5.3.6Neither Corporation nor any Shareholder has received any notice or has any reason to believe that Corporation or the lessor or lessee of any property used at any time in conducting all or any portion of the Aerial Beauty Supply Business or owned either presently or at any time previously by Corporation (or any predecessor thereof) is a potentially responsible party for a federal, state, municipal or local cleanup site or corrective action under any Environmental Law.

5.3.7There is no pending, or to the knowledge of any Shareholder or Officer, threatened or proposed proceeding or governmental action to modify the zoning classification of, or to condemn or take by the power of eminent domain (or to purchase in lieu thereof), or to classify as a landmark, or to otherwise restrict the use of any of the properties where any Store or Warehouse is located.

5.3.8The Corporation and the Aerial Beauty Supply Business have obtained all Environmental Permits that are required for the operation of the Aerial Beauty Supply Business as presently conducted and the use of any Store or Warehouse required by any Environmental Law, and are, and have been at all times, in compliance with each such Environmental Permit, consent, approval or authorization.  Schedule 5.3.8 contains a complete and accurate list of each such Environmental Permit.

5.3.9There is no Legal Proceeding pending, or to the knowledge of any Shareholder or Officer, threatened by any Governmental Authority or other Person, against the Corporation or any Shareholder relating to environmental protection, compliance with Environmental Laws, or the condition of any Subject Property, nor is the Corporation or any Shareholder aware of any unasserted Legal Proceeding or any such claim the assertion of which is probable.

5.3.10Corporation has provided to Purchaser true and complete copies of all environmental site assessments, audits, test results, analytical data, boring logs, and other environmental reports, investigations and studies in the possession, custody or control of

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Corporation relating to locations or Assets currently owned, leased, operated or used by the Corporation.

5.4Financial Statements; Internal Controls.

5.4.1Corporation has delivered to Purchaser complete copies of the Financial Statements.  Except as set forth in Schedule 5.4.1, the Financial Statements have been prepared in accordance with GAAP and the books and records of the Corporation, and present fairly the financial position, results of operations and cash flows of the Corporation at and for the respective periods indicated (subject, in the case of the Unaudited Financial Statements, to normal year-end adjustments, which will not be material to the Corporation, individually or in the aggregate).

5.4.2Corporation has devised and maintained systems of internal accounting controls with respect to the Aerial Beauty Supply Business sufficient to provide reasonable assurances that: (i) all transactions are executed in accordance with management’s general or specific authorization; (ii) all transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP and to maintain proper accountability for Assets; (iii) access to the Corporation’s Assets is permitted only in accordance with management’s general or specific authorization; (iv) the recorded accountability for Assets is compare d with the actual levels at reasonable intervals and appropriate action is taken with respect to any differences; (v) the financial records and financial statements of the Corporation are complete and accurate; and, (vi) material information regarding the operations of the Corporation and its financial condition is accumulated and communicated to Corporation’s management, including its principal executive and financial officers.

5.4.3Corporation has no Liabilities, except: (i) as set forth in Schedule 5.4.3; (ii) Liabilities and obligations disclosed or reserved against in the Financial Statements or specifically disclosed in the notes thereto; and, (iii) account payable and other current Liabilities.

5.5Absence of Certain Changes.  Since June 30, 2010, except as set forth in Schedule 5.5, the Aerial Beauty Supply Business has been conducted in the ordinary course consistent with past practice and there has not been:

5.5.1Any declaration or payment of any dividend or other distribution or consideration with respect to any Shares or other Corporation Securities, or any redemption or other acquisition by the Corporation of any Corporation Securities, other than tax distributions made to Shareholders on a pro rata basis and the transfer of the Life Insurance as contemplated under this Agreement;

5.5.2Any amendment or modification of the Organizational Documents of the Corporation or of the terms of any Corporation Securities;

5.5.3Any incurrence of any Indebtedness by the Corporation, other than in the ordinary course of business;

5.5.4Any creation or other incurrence of any Lien on any Asset of the Corporation other than Permitted Liens;

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5.5.5       Any loan, advance or capital contribution to or investment in any Person by the Corporation;

5.5.6       Any material damage, destruction or other casualty loss (whether or not covered by insurance) affecting the Aerial Beauty Supply Business or the Assets of the Corporation;

5.5.7       Any: (i) change in any method of accounting or accounting principles or practices by the Corporation except for any such change required by reason of a concurrent change in GAAP; or (ii) revaluation of any material Assets;

5.5.8       Any: (i) grant of any severance or termination pay or other arrangement to (or amendment to any existing arrangement with) any director, officer or employee of the Corporation; (ii) increase in benefits payable under any existing severance or termination pay policies or employment agreements; (iii) employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) entered into with any director, officer or employee of the Corporation; (iv) establishment, adoption or amendment (except as required by applicable law) of any collective bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred compensation, compensation, stock option, restricted stock or other benefit plan or arrangement covering any director, officer or employee of the Corporation; or (v) increase in compen sation, bonus or other benefits payable to any director, officer or employee of the Corporation, other than in the ordinary course of business consistent with past practice;

5.5.9       Any capital expenditures, or commitments for capital expenditures, in an amount in excess of $100,000 in the aggregate, by the Corporation;

5.5.10     Any Tax election made or changed, any annual Tax accounting period changed, any method of Tax accounting adopted or changed, any amended Tax Returns or claims for  Tax refunds filed, any closing agreement entered into with any Tax authority with respect to Taxes, any proposed Tax adjustments or assessments, any Tax claim, audit or assessment settled with any Tax authority, or any right to claim a Tax refund, offset or other reduction in Tax liability surrendered, in each case, by the Corporation;

5.5.11     Any payments made to, discounting in favor of or any other consideration extended to customers or suppliers by the Corporation, other than in the ordinary course of business consistent with past practice;

5.5.12     Any failure to pay or satisfy when due any Liability of the Corporation;

5.5.13     Any sale, transfer, lease or other disposition of any Asset, except for Inventory sold in the ordinary course of business consistent with past practice;

5.5.14     Any acquisition of a material amount of the stock or Assets of any other Person;

5.5.15     Any amendment, cancellation, compromise or waiver of any claim or right of the Corporation; or

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5.5.16     Any agreement or commitment by the Corporation to do any of the foregoing or any action or omission by the Corporation that would reasonably be expected to result in any of the foregoing.

5.6          Books of Account.  Corporation’s books of account and other records fairly present and reflect (subject to normal month end and year end adjustments) all of the transactions entered into by Corporation and as to which Corporation is a party or may be bound or otherwise affected.

5.7          Tax Matters.  Except as set forth in Schedule 5.7:

5.7.1       Corporation has timely filed all Tax Returns required to have been filed, and each such Tax Return has been prepared in compliance with all applicable Laws, and all such Tax Returns are true and accurate in all respects.  Corporation has paid all Taxes due or owing (whether or not shown on any Tax Return), including any prior Tax deficiencies, and Taxes subsequently assessed by an appropriate Tax authority.  With respect to any Taxes that are not yet due and owing, Corporation has made sufficient accruals on the Financial Statements.  Corporation has complied with all applicable Laws relating to the payment and withholding of Taxes and has duly and timely withheld and paid over to the appropriate Tax authority all amounts required to be so withheld and paid under all applicable Laws. There are no outstanding requests for, and Corporation has not been granted any, extensions of time within which to file Tax Returns.

5.7.2       Neither the IRS nor any other Tax authority has asserted, proposed or assessed against Corporation in writing any deficiency or claim for Taxes which has not been settled or otherwise resolved, and no written claim has ever been made by any jurisdiction in which Corporation does not file Tax Returns to the effect that Corporation is or may be subject to any Tax imposed by that jurisdiction.

5.7.3       There is no pending or to the knowledge of any Shareholder or Officer, threatened action, audit, proceeding, or investigation by the IRS or any other Tax authority against or with respect to Corporation with respect to: (i) the assessment or collection of Taxes; or, (ii) a claim for refund made by Corporation with respect to Taxes previously paid.

5.7.4       Corporation has not waived or requested to waive any statute of limitations with respect to the assessment of any Tax or agreed to any extension of time with respect to the assessment of any Tax.

5.7.5       There are no Liens for Taxes (other than for Taxes not yet due and payable) upon any of the Assets of Corporation.

5.7.6       Corporation will not be required to: (i) include in income any adjustment pursuant to Section 481(a) of the Code (or similar provisions of other Law) by reason of a change in accounting method nor does Corporation or any Shareholder or Officer have any knowledge that the IRS (or other Tax authority) has proposed, or is considering, any change in accounting method requiring any adjustment to the income of Corporation for any past, present, or future taxable period; or, (ii) include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a

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result of any “closing agreement,” as described in Section 7121 of the Code (or any corresponding provision of state, local or foreign income Tax Law).  Corporation has not entered into any closing agreement under Section 7121 of Code or any corresponding provision of any state, foreign or local income Tax Law.

5.7.7       Corporation has not made, will not make, or become obligated to make, as a result of any transactions contemplated hereby, any “parachute payments” as defined in Section 280G of the Code (without regard to subsection (b)(4) thereof).

5.7.8       There are no elections, consents or agreements with Tax authorities other than those reflected on Tax Returns filed with Tax authorities, copies of which have been provided to the Purchaser prior to the Closing Date.

5.7.9       Corporation: (i) is not a party to any tax sharing, indemnity or similar agreement or arrangement, including any terminated agreement as to which it has any continuing Liability; (ii) has no current or potential contractual obligation to indemnify any other person or entity with respect to Taxes: and, (iii) has no Liability for the Taxes of any Person as a transferee or successor or otherwise.

5.7.10     Corporation is not and has never been a member of any consolidated, combined, affiliated or unitary group of corporations for any Tax purposes.

5.7.11     Corporation has not paid any dividends in the past seven (7) years other than cash dividends.

5.7.12     All transactions between Corporation and any Affiliates or any related person (as defined in Section 267 of the Code) have been consummated on an arms length basis for fair value so as not to give rise to any Tax Liability, under Section 482 of the Code.

5.7.13     Corporation has not participated in any reportable transaction, as defined in Treasury Regulation Section 1.6011-4(b)(1), or a transaction substantially similar to a reportable transaction.

5.7.14     Corporation has not constituted either a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code: (i) in the two (2) years prior to the date of this Agreement or, (ii) in a distribution which could otherwise constitute part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement.

5.7.15     Corporation has properly and timely elected under Code Sections 1362 of the Code and all applicable Treasury regulations promulgated thereunder, and under each analogous or similar provision of state or local Law in each jurisdiction where Corporation is required to file an income or franchise Tax return and is permitted to so elect, to be treated as an “S” corporation for all taxable periods since January 1, 1992.  There has not been any voluntary or involuntary termination or revocation of any such election before the Closing Date and, to the knowledge of any Shareholder or Officer, no Tax authority has challenged or is challenging Corporation’s qualification as an S corporation.  Corporation has complied with all Laws

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necessary to maintain its election as an S corporation at all times since formation and Corporation will be a valid S corporation within the meaning of Code Sections 1361 (and any comparable provision of state or local Law) up to and including the Closing Date.

5.7.16     Each of the Shareholders is, and has been at all times during the period in which both: (i) the Corporation has been an S corporation within the meaning of Section 1361(a) of the Code; and, (ii) such Shareholder has been a shareholder of the Corporation, a valid shareholder of an S corporation within the meaning of Section 1361(a) of the Code (and any comparable provision of state and local Tax Law in each jurisdiction in which the Corporation is obligated to file income or franchise Tax Returns).

5.7.17     Corporation does not have any potential Liability for any Tax under Section 1374 of the Code (or comparable state or local Law) in connection with the actual sale of the Corporation’s Assets, or a deemed sale of the Corporation’s Assets caused by the Section 338(h)(10) Election. Corporation has not, in the past 10 years: (i) acquired Assets from another corporation in a transaction in which Corporation’s Tax basis for the acquired Assets was determined, in whole or in part, by reference to the Tax basis of the acquired Assets in the hands of the transferor; or, (ii) acquired the stock of any corporation which is a qualified subchapter S subsidiary.

5.8          No Material Adverse Effect.  Since December 31, 2009, there has not been any Material Adverse Effect.

5.9          Assets.  Except as disclosed on Schedule 5.9, Corporation, now, and as of the Closing Date will, own and have good and marketable title to, and is the lawful owner of (without limitation), all Assets used in connection with the Aerial Beauty Supply Business, and all of the Assets reflected in the respective Financial Statements (other than assets leased under any lease set forth in Schedule 5.10.1(a) and assets disposed of in the ordinary course of business consistent with customary past practices and not disposed of in violation of any provision hereof), free and clear of all Liens, other than Permitted Liens. The Assets of the Corporation as of the Closing Date will be, all of the Assets required for the conduct of the Aerial Beauty Supply Business consistent with past practice.  The plants, buildings, structures and material equipment and all other tangible Assets are in good repair and operating condition, subject only to ordinary wear and tear, and are adequate and suitable for the purposes for which they are presently being used or held for use.  There are no facts or conditions affecting any material Asset of the Corporation that could reasonably be expected, individually or in the aggregate, to interfere with the use, occupancy or operation of such Assets.

5.10        Leases.

5.10.1     Schedule 5.10.1(a) lists all of the leases of personal property, including vehicles, to which Corporation is a party or is otherwise bound (including all amendments and modifications thereto), and reflects for each the names of the lessor and lessee, the address of the Store, Warehouse or other location where the personal property is located, and the commencement and expiration dates (including renewal terms, if any).  Schedule 5.10.1(b) lists all of the leases of real property to which Corporation is a party or is otherwise bound (including all amendments and modifications thereto) and reflects each of the names of the lessor and lessee,

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the address or location of the Store, Warehouse or other item of real property, and the commencement and expiration dates (including renewal terms, if any).

5.10.2     Corporation has delivered to Purchaser true and complete copies of all real property leases and leases of personal property to which Corporation is a party or is otherwise bound (including all amendments and modifications thereto).  Each such lease is, and upon the consummation of the transactions contemplated hereby on the Closing Date as herein provided will be, valid and subsisting and in full force and effect and enforceable in accordance with its terms by Corporation.  Except as described in Schedule 5.4.3, with respect to Corporation’s Deer Park, IL, lease, no such lease relates to a Store, Warehouse or other item or real property that has been closed.  No lease has been assigned or subleased in whole or in part by Corporation to another Person.  Except with respect to transactions contemplated under this Agreement, Corpor ation and the lessor thereof have performed all of their respective obligations, and there is no default thereof, or event, which with the giving of notice, the passage of time or both, would result in a default on the part of, or acceleration of obligations of, either Corporation or the lessor under any such lease.  Corporation has not assigned, hypothecated, pledged, mortgaged, or encumbered its interest, or any part thereof, as lessee under any such lease.

5.10.3     All personal property leased by Corporation as lessee is in good working condition, ordinary wear and tear excepted, has been maintained as required by and in accordance with the terms of each such lease, and is suitable for the present use thereof.  The current use by Corporation of the Stores, Warehouses, other items of real property, and personal property leased by it does not violate the terms of any lease, any Law, or conflict with any Contract to which Corporation is a party or is otherwise bound.  No proceedings are pending or to the knowledge of any Shareholder or Officer, threatened, for condemnation of all or any part of any Store, Warehouse, or other item of real property leased Corporation.   All real and personal property leases are arms length and have been made in the usual and ordinary course of business consistent with the cus tomary past practices of Corporation.

5.11        Contracts.

5.11.1     Set forth on Schedule 5.11.1 is a list of all Contracts of the Corporation as of the Closing Date.  The parties are in agreement that all Contracts requiring the payment of money in exchange for goods or services, with the payment not exceeding $25,000 or having a term of less than ninety (90) days can be excluded from Schedule 5.11.1 (the “Excluded Contracts”).  The Shareholders and Corporation have delivered true and correct copies of all Contracts, other than the Excluded Contracts, to Purchaser (including all amendments and modifications thereto).  The aggregate value of Excluded Contracts does not exceed $100,000.

5.11.2     All Contracts of the Corporation are arms length and were made in the usual and ordinary course of business consistent, as applicable, with Corporation’s customary past practices.  Corporation and the other parties thereto have performed all of their respective obligations and duties under each Contract and, except with respect to transactions contemplated under this Agreement, there is no default or event, which with the giving of notice, the passage of time or both, would result in a default on the part of, or accelerate any obligation of, Corporation or any such other party under any such Contracts.

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5.12        Purchase Orders.  Set forth on Schedule 5.12 is a list of all unfilled purchase orders and commitments of Corporation, for orders over Ten Thousand Dollars ($10,000) as of a specified date within 10 days prior to the Closing Date.  All unfilled purchase orders and commitments of Corporation as of the Closing Date are arms length and have been made in the usual and ordinary course of business consistent with Corporation’s customary past practices and in normal quantities required by the Aerial Beauty Supply Business.  Corporation has previously delivered true and correct copies of all open purchase orders to Purchaser (including all amendments and modifications thereto).

5.13        Customer Orders.  All unfilled customer orders and commitments of Corporation as of the Closing Date are arms length and have been made in the usual and ordinary course of business consistent with Corporation’s customary past practices and at prices reflecting the customary markups of  Corporation.  Corporation has previously delivered true and correct copies of all customer orders to Purchaser (including all amendments and modifications thereto).

5.14        Inventory.  For a period of one (1) year prior to the Closing Date, all of the purchase orders of Corporation for Inventory have been arms length and in the usual and ordinary course of business consistent with Corporation’s customary past practices. The Inventory as of the Closing Date is in normal quantities and saleable in the ordinary course of business consistent with customary past practices by the Aerial Beauty Supply Business; and, except as set forth on Schedule 5.14, is in good clean condition, in currently available packaging, not damaged or obsolete and carried on the Financial Statements at not more than the amount resulting from the method used to calculate the Inventory value under paragraph 4.1.1.

5.15        Permits.  Set forth on Schedule 5.15 hereto is a true and correct list of all Permits possessed or used by Corporation.  Corporation has previously delivered to Purchaser true and complete copies of all Permits possessed or used by Corporation (including all amendments and modifications thereto).  The Permits which are listed on Schedule 5.15 are all that are necessary to conduct the Aerial Beauty Supply Business as presently conducted, and in each case where applicable, to own the Assets owned by Corporation and lease the Assets leased by Corporation.  Corporation is in compliance with all such Permits, and all such Permits are in full force and effect.

5.16        Tangible Assets.  Set forth on Schedule 5.16 are all of the tangible Assets owned by Corporation, having an original acquisition cost of $1,000 or more.

5.17        Legal Proceedings.  Schedule 5.17 sets forth all Legal Proceedings (excluding worker’s compensation proceedings) to which Corporation has been a party during the last three (3) years, to which Corporation is currently a party or which, for equivalent periods, involves any of the Assets used by the Aerial Beauty Supply Business.  Except as set forth in Schedules 5.17, there are no Legal Proceedings pending or, to the knowledge of any Shareholder or Officer, threatened against Corporation, nor does Corporation or any Shareholder know, or have any grounds to know or reason to believe, of any basis for the filing of a Legal Proceeding involving the Corporation or its Assets.  Corporation is not in default with respect to any order, judgment, injunction, decree or consent decree by any Governmental Authority.  No suc h order, judgment, injunction decree or consent decree is now in effect which pertains to Corporation or any aspect of the Aerial Beauty Supply Business or any of the Assets used therein.  Corporation has made available for review by Purchaser true and complete copies of all documentation prepared or

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generated in connection with all of the Legal Proceedings disclosable in this paragraph 5.17, including, without limitation, complaints, orders, and briefs.

5.18        Intellectual Property.

5.18.1     Schedule 5.18.1 lists all Intellectual Property owned by the Corporation (the “Owned Intellectual Property”) that is registered or subject to an application for registration or that is otherwise used in the Aerial Beauty Supply Business, other than Trade Secrets.  The Corporation is the exclusive owner of the Owned Intellectual Property set forth in Schedule 5.18.1, free and clear of any Liens other than Permitted Liens.

5.18.2     Schedule 5.18.2 lists all agreements to which the Corporation is a party or by which it is otherwise bound that relate to Intellectual Property, including:  (i) licenses of Intellectual Property to the Corporation by any other Person; (ii) licenses of Intellectual Property to any other Person by the Corporation; (iii) agreements otherwise granting or restricting the right to use Intellectual Property; and, (iv) agreements transferring, assigning, indemnifying with respect to or otherwise relating to Intellectual Property used or held for use in the Aerial Beauty Supply Business.  Corporation does not use any Software or other Intellectual Property of any third party except pursuant to license arrangements listed on Schedule 5.18.2.

5.18.3     The conduct of the Aerial Beauty Supply Business does not infringe or otherwise conflict with the rights of any Person in respect of any Intellectual Property, and has not done so at any time prior to the Closing Date.  None of the Owned Intellectual Property is being infringed or otherwise used or being made available for use by any Person without a license or permission from the Corporation.

5.18.4     Except as set forth in Schedule 5.18.4, the Corporation has taken commercially reasonable actions to ensure full protection of the Owned Intellectual Property under any applicable Law (including making and maintaining in full force and effect filings, registrations and issuances).  Corporation has taken commercially reasonable actions to maintain the secrecy of all confidential Intellectual Property used in the Aerial Beauty Supply Business. Corporation is not using (or permitting the use of) any material Owned Intellectual Property in a manner that would reasonably be expected to result in the cancellation or unenforceability of such Owned Intellectual Property.

5.18.5     Neither Corporation nor any Shareholder has received:  (i) any notice or claim of infringement; or (ii) any claim challenging or questioning the validity or effectiveness of any of the Owned Intellectual Property, and neither the Corporation nor any Shareholder know of any basis for any such claim.

5.18.6     The transactions contemplated by this Agreement will in no way alter or impair Corporation’s right to any of the Owned Intellectual Property or the free alienability thereof.

5.19        Employees.  Set forth on Schedule 5.19 hereto is a lists of all hourly and salaried employees of Corporation as of the Closing Date, setting forth as of such date for each his or her title and/or current job description, compensation, a description (individually or collectively) of all fringe benefits of any kind or nature, including all bonus and expense arrangements.

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Corporation has complied with all Laws with regard to the treatment of and payment of all such employees (including but expressly not limited to Title VII of the Civil Rights Act, as amended, the Fair Labor Standards Act and state wage and expense calculation and payment statutes).  All compensation and fringe benefits of any kind or nature which predate the Closing Date have been or will be paid prior to such date, or to the extent not paid, will be fully accrued on the Closing Balance Sheet.  Corporation has not effectuated (i) a “plant closing” (as defined in the Worker Adjustment and Retraining Notification (WARN) Act Pub. L. 100-379, 102 stat. 890 (1988) (the “WARN Act”)) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Corporation; or (ii) a “mass layoff” (as defined in the WARN Act) affecting any site of employment or facility of the Corporation; and the Corporation has not been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local Law.  Except as set forth on Schedule 5.19 none of the Corporation’s employees has suffered an “employment loss” (as defined in the WARN Act) during the six (6) months prior to the Closing Date.

5.20        Labor Contracts and Controversies.  Corporation is not a party to any collective bargaining agreement with any labor union or any local or subdivision thereof.  To the knowledge of the Shareholders, there is no current union organizing activity among any of the employees of Corporation nor any union representation petition pending or threatened before the National Labor Relations Board or any similar agency in any state.  There is no controversy to which Corporation is a party pending before any Governmental Authority or pursuant to any internal grievance procedure or threatened, including, without limitation, any unfair labor practice charges involving Corporation.

5.21        Retirement and Benefit Plans; ERISA.

5.21.1     Schedule 5.21.1 lists all the Company Benefit Plans (including a description of any unwritten Company Benefit Plans).  With respect to each such Company Benefit Plan, Shareholders have provided or made available to Purchaser, to the extent applicable: (i) the current plan document, trust agreement, insurance contract and other funding arrangement; (ii) the two most recent actuarial and trust reports; (iii) the two most recent Forms 5500 with all attachments required to have been filed with the IRS or the Department of Labor or any similar reports filed with any comparable governmental authority in any non-U.S. jurisdiction having jurisdiction over any Company Benefit Plan, and all schedules thereto; (iv) the most recent IRS determination letter; (v) the current summary plan description; and, (vi) all communications received from or sent to the IRS, the Pension Benefit Guaranty Corporation, the Department of Labor or any other Governmental Authority for the current plan year and the two preceding plan years; and, (vii) all amendments and modifications.  The Corporation has not communicated to any current or former employee any intention or commitment to establish, implement, amend or modify any Company Benefit Plan or any other employee or retiree benefit or compensation plan or arrangement.

Each Company Benefit Plan intended to be qualified under section 401(a) of the Code, and the trust (if any) forming a part thereof, is so qualified and has received a favorable determination letter from the IRS (or the Corporation is relying upon the opinion or advisory letter issued by the IRS to the underlying plan document sponsor).  All amendments and actions required to bring each Company Benefit Plan into conformity with the applicable provisions of ERISA, the Code, and other applicable Law have been made or taken, except to the extent such

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amendments or actions are not required by Law to be made or taken until after the Closing Date.  Each Company Benefit Plan has been operated in all material respects in accordance with its terms and applicable Law.  Each Company Benefit Plan that is a “nonqualified deferred compensation plan” (within the meaning of Section 409A(d)(1) of the Code) subject to Section 409A of the Code was, as of January 1, 2009, and has remained, in documentary and operational compliance with Section 409A of the Code and the then applicable guidance issued by the Internal Revenue Service thereunder.

5.21.2     Neither the Corporation nor any Related Person has at any time maintained, sponsored, contributed to or been obligated to contribute to an “employee pension plan” (as defined in Section 3(2) of ERISA) that is or was subject to Title IV of ERISA, including a “multi-employer plan” (as defined in ERISA Section 3(37) and 4001(a)(3)), or a “multiple employer plan” (meaning a plan sponsored by more than one employer within the meaning of ERISA Sections 4063 or 4064 or Code Section 413(c)).

5.21.3     Neither Corporation nor any Related Person has incurred (either directly or indirectly, including as a result of an indemnification obligation) any liability under or pursuant to the penalty, excise Tax or joint and several liability provisions of the Code relating to employee benefit plans, and no event, transaction or condition has occurred or exists that could result in any such liability to Corporation or any Related Person, or, following the Closing Date, Purchaser or any of its Affiliates.  All contributions and premiums required to have been paid by Corporation or any Related Person to any Company Benefit Plan under the terms of any such plan or its related trust, insurance contract or other funding arrangement, or pursuant to any applicable Law (including ERISA and the Code) or collective bargaining agreement have been paid within the time prescribed by any such plan, trust, contract, agreement or applicable Law.

5.21.4     There are no pending or, to the knowledge of any Shareholder or Officer, threatened, Losses by or on behalf of any participant in any of the Company Benefit Plans, or otherwise involving any such Company Benefit Plan or the assets of any Company Benefit Plan, that individually or in the aggregate would reasonably be expected to be materially adverse to the Corporation.  The Company Benefit Plans are not presently under audit or examination (nor has written notice been received of a potential audit or examination) by the IRS, the Department of Labor, or any other Governmental Authority, domestic or foreign, and no matters are pending with respect to a Company Benefit Plan under the IRS’s Employee Plans Compliance Resolution System (EPCRS), or other similar programs.

5.21.5     Corporation has no liability in respect of post-retirement health, medical or life insurance benefits for retired, former or current employees of the Corporation other than pursuant to the group health plan continuation coverage requirements of Section 4980B of the Code and Sections 601 through 608 of ERISA or similar applicable Law.

5.21.6     Except as set forth on Schedule 5.21.1, the execution, delivery, and performance of this Agreement by the Corporation and the consummation by the Corporation of the transactions contemplated by this Agreement will not (alone or in combination with any other event) result in an increase in the amount of compensation or benefits or the acceleration of the vesting or timing of payment of any compensation or benefits payable to or in respect of any current or former employee, officer, director or independent contractor of the Corporation or any increased or accelerated funding obligation with respect to any Company Benefit Plan.  No

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payment or deemed payment by the Corporation will arise or be made as a result (alone or in combination with any other event) of the execution, delivery and performance of this Agreement by the Corporation, or the consummation by Corporation of the transactions contemplated by this Agreement, that would not be deductible pursuant to section 280G of the Code.

5.22        Transactions With Related Parties.  Except as set forth on Schedule 5.22 hereto,  no Shareholder, nor any member of the “immediate family” (as such term is defined in Rule 16a-1 of the Exchange Act) of any Shareholder, or beneficiary or trustee of any trust: (i) owns any equity interest, directly or indirectly in, or is an officer or director of, any Person which: (A) is a competitor of Corporation; (B) is a customer or supplier of Corporation; or (C) has any contractual or business relationship whatsoever with Corporation; provided that the foregoing does not apply to the ownership (collectively) by them of not more than two percent (2%) of the outstanding security (or any class thereof) of any corporation or partnership listed on a national securities exchange, the Nasdaq Stock Market or traded over-the-counter; or (ii) has or claims to have any direct or indirect interest in any Asset used or held for use by Corporation.

5.23        Product Warranty.  Corporation has not extended any express warranties and there are no outstanding express warranties on any products sold by Corporation except for those from the manufacturers for which Corporation has no independent liability.

5.24        No Broker.  Except as set forth on Schedule 5.24, this Agreement and the transactions contemplated herein have not and will not be brought about through the action of any broker or finder retained or employed by any of the Shareholders or Corporation who would be entitled to a commission, finder’s fee or similar compensation.  In the event any such compensation is payable to a broker or finder, such compensation shall be paid by, and shall be the sole responsibility of, Shareholders.

5.25        Disclosure.  No representation or warranty by any of the Shareholders or Corporation to Purchaser contained in this Agreement, or any list, Schedule, or Exhibit or other writing furnished to Purchaser pursuant to the provisions of this Agreement or the transactions contemplated hereby, contains or will contain any untrue statement of fact or omits or will omit to state a fact necessary in order to make the statements herein and therein not misleading.

5.26        Insurance.

5.26.1     Schedule 5.26 lists, and Shareholders have made available to Purchaser complete copies of, all insurance policies (including fidelity bonds and other similar instruments) relating to the Corporation, the Assets, the Aerial Beauty Supply Business or the employees, officers or directors of the Corporation.  There is no claim by or with respect to the Corporation pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies or in respect of which such underwriters have reserved their rights.  All premiums payable under such policies have been timely paid, and Corporation has otherwise complied fully with the terms and conditions of such policies.  Such policies (or other policies providing substantially similar insurance coverage) have been in effect continuously since at least Jan uary 1, 2005 and remain in full force and effect.  The Corporation does not know of any threatened termination of, premium increase with respect to, or alteration of coverage under, any of such policies.

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5.26.2      No person other than Corporation and the Shareholders has any right, title or interest in the Life Insurance.  Upon transfer of the Life Insurance to the Shareholders, Corporation shall have no Liabilities with respect to the Life Insurance to any Person.

5.27         Indebtedness.  All Indebtedness outstanding as of September 30, 2010 is described in Schedule 5.27.  Schedule 5.27 sets out in respect of each such liability or obligation, its date, the other party or parties, principal repayment terms and all other material items.  The Shareholders have delivered to Purchaser true and complete copies of all instruments, notes, drafts, and any other document of any kind or description evidencing all of the Indebtedness (including all amendments and modifications thereto).

5.28         Capitalization.

5.28.1      The authorized capital stock of the Corporation consists of 56,000 Class A voting shares and 112,000 Class B non-voting common shares of which 34,882 shares of common stock, par value $1.00 per share, are issued and outstanding.  Of that number, 17,875 have voting rights and 17,007 are non-voting.  The Shares have been duly authorized and validly issued and are fully paid and nonassessable.  Shareholders own the Shares, beneficially and of record, free and clear of any Lien.  Upon delivery of and payment for the Shares at the Closing, Purchaser shall acquire good and valid title to all of the Shares, the Corporation and the Aerial Beauty Supply Business free and clear of any Lien, except as disclosed in Schedule 5.28.1.

5.28.2      Except as set forth in Schedule 5.28.2 (and therein setting forth the ownership numbers and percentage ownership of the Shares, and disclosing whether such Shares are voting or nonvoting), there are no outstanding: (i) Corporation Securities; (ii) any options or other rights or agreements, commitments or understandings of any kind to acquire from any Shareholder, any Shares; (iii) voting trusts, proxies or other similar agreements or understandings to which the Corporation is a party or by which the Corporation is bound with respect to the voting of any shares of capital stock of or other voting or equity interests in the Corporation; or, (iv) contractual obligations or commitments of any character restricting the transfer of, or requiring the registration for sale of, any shares of capital stock of or other voting or equity interests in the Corporation.  There are no outstanding obligations of the Corporation to repurchase, redeem or otherwise acquire any Corporation Securities.

5.29         Accounts Receivable.  All accounts, notes receivable and other receivables (other than receivables collected since August 31, 2010) reflected on the Unaudited Financial Statement are, and all accounts and notes receivable arising from or otherwise relating to the business of the Corporation as of the Closing Date will be, valid, genuine and fully collectible in the aggregate amount thereof, subject to normal and customary trade discounts, less any reserves for doubtful accounts recorded on the Financial Statements.  All accounts, notes receivable and other receivables arising out of or relating to the business of the Corporation have been included in the Financial Statements, and all accounts, notes receivable and other receivables arising out of or relating to the Aerial Beauty Supply Business as of the Closing Date wil l be included in the Closing Balance Sheet, in accordance with GAAP.

5.30         Bank Accounts.  Schedule 5.30 sets forth the names and locations of each bank, brokerage firm or other financial institution at which Corporation has an account (giving account numbers) or safe deposit box and the names of all persons authorized to draw thereon or have

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access thereto, and the names of all persons, if any, holding powers of attorney or comparable delegation of authority from Corporation.

5.31         Claims Against Officers and Directors.  There are no pending or, to the knowledge of any Shareholder or Officer, threatened, claims against any director, officer, employee or agent of Corporation which could give rise to any claim (whether through indemnification, contribution or otherwise) against Corporation.

5.32         Recorded Sales Consistent With Manufacturers’ Directions.  All sales data whether provided in the Financial Statements of Corporation or otherwise are based upon sales conducted substantially in accordance with manufacturers’ rules and regulations for sales of merchandise established by the respective manufacturers (so as not to be deemed a material breach), and does not contain any recorded sales resulting from Diversion.

5.33         Intercompany Accounts; Transactions With Affiliates.

5.33.1      Schedule 5.33.1 lists all balances as of June 30, 2010 between Shareholders or any of their Affiliates, on the one hand, and the Corporation on the other hand.  Since the June 30, 2010 there has not been any accrual of liability by the Corporation to any Shareholder or any of their Affiliates or other transactions between the Corporation and the Shareholders or any of their Affiliates, except, with respect to the period prior to the date of this Agreement, in the ordinary course of business of the Corporation consistent with past practice, and thereafter, as provided in Schedule 5.33.1.

5.33.2      Schedule 5.33.2 lists all agreements, arrangements and other commitments or transactions to or by which the Corporation, on the one hand, and any Shareholder or any of their  Affiliates, on the other hand, are or have been a party or otherwise bound or affected and that: (i) were entered into since three years ago; (ii) are currently pending or in effect; or, (iii) involve continuing Liabilities or obligations to the Corporation (each, an “Affiliate Transaction”).  Except as expressly indicated on Schedule 5.33.2, each Affiliate Transaction was on terms and conditions no more favorable to the Corporation or the other party than as would have been obtainable by them at the time in a comparable arm’s-length transaction with a third party.  Except as disclosed in Schedule 5.33.2, no stockholder, officer, director or employee of the Corporation, or any family member, relative or Affiliate of any such stockholder, officer, director or employee: (i) owns, directly or indirectly, any interest in: (A) any Asset of Corporation; or (B) any Person that is a supplier, customer or competitor of the Corporation; (ii) serves as an officer, director or employee of any Person that is a supplier, customer or competitor of the Corporation; (iii) is a debtor or creditor of the Corporation.  For purposes of this paragraph 5.33.2, and without limitation, Affiliates of the Shareholders shall be deemed to include: (i) any Person directly or indirectly beneficially owning or controlling 5% or more of the outstanding voting securities of Shareholder or any of their Affiliates; (ii) any Person 5% or more of whose outstanding voting securities are directly or indirectly beneficially owned or controlled by a Shareholder or any of their Affiliates; or, (iii) any current or former director or offi cer of Shareholders or any of their Affiliates or any “associates” or members of the “immediate family” (as such terms are respectively defined in Rule 12b-2 and Rule 16a-1 of the Exchange Act) of any such director or officer.

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5.34         Owned Real Property.  Schedule 5.34 contains a true, correct and complete list of each parcel of Real Property.  Corporation has good and marketable fee simple title to the Real Property, free and clear of all Liens, other than Permitted Liens.  Except as expressly set forth on Schedule 5.34, all Permits required for the occupancy, management, use and operation (as appropriate) of the Real Property as presently being used have been obtained and are in full force and effect and no Shareholder or Corporation has received any written notices of violations in connection with such items.  All buildings, plants and structures owned or used by the Corporation in connection with the Real Property: (i) lie wholly within the boundaries of the Real Property and do not encroach upon the property of any other Person; and (i i) are, as currently used by the Corporation, in compliance with all applicable zoning Laws.  Corporation and the other parties thereto have performed all of their respective obligations and duties under each Lien which may affect the Real Property or any portion thereof and there is no default or event, which with the giving of notice, the passage of time or both, would result in a default on the part of, or accelerate any obligation of, Corporation or any such other party under any such Lien.  There are no condemnation proceedings or agreements or Contracts in lieu thereof relating to the Real Property that are pending or threatened.  Neither any Shareholder or Officer nor the Corporation has received any written notice that any portion of the Real Property is to be condemned, requisitioned or otherwise taken in whole or in part by any Governmental Authority.  Neither any Shareholder or Officer nor the Corporation has received any written notice of any such public improvements or s pecial assessments that may adversely affect any of the Real Property.  Neither any Shareholder nor Corporation owns or holds, or is obligated under, or a party to any option, right of first refusal, or other contractual right to purchase, sell, lease or dispose of the Real Property or any portion thereof or interest therein.

6.

Representations and Warranties of Purchaser

In order to induce the Shareholders to enter into this Agreement and to consummate the transactions contemplated hereunder, Purchaser represents and warrants to the Shareholders that the following statements are true and correct as of the Closing Date:

6.1           Organization, Power and Authority.  Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware.  Purchaser is a wholly-owned indirect subsidiary of Sally Beauty Holdings, Inc., a Delaware corporation, and Purchaser is a disregarded entity for federal and state income tax purposes. Purchaser has full power and authority to own or lease its Assets and to carry on its business as now conducted by it, and to enter into the Transaction Documents and perform its obligations thereunder.

6.2           Authority and Binding Obligations.  The execution and delivery of this Agreement and the other Transaction Documents required to be executed by Purchaser, and the performance by Purchaser of its respective obligations hereunder, have been duly authorized by all required managers, members and other company approvals.  The execution and delivery of this Agreement and the other Transaction Documents required to be executed by Purchaser, and the performance by Purchaser of its obligations hereunder and thereunder, do not:  (i) violate or conflict with any provisions of the Organizational Documents of Purchaser or of any Law which is applicable to, binding upon or enforceable against Purchaser or its Assets; (ii) constitute or result in any breach

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of any of the terms, provisions, conditions of, or constitute a default under, or an event which, with notice or lapse of time or both, would constitute a default under any material Contract to which Purchaser is a party, or by which it or its Assets may be bound; or, (iii) require the consent or approval of any Governmental Authority or other Person.  The Transaction Documents have been duly executed and delivered by Purchaser and are legal, valid and binding obligations of each of Purchaser, enforceable in accordance with their respective terms.

6.3           No Broker.  This Agreement and the transactions contemplated herein have not and will not be brought about through the action of any broker or finder retained or engaged by Purchaser who is entitled to a commission, finder’s fee or similar compensation.  In the event any such compensation is payable to a broker or finder retained or engaged by Purchaser, such compensation shall be paid by, and shall be the sole responsibility of, the Purchaser.

7.

Covenants and Agreements

7.1           Consents to Assignment.  Ryan Hmielewski shall use his commercially reasonable best efforts to assist Purchaser as Purchaser may reasonably require after Closing in procuring consents to where necessary to assure the uninterrupted continuation of Store Leases, the Lincoln, Nebraska Warehouse lease and Contracts.

7.2           Restrictive Covenant.  As a material inducement to Purchaser to enter into and perform its obligations under this Agreement, Ryan Hmielewski and Laura Hmielewski (the “Hmielewskis”) agree, jointly and severally, as follows:

7.2.1        For a period of five (5) years after the Closing Date, the Hmielewskis shall not, directly or indirectly, alone or in conjunction with any other corporation, firm, partnership, person, venture or other entity, own (except as a holder of an aggregate of not more than two percent (2%) of the outstanding stock of a corporation or partnership whose stock or partnership interests are listed on national securities exchange, the Nasdaq Stock Market or traded over-the-counter), manage, operate, join, control, work for, permit the use of his/her name by, or consult with any Person that is engaged in a Beauty Supply Business, or otherwise engage in a Beauty Supply Business,  anywhere within the territory presently operated by Corporation as part of the Aerial Beauty Supply Business (including but not limited to the areas, as of the Closing Date, in which the Corporation has distribution rights from manufacturers, and the general market areas served through the Stores and by its outside salespeople, hereafter collectively referred to as the “Territory”).  This “Territory” is well known to the Hmielewskis, but if the scope of the Territory is not clear to either Hmielewski who is subject to the restrictions in this paragraph, then that Hmielewski shall have the duty to get clarification on the scope of the Territory covered from Purchaser before engaging in any behavior that might violate the restrictions in this paragraph.

7.2.2        For a period of one (1) year after the termination from employment from Corporation or its successors, neither of the Hmielewskis shall, as an employee, consultant, contractor, officer, owner, director, or otherwise, participate in, provide, supervise, manage or control activities or services on behalf of a Person engaged in a Beauty Supply Business within the Territory that are the same as or similar in function or purpose to the services that such individual provided to the Corporation or the Aerial Beauty Supply Business in the two year period preceding

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the termination of that individual’s employment (the “Look Back Period”).  This paragraph is not intended to prohibit: (i) employment with an independently operated subsidiary, division, or unit of a diversified corporation so long as the independently operated business unit at issue is truly independent and does not compete in any way with the Corporation (or its successor); or (ii) a passive and non-controlling ownership of less than 2% of a corporation or partnership whose stock or partnership interests are listed on national securities exchange, the Nasdaq Stock Market or traded over-the-counter). This paragraph 7.2.2 supplements, and does not replace, shorten, or diminish in any way the restrictions in paragraph 7.2.1.

7.2.3        The covenants contained in paragraphs 7.2.1 and 7.2.2 above shall be deemed to be a series of separate and severable covenants, one for each relevant county of each state located in the Territory.  Except for geographic coverage, each such separate covenant shall be deemed identical in terms with the covenants contained in paragraph 7.2.1.  If, in any judicial proceeding, a court should refuse to enforce all of the separate covenants deemed included in paragraph 7.2.1 because taken together they cover too extensive a geographic area, then it is intended that those of such covenants which, if eliminated, would permit the remaining separate covenants to be enforced in such proceedings shall, for the purpose of such proceeding, be deemed eliminated from the provisions hereof.

7.2.4        The covenants contained in paragraph 7.2.1 and 7.2.2 above shall be deemed to be a series of separate and severable covenants, one for each successive month during the terms of said covenants.  If, in any judicial proceeding, a court should refuse to enforce all of the separate covenants because taken together they cover too long a period of time, then the last of such covenants in time which, if eliminated, would permit the remaining separate covenants to be enforced in such proceeding shall, for the purpose of such proceeding, be deemed eliminated from the provisions hereof.

7.2.5        Any and all Proprietary Information which either Hmielewski heretofore obtained or may hereafter obtain with respect to the conduct and details of any portion of the Aerial Beauty Supply Business or a Beauty Supply Business as conducted by Purchaser, Corporation, any Affiliate thereof, or their successors, shall be held inviolate and shall not be revealed to any competitor of Corporation or Purchaser or any other Person.  Neither Hmielewski shall make any use of such knowledge or Proprietary Information, except for and on behalf of Purchaser, Corporation or an Affiliate thereof, or their successors.  “Proprietary Information” shall mean knowledge and information, relating to Corporation, or any portion of Aerial Beauty Supply Business or a Beauty Supply Business as conducted by Purchaser, Corporation, any Affiliate thereof or their successors, which: (i) is not generally available to the public; (ii) gives or may give any competitive advantage to Corporation, Purchaser, any Affiliate thereof or their successors with respect to the operation of any Beauty Supply Business; or (iii) if disclosed, could give any advantage to a competitor of Corporation, Purchaser, any Affiliate thereof or their successors, or could otherwise be deleterious to Corporation’s or Purchaser’s ownership or operation of a Beauty Supply Business.

7.2.6        For a period of three (3) years following the Closing, and also a period of one (1)  year after the date of their respective terminations from the Corporation or its successor, the Hmielewskis will not directly or indirectly, request, induce, influence or solicit any employee, customer, or supplier of Purchaser, Corporation or any Affiliate thereof (including, without limitation, any employee of Corporation who is hired as an employee by Purchaser) to terminate

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his, her or its employment or business relationship with Purchaser, Corporation or the Affiliate thereof.

7.2.7        The parties recognize that the goodwill and going business value of  the Corporation being purchased and acquired by Purchaser are very closely related to the special, unique and extraordinary knowledge and skill by each Hmielewski and that the consummation by Purchaser of this Agreement will be in reliance upon the unconditional assurance of each Hmielewski, as applicable, that they will fully comply with the terms of this Agreement, particularly, but not limited to, such terms as relate to their covenants and undertakings not to engage in competition or to divulge information.  Further, the period of protection of Purchaser against the competition of each Hmielewski, as applicable, and the geographical area within which such protection is essential has been agreed by the parties to be reasonable and necessary.  Therefore, if eith er Hmielewski shall at any time breach or in any manner violate any such covenant, then Purchaser, in addition to, but not in substitution for, any and all other relief to which Purchaser may be entitled either at law or in equity, shall be entitled to equitable relief against the Hmielewski by way of injunction to restrain the Hmielewski from such breach and to compel compliance by the Hmielewski with its obligations hereunder.  Each Hmielewski does hereby waive any requirement that Purchaser or Corporation prove: (i) that such breach will cause irreparable injury; or, (ii) that there is no adequate remedy at law.

7.2.8        In the event that a court of competent jurisdiction determines that either of the Hmielewskis has breached this paragraph 7.2, the Hmielewskis shall pay to Purchaser the attorneys’ fees and costs incurred by Purchaser in seeking relief or damages from such breach.

7.2.9        In the event that a court of competent jurisdiction shall refuse to enforce the provisions of the restrictive covenants set forth in paragraphs 7.2.1 and 7.2.2 of this Agreement because it deems the length of time or the geographical area to be excessive or unreasonable, then the time period or the geographical area, or both, shall be deemed to be amended to conform to such time period and geographical area as such court shall determine to be reasonable and not excessive.

7.3           Resignations.  Each Shareholder and Corporation shall assure that all officers designated by the Purchaser, all members of the Board of Directors of Corporation, and family members previously designated by Purchaser shall have resigned effective on the Closing Date.

7.4           Store Cash.            Any other provision of the Transaction Documents notwithstanding, the Stores will be left with no less that $200 apiece petty cash upon Closing.

7.5           Life Insurance.  The Life Insurance and the Jaeger Deferred Compensation Agreement were transferred out of Corporation on September 30, 2010.  The parties agree to treat the transfer of the Life Insurance prior to the Closing for all tax purposes as a distribution of the Life Insurance to the Shareholders in proportion to their ownership of stock in Corporation.

7.6           Post-Closing Access.  The parties hereto acknowledge that following Closing, the Shareholders may need access to information or documents in the control or possession of Purchaser, Corporation, or its successor, for the purposes of concluding or addressing the transactions contemplated herein, audits, Tax Returns, compliance with governmental requirements and regulations, and the prosecution or defense of third party claims.  Accordingly,

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Purchaser agrees that for a period of three (3) years after Closing, it will make, or cause the Corporation or its successor to make, reasonably available to the Shareholders, or their agents, independent auditors, counsel, and/or governmental agencies, upon written request and at the expense of the requesting Shareholder, such documents and information as may be available for periods prior and subsequent to Closing to the extent necessary to facilitate concluding or addressing the transactions herein contemplated, audits, Tax Returns, compliance with governmental requirements and regulations, and the prosecution or defense of claims.  All information shall remain subject to the restrictions in paragraph 7.2.5.

7.7           Potential Repayment of Salewsky Amount.  In the event that Charles S. Salewsky Jr. continuously remains an employee of Corporation, Purchaser or an Affiliate of Purchaser for the fifteen (15) months following the Closing Date and during such period is not entitled to receive any portion of the Salewsky Amount, Shareholders shall receive (within 10 days after expiration of such fifteen month period) an additional payment of the Salewsky Amount in the proportions set forth on Schedule 3.2.1.

8.

Conditions Precedent to Obligations of Corporation and the Shareholders

All of the obligations of each Shareholder and Corporation to consummate the transactions described herein shall be subject to the following conditions precedent (all or any of which may be waived in writing, in whole or in part, by the Shareholders and the Corporation) having been fulfilled on or before the Closing Date:

8.1           [Intentionally Omitted]

8.2           Escrow Agreement.  Purchaser shall have duly executed and delivered the Escrow Agreement, and the Regular Escrow.

8.3           Governmental Consents.  All governmental consents necessary for the acquisition of the Shares and the consummation of the transactions described herein shall have been obtained or made and shall be in full force and effect and all waiting periods required by Law shall have expired.

8.4           Performance.  Purchaser shall have complied with and performed all covenants and obligations required by this Agreement to be complied with or performed by it on or prior to the Closing Date.

8.5           [Intentionally omitted]

8.6           Litigation.  No claim, proceeding, investigation, or other Legal Proceeding, either administrative or judicial, shall on the Closing Date be threatened or pending against Purchaser, Corporation, the Aerial Beauty Supply Business, or any Shareholder, which, in the opinion of counsel for Corporation, presents a reasonable possibility that: (i) any of the transactions contemplated by this Agreement would be enjoined or prevented; (ii) the ability or right of the Purchaser to acquire, retain or use in the same manner the operations of the Aerial Beauty Supply Business without additional costs would be affected; or (iii) any third party may obtain damages

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from either Corporation or the Purchaser or its Affiliates, in regards to the consummation of the transactions contemplated by this Agreement.

8.7           No Violation of Law.  At the Closing Date, there shall exist no violation of any Law which adversely affects Purchaser or its Affiliates.

8.8           Secretary’s Certificate.  Shareholders shall have received a certificate from the Secretary of Purchaser in form reasonably satisfactory to counsel to Shareholders: (i) certifying the resolutions from each of the managers and members of Purchaser approving this Agreement and the other Transaction Documents; and, (ii) certifying a copy of the current Organizational Documents of Purchaser.  The foregoing certificate shall also certify that the attached resolutions and Organizational Documents have not been rescinded, revoked, modified, or otherwise affected, and remain in full force and effect.

8.9           Closing Payment.  Purchaser shall have delivered to the Shareholders the Closing Payment in the amount set forth in paragraph 3.2.1.

9.

Conditions Precedent to Obligations of Purchaser

All of the obligations of Purchaser to consummate the transactions described herein shall be subject to the following conditions precedent (all or any of which may be waived in writing in whole or in part by Purchaser) having been fulfilled on or before the Closing Date:

9.1           [Intentionally omitted]

9.2           [Intentionally Omitted]

9.3           Certified Charters and Good Standing Certificates.  Certified copies of the Certificate of Incorporation (and all amendments thereto) for Corporation and good standing certificates for the Corporation from the Secretaries of State of Wisconsin, Illinois, Minnesota, New Mexico, Ohio, North Dakota, South Dakota, Nebraska, Iowa, Kansas, Missouri, Colorado and Michigan, dated within 15 days of the Closing Date.

9.4           Consents.  Purchaser shall have received the consents and filings as set forth on Schedule 3.3.2, as of the Closing Date, without any required payment, penalty, or loss of benefit by Purchaser or Corporation.

9.5           Escrow Agreement.  The Shareholders shall all have duly executed and delivered the Escrow Agreement.

9.6           Governmental Consents.  All governmental consents necessary for the acquisition of the Shares and the consummation of the transactions described herein shall have been obtained or made and shall be in full force and effect and all waiting periods required by Law shall have expired.

9.7           Lien Search Reports.  Prior to or on the Closing Date, the Shareholders shall have delivered to Purchaser a lien search report from the Wisconsin Department of Financial

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Institutions showing no financing statements or Lien claims of record affecting the Corporation or any assets of the Corporation, except for any Permitted Lien or Lien claims expressly set forth on Schedule 9.7 hereto.

9.8           Litigation.  No claim, proceeding, investigation, or other Legal Proceeding, either administrative or judicial, shall on the Closing Date be threatened or pending against Purchaser, Corporation, the Aerial Beauty Supply Business, or any Shareholder, which, in the opinion of counsel for Purchaser, presents a reasonable possibility that: (i) any of the transactions contemplated by this Agreement would be enjoined or prevented; (ii) the right of the Purchaser to acquire, retain or use in the same manner the operations of the Aerial Beauty Supply Business without additional costs would be affected; or (iii) any third party may obtain damages from either Corporation or the Purchaser or its Affiliates, in regards to the consummation of the transactions contemplated by this Agreement.

9.9           Negotiation of Consulting Agreement and Employment Agreements Amendment.   (i) A duly executed consulting agreement with Mark Konrad in the form of Exhibit A; and (ii) an amendment to the November 30, 2008 Employment Agreement  of Charles S. Salewsky Jr., in the form of Exhibit B, shall have been delivered.

9.10         No Violation of Law.  At the Closing Date, there shall exist no violation of any Law which adversely affects Corporation or Aerial Beauty Supply Businesses or any portion of any of the foregoing.

9.11         Opinion of Counsel.  There shall have been delivered to Purchaser an opinion of Godfrey & Kahn, counsel for the Shareholders and Corporation, dated the Closing Date, in the form attached hereto as Exhibit G.

9.12         Performance.  Each Shareholder and Corporation shall have complied with and performed all covenants and obligations required by this Agreement to be complied with or performed by them or either of them on or prior to the Closing Date.

9.13         [Intentionally omitted]

9.14         Resignations; Releases.  Purchaser shall have received: (i) a resignation letter of each officer of the Corporation designated by Purchaser, each member of the Board of Directors of Corporation and each Hmielewski family member designated by Purchaser, effective in each case on the Closing Date; (ii) a waiver and release of all claims in the form of Exhibit H, duly executed and delivered by each Shareholder; and, (iii) , a resignation and waiver and release of all claims in the form of Exhibit J, duly executed and delivered by Mark Konrad, Scott Hmielewski, Kristin Kolaszewski and Jeffrey Hmielewski.

9.15         Secretary Certificate.  Purchaser shall have received a certificate from the Secretary of the Corporation in form reasonably satisfactory to counsel to Purchaser: (i) certifying the resolutions from each of the Board of Directors and Shareholders of Corporation approving this Agreement and the other Transaction Documents; and, (ii) certifying a copy of the current Organizational Documents of Corporation.  The foregoing certificate shall also certify that the attached resolutions and Organizational Documents have not been rescinded, revoked, modified, or otherwise affected, and remain in full force and effect.

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9.16         Share Certificates.  Shareholders shall have tendered to the Purchaser certificates evidencing all of the Shares, which certificates shall be duly endorsed in blank or accompanied by duly executed stock powers, with all signatures guaranteed.

9.17         Noncompete Agreements.  Purchaser shall have received from Jeffrey Hmielewski, Scott Hmielewski and Kristin Kolaszewski executed noncompete agreements in the form of Exhibit I.

9.18         Section 338(h)(10) Election.  Purchaser shall have received from all of the Shareholders and the Corporation executed copies of all forms for the Section 338(h)(10) Election contemplated by paragraph 15.1.

10.

Indemnification

10.1         Indemnification by the Shareholders.  Notwithstanding any investigation by or knowledge of Purchaser, each of the Shareholders hereby, jointly and severally, agree to defend, indemnify and hold Purchaser and its Affiliates (including Corporation) harmless from and against any and all losses, Liabilities, damages (including special, incidental or consequential), obligations, judgments, damage, diminution in value, actions, demands, suits, proceedings, claims, penalties, interest, costs and expenses (including reasonable attorneys’ fees and other expenses relating thereto which will be reimbursed as incurred by Purchaser) (collectively, “Losses”), arising out of or in connection with any of the following (hereafter collectively, “Claims”):  (i) any breach of any representation or warranty made by C orporation or any Shareholder in this Agreement or in any other Transaction Document; (ii) any breach of covenant, agreement or undertaking of any Shareholder in this Agreement or in any other document or instrument attached hereto or delivered by Corporation or any Shareholder in connection with this Agreement; (iii) any Legal Proceeding to the extent that said Legal Proceeding relates to matters occurring prior to the Closing and proves not to be fully reserved on the Closing Balance Sheet and not included in the calculation of Closing Combined Net Assets; (iv) any and all Environmental Matters to the extent that said such Environmental Matters relate to matters occurring prior to the Closing and prove not to be fully reserved on the Closing Balance Sheet and not included in the calculation of Closing Combined Net Assets; (v) any Liabilities or other Losses of any kind or nature arising out of or in connection with the operation of Corporation or the Aerial Beauty Supply Business prior to Closing to the extent not reserved on the Closing Balance Sheet and not included in the calculation of Closing Combined Net Assets; (vi) all Taxes (or the non-payment thereof) of the Corporation for any Pre-Closing Tax Period; (vii) all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Corporation (or any predecessor of any of the foregoing) is or was a member on or prior to the Closing Date, including pursuant to Treasury Regulation §1.1502-6 or any analogous or similar Law; (viii) any and all Taxes of any Person (other than the Corporation) imposed on the Corporation as a transferee or successor, by contract or pursuant to any Law, which Taxes relate to an event or transaction occurring before the Closing, in each case, with respect to clauses (vii) and (viii) to the extent not accrued for in the Closing Balance Sheet (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) and not taken into account in any adjustment to Purchase Price pursuant to paragraph 4.1; and, (ix) all Transfer Taxes.

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10.2         [Intentionally omitted]

10.3         Indemnification by Purchaser.  Notwithstanding any investigation by or knowledge of the Shareholders, Purchaser hereby agrees to defend, indemnify and hold harmless any Shareholder and its Affiliates from and against any and all losses, Liabilities, damages (including special, incidental and consequential), obligations, judgments, damage, diminution in value, actions, demands, suits, proceedings, claims, penalties, interest, costs and expenses (including reasonable attorneys’ fees and other expenses relating thereto which will be reimbursed as incurred by Shareholders) (hereafter collectively “Shareholder Losses”) arising out of or in connection with any: (i) breach of representation or warranty made by Purchaser in this Agreement, or in any other document or instrument attached hereto or delivered by Purchaser in connection with this Agreement; or (ii) breach of covenant, agreement or undertaking of Purchaser in this Agreement or in any other document or instrument attached hereto or delivered by Purchaser in connection with this Agreement.

10.4         Survival.  All of the respective representations and warranties contained in this Agreement or in any other document or instrument delivered by or on behalf of any party hereunder or pursuant hereto, shall survive the Closing Date for a period of three (3) years.  Notwithstanding the foregoing:   (i) those representations and warranties made in paragraphs 5.3, 5.7, 5.19 and 5.21 shall survive the Closing Date until the expiration of the relevant statute of limitations period plus ninety (90) days; and, (ii) those representations and warranties made in paragraphs 5.1, 5.2, 5.24, 5.26.2, 5.28, 6.1, 6.2 and 6.3, and all covenants and agreements shall survive the Closing Date indefinitely.

10.5         Limitation on Indemnification.

10.5.1      Except as otherwise set forth in this Agreement, Shareholders shall be obligated to indemnify the Purchaser and its Affiliates under paragraph 10.1(i) and 10.1(v) only when the aggregate of all Claims suffered or incurred by the Purchaser and its Affiliates as to which a right of indemnification is provided under paragraphs 10.1(i) and 10.1(v) exceed Two Hundred Fifty Thousand Dollars ($250,000) (the “Threshold Amount”). After the aggregate of all such Losses suffered or incurred by Purchaser and its Affiliates exceeds the Threshold Amount, the Shareholders shall be obligated to indemnify the Purchaser and its Affiliates for such Claims only in excess of the Threshold Amount.  The aggregate liability of the Shareholders generally (subject to the exceptions otherwise found in this Agreement) under paragraph 10.1(i) sha ll not exceed Forty Million Dollars ($40,000,000) (the “Maximum Amount”).  Provided, however, neither the Threshold Amount nor the Maximum Amount shall be applicable to, nor factored into any Claim for indemnification: (i) under paragraph 10.1(i) in connection with a breach of any of paragraphs 5.1, 5.2, 5.3 (excepting 5.3.1 to which the Threshold Amount shall apply), 5.7, 5.19, 5.21, 5.24, 5.26.2, or 5.28; or (ii) under any paragraph of 10.1(ii) through (ix); excepting the Threshold Amount shall be factored into any Claim for indemnification under paragraph10.1(v).  All amounts required to be paid by Shareholders under paragraph 10.1 shall be paid out of the Regular Escrow, unless the funds in the Regular Escrow are insufficient, in which case, the balance shall be paid by Shareholders.

10.5.2      The indemnification rights of the parties hereto for Claims resulting from a breach of representations and warranties contained in this Agreement under this Article 10 are subject to the condition that the Indemnifying Party shall have received written notice of the

37

Claims for which indemnity is sought (the “Claim Notice”) within thirty-six (36) months after the Closing Date; provided, however, that, the indemnification rights of Purchaser for Claims resulting from a breach of the representations and warranties made by the Shareholders in paragraphs 5.3, 5.7, 5.19, and 5.21 are subject to the condition that the Shareholders shall have received a Claim Notice within ninety (90) days after the expiration of the statute of  limitations related to the existence of such Claim under applicable Laws; and provided further that Claims resulting from a breach of the representations and warranties made in paragraph 5.1, 5.2, 5.24, 5.26.2, 5.28, 6.1, 6.2 and 6.3 shall survive indefinitely.

10.5.3      For purposes of determining whether a party has breached any representation or warranty in this Agreement and for calculating the Threshold Amount, any qualification or limitation of a representation or warranty by reference to materiality of matters stated therein or as to matters having or not having a “Material Adverse Effect”, or words of similar effect, shall be disregarded.

10.6         No Corporation Liability to Shareholders.  For the avoidance of doubt, all of the representations, warranties, covenants and agreements of the Corporation in the Transaction Documents are made for the sole benefit of the Purchaser, and the Corporation shall have no Liability to any Shareholder in connection with the Transaction Documents.

10.7         Exclusive Remedy.  Purchaser and Shareholders acknowledge and agree that the foregoing indemnification provisions in this Article 10 shall be the sole and exclusive remedy of Purchaser and Shareholders with respect to the transactions contemplated by this Agreement.  However, notwithstanding any provision of this Agreement to the contrary, the limitations described in Article 10 shall only apply to Claims under paragraph 10.1(i) and shall not apply to Claims for fraud or intentional misstatement or Claims for indemnification under any of paragraph 10.1(ii) through (ix), excepting the Threshold Amount shall be factored into any Claim for indemnification under paragraph 10.1(v).

10.8         Procedure Relative to Indemnification.

10.8.1      In the event that any party hereto shall claim that it is entitled to be indemnified pursuant to the terms of this Article 10, such party (the “Claiming Party”) shall promptly provide a Claim Notice to the party or parties against which the claim is made (the “Indemnifying Party”) promptly after the Claiming Party receives notice of any action, Legal Proceeding, demand or assessment or otherwise has received notice of any claim of a third party (a “Third Party Claim”) that may reasonably be expected to result in a claim for indemnification by the Claiming Party against the Indemnifying Party, but in no event shall such Claim Notice be delivered later than 30 days after the Claiming Party receives notice of such claim, or later than 15 business days after being served with any summons, complaint or similar legal process.
60; The Claim Notice shall specify the breach of representation, warranty, agreement or covenant claimed by the Claiming Party and the Losses or Shareholder Losses, as the case may be, incurred by, or imposed upon, the Claiming Party on account thereof.  If such Losses or Shareholder Losses, as the case may be, are liquidated in amount, the Claim Notice shall so state and such amount shall be deemed the amount of the claim of the Claiming Party.  If the amount is not liquidated, the Claim Notice shall so state and in such event a claim shall be deemed asserted against the Indemnifying Party on behalf of the Claiming Party, but no payment shall be made on account thereof except to the extent that the amount of such claim (or any portion thereof) is liquidated

38

and the claim (or any portion thereof) is finally determined.  Any Claim Notice received by an Indemnifying Party after the time periods set forth in this paragraph shall remain effective to the extent that the Indemnifying Party is not materially prejudiced by any delay.

10.8.2      The following provisions shall apply to claims of the Claiming Party which are based upon a Third Party Claim:

(i)            The Indemnifying Party shall, except as set forth in paragraph 10.8.2(ii)  have the obligation, upon receipt of the Claim Notice and at its expense, to defend such Third Party Claim in its own name and/or, if necessary, in the name of the Claiming Party, with counsel of its choice (but with the advice and consent of the Claiming Party, which shall not be unreasonably withheld or delayed) ; provided, however, that if the Third Party Claim involves a matter solely of concern to the Claiming Party in addition to the claim for which indemnification under this Article 10 is being sought, such matter of sole concern shall be within the sole responsibility of the Claiming Party and its counsel.  The Claiming Party will cooperate with and make available to the Indemnifying Party such assistance and materials as may be reasonably requested of the Claiming Party, and the Claiming Party shall have the right, at the Claiming Party’s expense, to participate in the defense.  The Indemnifying Party shall have the right to settle and compromise such claim only with the consent of the Claiming Party (which consent shall not be unreasonably withheld or delayed) unless the following shall apply: (A) there is no finding or admission of any violation of any Law or any violation of the rights of any Person and no affect on any other claims that may be made against the Claiming Party; and (B) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party.  If the Claiming Party fails to consent to any settlement or compromise offer, the Indemnifying Party may continue to contest such claim and, in such event, the maximum liability of the Indemnifying Party for such claim, including all costs and expenses described in paragraph 10.8.4, below, will not exceed such settlement or compr omise offer.

(ii)           The Indemnifying Party  shall also have the right within 30 days from receipt of the Claim Notice to notify the Claiming Party that the Indemnifying Party disputes the merits of the Third Party Claim and/or that the Third Party Claim is the subject of indemnification hereunder.  Such dispute shall not affect the Indemnifying Party’s obligation to  defend the Third Party Claim under subsection (i), above, however, Indemnifying Party reserves the right to bring a separate legal action at any time seeking a declaration that Indemnifying Party is not obligated to defend against and/or provide indemnification for, the Third Party Claim at issue

(iii)          In the event the Indemnifying Party does not defend the Third Party Claim, then the Claiming Party shall have the right to conduct a defense against such Third Party Claim and shall have the right to settle and compromise such Third Party Claim if it acts reasonably and in good faith upon 5 days’ notice to, but without having to first obtain the consent of, the Indemnifying Party.  For purposes of clarity and not as a limitation, nothing herein shall limit the extent or timing of the payment of reasonable attorneys’ fees and other expenses relating to conducting a defense as otherwise set forth in this Article 10.

10.8.3      Upon receipt of a Claim Notice that does not involve a Third Party Claim, the Indemnifying Party shall have 30 days from the receipt of such Claim Notice to notify the Claiming Party that the Indemnifying Party disputes such claim.   Any such Claim Notice

39

received by an Indemnifying Party after the time periods set forth in this paragraph shall remain effective to the extent that the Indemnifying Party is not materially prejudiced by any delay. The Claiming Party shall have 30 days to respond in a written statement to the objection of the Indemnifying Party.  If after such 30-day period there remains a dispute as to any such claim, then the Claiming Party and the Indemnifying Party shall attempt in good faith for a period not to exceed 30 additional days to agree upon the rights of the respective parties with respect to such claim.  If the parties should so agree, a memorandum setting forth such agreement shall be prepared and signed by the Purchaser and the Shareholders’ Representative.  If the parties do not agree within such additional 30-day period, then the Claiming Party may pursue any and all other remedies available to it hereunder.

10.8.4      Subject to any other remedy provisions set forth in this Agreement, once the amount of any claim (or any portion thereof) under this Article 10 is liquidated and the claim (or any portion thereof) is finally determined, the Claiming Party shall be entitled to pursue each and every remedy available to it at law or in equity to enforce the indemnification provisions of this Article 10 and, in the event it is determined, or the Indemnifying Party agrees, that it is obligated to indemnify the Claiming Party for such claim (or any portion thereof), the Indemnifying Party agrees to pay reasonable attorneys’ fees and other expenses relating thereto which may be incurred by the Claiming Party in attempting to enforce indemnification under this Article 10, whether the same shall be enforced by suit or otherwise which the Indemnifying Party and th e Claiming Party agree are due to the Claiming Party or which a court finally determines are due to the Claiming Party.  In the event it is finally determined, or the Claiming Party agrees, that the Indemnifying Party is not obligated to indemnify the Claiming Party for such claim (or relevant portion thereof), the Claiming Party agrees to pay reasonable attorneys’ fees and other expenses related thereto, which may have been incurred by the Indemnifying Party in defending and/or disputing the claim (or relevant portion thereof) for indemnification by the Claiming Party under this Article 10.  Any internal costs incurred by any party shall not be deemed a reimbursable expense under this Article 10.

10.8.5      For purposes of clarity and not as a limitation, for purposes of this paragraph 10.8, the Shareholders’ Representative will act on behalf of the Shareholders and the Shareholders will all be bound by the acts and omissions of the Shareholders’ Representative hereunder.

10.8.6      For purposes of clarity and not as a limitation, nothing in this Article 10 requires Purchaser to delay the issuance of a Claim Notice for any Claimed Amount, as those terms are defined in the Escrow Agreement.

11.

Assignment

Neither this Agreement nor the rights or obligations contained herein shall be assignable by any party except with the written consent of all the parties hereto.  Notwithstanding the preceding sentence, Purchaser may assign its rights under this Agreement to any successor in interest to its business, or to any Affiliate, but such assignment shall not relieve Purchaser of its obligations under this Agreement.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, heirs, executors and representatives,

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subject to the foregoing provisions of this Article 11.

12.

Notices

All notices, requests, demands and other communications hereunder shall be in writing, and shall be deemed to have been given when delivered in person or by first class, registered or certified mail, return receipt requested, postage and registration or certification fees prepaid, or delivered by reliable overnight delivery service, providing a receipt evidencing delivery, or delivered by facsimile transmission, with a copy also delivered promptly thereafter by any of the other foregoing means:

If to Purchaser, to:
	Beauty Systems Group LLC
	3001 Colorado Boulevard
	Denton, Texas 76210
	Attention: President
with a copy to:	Sally Beauty Holdings, Inc.
	3001 Colorado Boulevard
	Denton, Texas 76210
	Attention: General Counsel

If to Shareholders, any Shareholder, and Shareholders’ Representative:

	Ryan Hmielewski
	N2811 Stanley Lane
	Marinette, Wisconsin 54143
with a copy to:	Godfrey & Kahn, S.C.
	333 Main Street, Suite 600
	Green Bay, Wisconsin 54301
	Attention: William J. Plummer

or at such other address as hereafter shall be furnished by a notice sent in like manner by such addresses to the others.

13.

Specific Performance

The parties hereto expressly agree that the Corporation and the Aerial Beauty Supply Business being purchased and sold hereunder are special and unique, and that a breach of any of the terms, provisions or conditions  hereof, in respect to the sale and purchase thereof, will result in irreparable injury for which there is no adequate remedy at law, and therefore, in addition to and not in substitution for any and all other relief in law or equity, the aggrieved party shall be entitled to equitable relief and specific performance to compel compliance with the terms and conditions of this Agreement and to recover all costs and expenses, including reasonable

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attorneys’ fees and expenses, incurred in connection with the enforcement of this Agreement.

14.

Integration, Interpretation and Miscellaneous Provisions

14.1         Entire Agreement.  All prior negotiations and agreements between the parties hereto are superseded by this Agreement, and there are no representations, warranties, understandings or agreements other than those expressly set forth herein, in the documents executed and delivered in connection herewith or in the Schedules, and Exhibits hereto, except as modified in writing concurrently herewith or subsequent hereto.

14.2         Waiver.  Failure or delay on the part of any of the parties hereto to exercise any right, power or privilege hereunder, or under any instrument executed pursuant hereto, shall not operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or of any other right power or privilege.  All waivers of any right, power or privilege hereunder must be in writing.

14.3         Governing Law.  This Agreement and the agreements attached as Exhibits hereto shall be governed by and construed in accordance with the laws of the State of Wisconsin, to the same extent as agreements entered into and fully performed in the State of Wisconsin.

14.4         Public Announcement.  Except as may otherwise be required by Law or the rules and other requirements of the New York Stock Exchange (the “Disclosure Requirements”), no announcement of this transaction shall be made to the general public until at or after the Closing.  Except as may otherwise be required by Disclosure Requirements, the parties will consult and cooperate with each other as to the timing and content of announcements of this transaction to the general public, if any, and to employees, customers and suppliers of the Corporation.

14.5         Expenses.  Each of the parties shall bear its own expenses (including, without limitations, fees and expenses of its attorneys and accountants) in connection with this Agreement or the consummation of the transactions contemplated herein, whether or not the Closing takes place.  Expenses of Corporation and/or Shareholders related to this transaction chargeable to Corporation shall be reflected in the Closing Balance Sheet.

14.6         Further Assurances.  Following the Closing Date, upon the request of Purchaser and without further consideration, each Shareholder will execute, or cause to be executed, and will deliver to the Purchaser further documents of transfer, conveyance, assignment and consent, and take such other action as may be reasonably necessary or advisable to effectively carry out the other terms and provisions of this Agreement.

14.7         Joint and Several Liability.  Each Shareholder shall be jointly and severally liable for all representations, warranties, covenants, obligations, duties, and Liabilities of any Shareholder under this Agreement and any and all documents executed or delivered by any Shareholder in connection therewith.  The terms “the Shareholders” or “any Shareholder” (and the like) are each intended to refer to each Shareholder individually, and impose a joint and several obligation on each. With respect to any representation or warranty of Corporation, the term shall also include any predecessor of Corporation and any entity merged into Corporation or preceding Corporation.

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14.8         Counterparts.  This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

14.9         Facsimile/PDF Copies.  “Facsimile” or “PDF” transmissions of signed documents shall be regarded and accepted as if they bore original signatures.  Promptly after such Facsimile or electronic transmission, the original document bearing the original signatures shall be provided to the other party.

14.10       Termination.

14.10.1    In the event that the Closing shall not take place on or before November 15, 2010, except solely due to the default of Purchaser, in addition to, but not in substitution for, any and all other relief to which Purchaser may be entitled, either at law or in equity, Purchaser shall have the right, exercisable upon giving written notice to the Shareholders, to cancel and terminate this Agreement.

14.10.2    In the event that the Closing shall not take place on or before November 15, 2010, except solely due to the default of any of the Shareholders, in addition to, but not in substitution for, any and all other relief to which any of the Shareholders may be entitled, either at law or in equity, the Shareholders shall have the right, exercisable upon giving written notice to Purchaser, to cancel and terminate this Agreement.

14.11       Miscellaneous.  Gender and number references shall be deemed modified to fit the context.  The Exhibits and Schedules to this Agreement are hereby made a part hereof and shall be construed with and as an integral part of this Agreement.  Every provision of this Agreement is intended to be severable, and if any term or provision is determined to be illegal or invalid for any reason whatsoever, such legality or invalidity shall not affect the legality or validity of the remainder of this Agreement.

14.12       Resolution of Paragraph 4.1 Disputes.  If the amount of the Closing Combined Net Assets pursuant to paragraph 4.1 cannot be resolved between the parties within 30 days after the Shareholders dispute the proposed Closing Combined Net Assets, the matter shall be submitted to an independent “Big Four” accounting firm (the “Accounting Firm”) for its review and resolution.  The decision of the Accounting Firm shall be binding on the parties and may be specifically enforced by legal proceedings.  The Accounting Firm shall be selected jointly by the Shareholders and Purchaser, or if the parties are unable to agree, by lot.  The fees and expenses of the Accounting Firm shall be borne equally by the Shareholders and Purchaser.  Purchaser and the Shareholders and their respective agents and representatives, shal l have a reasonable opportunity to review the working papers relating to the preparation of the Closing Balance Sheet and shall have reasonable access to WIPFLi, the accountants who prepared the Closing Balance Sheet.

14.13       Notification.  For all purposes of notification by the Shareholders to the Purchaser, Purchaser can conclusively rely on any notification given by Ryan Hmielewski in accordance with Article 12, as representing all of the Shareholders or any one of them individually and such notice shall be sufficient for purposes of this Agreement.  For all purposes of notification by the Purchaser to the Shareholders, Purchaser can conclusively rely that any notice given by the Purchaser to Ryan Hmielewski in accordance with Article 12, is sufficient notice to all the

43

Shareholders and to each of the foregoing individually and such notice shall be sufficient for purposes of this Agreement.  The Shareholders hereby irrevocably appoint Ryan Hmielewski with full power and authority to bind Shareholders in any post-Agreement matter and fully represent all Shareholders with respect to all matters arising after this Agreement is executed and arising out of or related to this Agreement (the “Shareholders’ Representative”) and the Shareholders agree that Purchaser can conclusively rely on such appointment.

15.

Additional Tax Matters

15.1         Section 338(h)(10) Election.

15.1.1      Purchaser and Shareholders shall join in the making of a timely election under Section 338(h)(10) of the Code and the Treasury Regulations and any corresponding or similar elections under state, local or foreign tax law with respect to the purchase and sale of the Shares (collectively, the “Section 338(h)(10) Election”).  On or prior to the Closing Date, the Shareholders shall deliver to Purchaser two executed original IRS Forms 8023 (or successor form) (together with any schedules or attachments thereto) for the purpose of making the Section 338(h)(10) Election for federal income tax purposes. Purchaser shall be responsible for the preparation and filing of all forms and documents required to effectuate the Section 338(h)(10) Election.  In addition to the Form 8023, the Shareholders shall exe cute (or cause to be executed) and deliver to Purchaser such additional documents or forms as are reasonably requested by Purchaser to complete properly the Section 338(h)(10) Election at least thirty (30) days prior to the date such Section 338(h)(10) Election is required to be filed. Purchaser, the Corporation and the Shareholders shall file all Tax Returns and statements, forms and schedules in connection therewith in a manner consistent with the Section 338(h)(10) Election and shall take no position contrary thereto unless required to do so by applicable Tax Laws.

15.1.2      Within one hundred twenty (120) days after the Closing Date, Purchaser shall prepare (or cause to be prepared) and deliver to the Shareholders a schedule (the “Allocation Schedule”) allocating the “Aggregate Deemed Sales Price”, as defined in Treasury Regulation Section 1.338-4, among the assets of the Corporation and the covenants set forth in paragraph 7.2.  The Allocation Schedule shall be reasonable and shall be prepared in accordance with Sections 338(h)(10) and 1060 of the Code and the Treasury Regulations promulgated thereunder.  The Allocation Schedule shall be deemed to be accepted by and shall be conclusive and binding on the Shareholders except to the extent, if any, that the Shareholders shall have delivered within 30 days after the date on which the Allocation Schedule is delivered to the Shareh olders, a written notice to Purchaser stating each and every item to which the Shareholders dispute (it being understood that any amounts not disputed shall be final and binding).  If a change proposed by the Shareholders is disputed by Purchaser, then the Shareholders and Purchaser shall negotiate in good faith to resolve such dispute.  If, after a period of twenty (20) days following the date on which the Shareholders give Purchaser notice of any such proposed change, any such proposed change still remains disputed, then the Shareholders and Purchaser shall submit the dispute for resolution through the process and on the terms set forth in paragraph 14.12.  Purchaser and each Shareholder shall file (or cause to be filed) all federal, state and local Tax Returns in accordance with the Allocation Schedule, and shall take no position contrary thereto or inconsistent therewith (including, without limitation, in any amended Tax Return or claim for refund, any examination

44

or audit by any Tax authority, or any other proceeding), except to the extent otherwise required by Law.

15.1.3      Subject to the limitation below, Purchaser shall indemnify each Shareholder for: (i) any increase in the federal income Tax of such Shareholder attributable to the taxable year in which the Closing Date occurs over the federal income Tax that would have been payable by such Shareholder attributable to such taxable year if Purchaser had purchased from the Shareholders all of the outstanding stock of the Corporation and there was no election made under Section 338(h)(10) of the Code with respect to such purchase, and (ii) any increase in any state or local income Tax of such Shareholder attributable to the taxable year in which the Closing Date occurs over  the state or local income Tax that would have been payable by such Shareholder attributable to such taxable year if there was no election made under Section 338(h)(10) of the Code with respect to such purchase.  Any indemnification payment made pursuant to this paragraph 15.1.3 shall be treated as an adjustment to the Stock Purchase Price; and the amount of any indemnification payable to any Shareholder shall be grossed up to reflect the income Tax ultimately payable by such Shareholder on account of such indemnification payment (collectively, the “Paragraph 15.1.3 Payment”).  All determinations of amounts payable under this paragraph 15.1.3 shall be performed by WIPFLi, the cost of which shall be paid 50% by the Purchaser and 50% by the Shareholders as soon as practicable after the finalization of the original and each revision of the Allocation Schedule to the Shareholders in accordance with paragraph 15.1.2.  WIPFLi shall provide Purchaser with its determination of the Paragraph 15.1.3 Payment as well as any supporting workpapers and other information reasonably requested by Purchaser to conduct its review of WIPFLi’s determined amount. The d etermination by WIPFLi of the Paragraph 15.1.3 Payment shall be deemed to be accepted by and shall be conclusive and binding on the Purchaser except to the extent, if any, that the Purchaser shall have delivered within thirty  (30) days after the date on which the determination is delivered to the Purchaser, a written notice to the Shareholders’ Representative stating each and every item to which the Purchaser disputes (it being understood that any amounts not disputed shall be final and binding). If such determination by WIPFLi is disputed by the Purchaser, then the Shareholders’ Representative and the Purchaser shall negotiate in good faith to resolve such dispute.  If, after a period of thirty  (30) days following the date on which the Shareholders give Purchaser notice of any such proposed change, any such proposed change still remains disputed, then the Shareholders and Purchaser shall submit the dispute for resolution through the process and on the terms set forth in paragraph 14.12.   The Purchaser shall pay the  Shareholders the Paragraph 15.1.3 Payment within ten (10) days of finalization.  If, pursuant to any revision to the Allocation Schedule, the Shareholders collectively have received an aggregate amount of Paragraph 15.1.3 Payment in excess of (or less than) the required Paragraph 15.1.3 Payment, the Shareholders will pay, jointly and severally, such excess to the Purchaser (or the Purchaser shall pay to the Shareholders) within ten (10) days of the finalization of such amount.  The Paragraph 15.1.3 Payment paid to all Shareholders shall not exceed $1,000,000 in the aggregate.

15.2         Responsibility for Filing Tax Returns.   Shareholders shall prepare and file (or cause to be prepared and filed) all Tax Returns for the Corporation for any taxable period that ends on or prior to the Closing Date (but for which Tax Returns are timely prepared and filed after the Closing Date) in a manner consistent with previously filed Tax Returns for the Corporation, provided, however, Shareholders shall permit Purchaser to review and comment on each such Tax Return prior to filing. In the event of any disagreement between Purchaser and

45

Shareholders regarding items set forth on the Tax Returns described in this paragraph 15.2 Purchaser and Shareholders shall, in good faith, use their best efforts to agree on such items.

15.3         Audits and Other Proceedings.

15.3.1      Following the Closing Date, if an audit or other administrative or Legal Proceeding is initiated by any Tax authority with respect to Taxes of the  Corporation for which Shareholders would be liable pursuant to paragraph 10.1, Purchaser or the Corporation, as the case may be, shall notify the Shareholders in writing of such audit or proceeding.  Failure to give such notice shall not relieve Shareholders from any indemnification obligation which they would have with respect to paragraph 10.1, except to the extent that the Shareholders are actually and materially prejudiced thereby (which for this purpose, shall include, but not be limited to, the inability of the Shareholders to contest the subject matter of the audit or proceeding or any monetary detriment attributable to not receiving prompt notice of such audit or proceeding).  The Sharehol ders will have the right, at their option, to control the conduct of all stages of such audit or other administrative or judicial proceeding with representatives of its own choosing with respect to Taxes of Corporation for which Shareholders would have an indemnification obligation under paragraph 10.1, provided, however, the Shareholders shall allow the Corporation and its counsel to participate in any audit or other administrative or judicial proceeding to the extent that such Tax Returns relate to the Corporation.  At such time as such request is received by Purchaser, Purchaser or the Corporation, as the case may be, will furnish the Shareholders with powers of attorney or any other documentation or authorization necessary or appropriate to enable the Shareholders to control the conduct of such audit or other proceeding.  Purchaser shall control the conduct of all stages of all other audits or other administrative or judicial proceedings with respect to Taxes of the Corporation.  Purchaser and the Corporation shall not, and shall not permit any of their Affiliates to, accept any proposed adjustment or enter into any settlement or agreement in compromise regarding any Taxes of the Corporation for which Shareholders would have an indemnification obligation under paragraph 10.1 without the express written consent of the Shareholders, which consent shall not be unreasonably withheld or delayed.

15.3.2      With respect to any audit or other administrative or Legal Proceeding that it controls, the Shareholders: (i) shall give prompt notice to Purchaser of any Tax adjustment proposed in writing pursuant to any audit or other administrative or judicial proceeding controlled by the Shareholders with respect to the assets or activities of the Corporation; and (ii) shall not accept any proposed adjustment or enter into any settlement or agreement in compromise which would bind Purchaser or the Corporation with respect to any Taxes of the Corporation  without the express written consent of Purchaser, which consent shall not be unreasonably withheld or delayed.

15.4         Cooperation on Tax Matters. Purchaser, the Corporation and Shareholders shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns, and any audit, litigation or other Legal Proceeding with respect to Taxes.  Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information which are reasonably relevant to any such audit, litigation or other Legal Proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Corporation and Shareholders agree: (i) to retain all books and records with respect to Tax matters pertinent to the Corporation relating to any taxable period beginning before the Closing Dat e until

46

the expiration of the statute of limitations (and, to the extent notified by Purchaser, or Shareholders, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any Tax authority; and, (ii) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Corporation or Shareholders, as the case may be, shall allow the other party to take possession of such books and records. Purchaser and Shareholders further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

15.5         S Corporation Status. Corporation and the Shareholders shall not revoke the Corporation’s election to be taxed as an S corporation within the meaning of Sections 1361 and 1362 of the Code (or any comparable state or local laws) for any period prior to and including the Closing Date.  In the event that Corporation’s S election is found to be invalid or to have terminated on or before the Closing Date, the Parties shall use their best efforts to obtain from the Internal Revenue Service a waiver of the invalidity or terminating event on the grounds of inadvertency.  The Parties shall take such steps, and make such adjustments, as may be required by the Internal Revenue Service pursuant to Section 1362(f)(3) and (4) of the Code.  Shareholders shall bear the expense of procuring the waiver, including the legal, accounting and tax costs of taking such steps, and of making such adjustments as may be required.

15.6         Transfer Taxes.  Notwithstanding and provision in this Agreement to the contrary, all transfer, documentary, sales, use, stamp, recording, registration and other such similar Taxes, charges and fees (including any penalties and interest) incurred in connection with the consummation of the transactions contemplated by this Agreement (the “Transfer Taxes”) shall be paid by the Shareholders when due, and the party required by applicable law shall file all necessary Transfer Tax Returns and other documentation with respect to all Transfer Taxes, and, if required by applicable law, the other parties will, and will cause their affiliates to, join in the execution of any such Transfer Tax Returns and other documentation.

[Signature Page to Follow]

47

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.

PURCHASER:			CORPORATION:
BEAUTY SYSTEMS GROUP LLC			AERIAL COMPANY, INC.
By:		/s/ John Golliher	By:	/s/ Ryan Hmielewski
Name: John Golliher			Name: Ryan Hmielewski
Title: President			Title: President
SHAREHOLDERS:
/s/ Ryan Hmielewski			/s/ Laura Hmielewski
Ryan Hmielewski			Laura Hmielewski
LAURA HMIELEWSKI IRREVOCABLE TRUST OF 1992
By:	/s/ William J. Plummer, Trustee
William J. Plummer, Trustee
RYAN J. AND LAURA J. HMIELEWSKI DESCENDANTS TRUST
u/a/d 12/31/04 f/b/o JEFFREY HMIELEWSKI
By:	/s/ William J. Plummer, Trustee
William J. Plummer, Trustee
RYAN J. AND LAURA J. HMIELEWSKI DESCENDANTS TRUST
u/a/d 12/31/04 f/b/o SCOTT HMIELEWSKI
By:	/s/ William J. Plummer, Trustee
William J. Plummer, Trustee
RYAN J. AND LAURA J. HMIELEWSKI DESCENDANTS TRUST
u/a/d 12/31/04 f/b/o KRISTIN KOLASZEWSKI
By:	/s/ William J. Plummer, Trustee
William J. Plummer, Trustee

48

EX-4.13

Exhibit 4.13

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

TABLE OF CONTENTS

Section		Page
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS		1
1.01	Defined Terms	1
1.02	Other Interpretive Provisions	59
1.03	Accounting Terms	60
1.04	Rounding	61
1.05	Times of Day	61
1.06	Letter of Credit Amounts	61
1.07	Currency Equivalents Generally	61
1.08	Québec Matters	61
1.09	Dutch Matters	61
ARTICLE II THE COMMITMENTS AND CREDIT EXTENSIONS		62
2.01	Committed Loans; Reserves	62
2.02	Borrowings, Conversions and Continuations of Committed Loans	64
2.03	Letters of Credit	67
2.04	Swing Line Loans	76
2.05	Prepayments	80
2.06	Termination or Reduction of Commitments	82
2.07	Repayment of Loans	83
2.08	Interest	83
2.09	Fees	84
2.10	Computation of Interest and Fees	84
2.11	Evidence of Debt	86
2.12	Payments Generally; Administrative Agent’s Clawback	86
2.13	Sharing of Payments by Lenders	88
2.14	Settlement Amongst Lenders	89
2.15	Increase in Commitments	90
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY; APPOINTMENT OF PARENT		92
3.01	Taxes	92
3.02	Illegality	93
3.03	Inability to Determine Rates	94
3.04	Increased Costs; Reserves on LIBOR Rate Loans	94
3.05	Compensation for Losses	95
3.06	Mitigation Obligations; Replacement of Lenders	96
3.07	Survival	96
3.08	Designation of Parent as Borrowers’ Agent	96
ARTICLE IV CONDITIONS PRECEDENT TO CREDIT EXTENSIONS		97
4.01	Conditions of Initial Credit Extension	97
4.02	Conditions to all Credit Extensions	101
ARTICLE V REPRESENTATIONS AND WARRANTIES		101
5.01	Existence, Qualification and Power	101
5.02	Authorization; No Contravention	102

i

5.03	Governmental Authorization; Other Consents	102
5.04	Binding Effect	102
5.05	Financial Statements; No Material Adverse Effect	103
5.06	Litigation	103
5.07	No Default	104
5.08	Ownership of Property; Liens	104
5.09	Environmental Compliance	104
5.10	Insurance	105
5.11	Taxes	105
5.12	Plans	105
5.13	Subsidiaries; Equity Interests	107
5.14	Margin Regulations; Investment Company Act	107
5.15	Disclosure	107
5.16	Compliance with Laws	108
5.17	Intellectual Property; Licenses, Etc.	108
5.18	Labor Matters	108
5.19	Security Documents	109
5.20	Solvency	109
5.21	Deposit Accounts; Credit Card Arrangements	109
5.22	Brokers	109
5.23	Customer and Trade Relations	109
5.24	Casualty	109
5.25	Senior Indebtedness	110
5.26	Anti-Terrorism	110
ARTICLE VI AFFIRMATIVE COVENANTS		110
6.01	Financial Statements	110
6.02	Certificates; Other Information	111
6.03	Notices	114
6.04	Payment of Obligations	115
6.05	Preservation of Existence, Etc.	116
6.06	Maintenance of Properties	116
6.07	Maintenance of Insurance	116
6.08	Compliance with Laws	116
6.09	Books and Records; Accountants	116
6.10	Inspection Rights	117
6.11	Additional Loan Parties	118
6.12	Cash Management	119
6.13	Information Regarding the Collateral	120
6.14	Physical Inventories	121
6.15	Environmental Laws	121
6.16	Further Assurances	122
6.17	Compliance with Terms of Leaseholds	122
6.18	Maintenance of New York Process Agent	122
6.19	Canadian Pension Benefit Plans	122
ARTICLE VII NEGATIVE COVENANTS		123
7.01	Liens	123
7.02	Investments	123
7.03	Secured Indebtedness	123
7.04	Fundamental Changes	123

ii

7.05	Dispositions	124
7.06	Restricted Payments	124
7.07	Prepayments of Indebtedness	125
7.08	Change in Nature of Business	125
7.09	Use of Proceeds	125
7.10	Amendment of Material Documents	125
7.11	Fiscal Year	126
7.12	Deposit Accounts; Credit Card Processors	126
7.13	Consolidated Fixed Charge Coverage Ratio	126
7.14	Limitations on Currency, Commodity and Other Hedging Transactions	127
ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES		127
8.01	Events of Default	127
8.02	Remedies Upon Event of Default	130
8.03	Application of Funds	130
8.04	Waivers By Loan Parties	135
ARTICLE IX ADMINISTRATIVE AGENT		135
9.01	Appointment and Authority	135
9.02	Rights as a Lender	136
9.03	Exculpatory Provisions	136
9.04	Reliance by Agents	137
9.05	Delegation of Duties	138
9.06	Resignation of Agents	138
9.07	Non-Reliance on Agents and Other Lenders	139
9.08	No Other Duties, Etc.	139
9.09	Agents May File Proofs of Claim	139
9.10	Collateral and Guaranty Matters	140
9.11	Notice of Transfer	140
9.12	Reports and Financial Statements	140
9.13	Agency for Perfection	141
9.14	Indemnification of Agents	141
9.15	Relation among Lenders	142
9.16	Defaulting Lender	142
9.17	Risk Participation	143
9.18	Parallel Debt Provisions	143
ARTICLE X MISCELLANEOUS		146
10.01	Amendments, Etc.	146
10.02	Notices; Effectiveness; Electronic Communications	148
10.03	No Waiver; Cumulative Remedies	149
10.04	Expenses; Indemnity; Damage Waiver	150
10.05	Payments Set Aside	151
10.06	Successors and Assigns	151
10.07	Treatment of Certain Information; Confidentiality	155
10.08	Right of Setoff	156
10.09	Interest Rate Limitation	156
10.10	Counterparts; Integration; Effectiveness	156
10.11	Survival	156
10.12	Severability	157
10.13	Replacement of Lenders	157

iii

10.14	Governing Law; Jurisdiction; Etc.	158
10.15	Waiver of Jury Trial	158
10.16	No Advisory or Fiduciary Responsibility	159
10.17	USA PATRIOT Act Notice; Proceeds of Crime Act	159
10.18	Foreign Asset Control Regulations	160
10.19	Time of the Essence	160
10.20	Designation as Senior Debt	160
10.21	Press Releases	160
10.22	Additional Waivers	160
10.23	Judgment Currency	162
10.24	No Strict Construction	162
10.25	Attachments	162
10.26	Language	163
SIGNATURES		S-1

iv

SCHEDULES

1.01	Guarantors
1.02	Existing Letters of Credit
2.01	Commitments and Applicable Percentages
5.01	Loan Parties Organizational Information
5.06	Litigation
5.08(b)(1)	Owned Real Estate
5.08(b)(2)	Leased Real Estate
5.09	Environmental Matters
5.10	Insurance
5.13	Subsidiaries; Other Equity Investments
5.17	Intellectual Property Matters
5.18	Collective Bargaining Agreements
5.21(a)	DDAs
5.21(b)	Credit Card Arrangements
6.02	Financial and Collateral Reporting
7.01	Existing Liens
7.02	Existing Investments
7.03	Existing Indebtedness
10.02	Administrative Agent’s Office; Certain Addresses for Notices

EXHIBITS

	Form of
A-1	Domestic Committed Loan Notice
A-2	Canadian Committed Loan Notice
B-1	Domestic Swing Line Loan Notice
B-2	Canadian Swing Line Loan Notice
C-1	Domestic Revolving Note
C-2	Canadian Revolving Note
C-3	Domestic Swing Line Note
C-4	Canadian Swing Line Note
C-5	Foreign Note - Domestic
C-6	Foreign Note - Canada
D	Assignment and Assumption
E	Borrowing Base Certificate
F	Compliance Certificate

v

CREDIT AGREEMENT

This CREDIT AGREEMENT (“Agreement”) is entered into as of November 12, 2010, 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:

“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.

1

“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% 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 satisf action 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.

“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.

2

“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 Date, the Aggregate Total Commitments are $400,000,000.

“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

(b)           From and after the first Adjustment 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 (even if the Average Daily Availability requirements for a different Le vel 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 recalculated at such higher rate for any applicable periods and shall be due and payable on demand.

Level	Average Daily Availability	LIBOR Margin/BA Rate Margin/Euribor Rate Margin		Domestic Prime Rate Margin/US Index Rate Margin/Canadian Prime Rate Margin
I	Greater than or equal to $275,000,000	2.25	%	1.25	%
II	Greater than or equal to $150,000,000 but less than $275,000,000	2.50	%	1.50	%
III	Less than $150,000,000	2.75	%	1.75	%

3

“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 Aggreg ate 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.

“Arrangers” mean Banc of America Securities LLC and Wells Fargo Capital Finance, LLC, 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.

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“Audited Financial Statements” means the audited consolidated balance sheet of the Parent and its Subsidiaries for the fiscal year ended September 30, 2009, 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 Permi tted 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) warehou semen’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 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”, “Eligi ble 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.

5

“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 cha rtered 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.

“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.

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“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) o r 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.

“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.

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“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% 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.

“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

8

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 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 in terest 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.

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“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 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 Pens ion 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).

“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 America-Canada 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)&nb sp;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

10

(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.

“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 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.

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“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 America-Canada 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.

“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 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,

12

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, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, guidelines or directives in connection therewith are deemed to have gone into effect and been adopted after the Closing Date.

“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; or

(c)           any “change in control” as defined in the Senior Term Loan Credit Agreement or either Notes Indenture; or

(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.

“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

13

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.

“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.

“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.

“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

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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 foreig n income taxes paid in cash during such period to (b) the sum of (i) Debt Service Charges plus (ii) the aggregate amount of all Restricted Payments paid by Parent in cash pursuant to Section 7.06(f) hereof, 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)&nb sp;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 o f 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

15

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 g overnmental 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 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.

“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 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% 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% 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 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

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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 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) com mercial finance examinations (but only to the 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-of-pocket 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 wo rkout 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

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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.

“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 any Lender that (a) has failed to fund any portion of the Committed Loans, participations in L/C Obligations or participations in Swing Line Loans required to be funded by it hereunder within three (3) Business Day of the date required to be funded by it hereunder (other than as a result of a good faith dispute), (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day 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) 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:

(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.

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“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% multiplied by the Appraised Value of Eligible Inventory;

minus

(b)           the then amount of all Availability Reserves applicable to Distribution.

“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

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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% 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 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).

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“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.  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.

“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.

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“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) $25,00,000 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 Date, the Domestic Total Commitments are $400,000,000.

“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 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

22

law governed limited partnership Sally Beauty International Holdings C.V. will be pledged in favor of the Collateral Agent.

“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 incl ude 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 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 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 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 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 an Account;

(b)           Credit Card Receivables that have been outstanding for more than five (5) Business Days from the date of sale;

(c)           Credit Card Receivables (i) that are not subject to a perfected first-priority security interest and Lien in favor of the 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

23

Agent or Canadian Agent, as applicable, pursuant to the Security Documents and Permitted Encumbrances);

(d)           Credit Card Receivables which are disputed, are with recourse, or with respect to which a claim, counterclaim, offset 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 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)            Credit Card Receivables which the Administrative Agent determines in its Permitted Discretion to be uncertain of collection.

 “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;

(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

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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)            Inventory of a Loan Party which is not a Material Subsidiary and which is the subject of any case under any Debtor Relief Law; or

(k)           Inventory acquired in a Permitted Acquisition and which is not of the type usually sold in the ordinary course of the 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 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, conditi on 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.

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“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 Re ceivable, 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,

(e)           Accounts with respect to an Account Debtor whose total obligations owing to Borrowers or Subsidiary Guarantors 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,

(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;

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(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;

(n)           Accounts arising out of sales on a bill-and-hold, guaranteed sale, sale-or-return, sale on approval or consignment 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 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;

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(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

(k)           Accounts acquired in a Permitted Acquisition, unless and until the Agents (i) have completed due diligence with 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 t hat 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 Date in agreeing to the foregoing provision.

“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)

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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 Bus iness 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).

“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 t he appointment of a

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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 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 imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or in which it is otherwise treated as doing business, 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) in the case of a Foreign Lender (other than a Canadian Lender or an assignee pursuant to a request by the Parent under S ection 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) 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).  For the avoidance of doubt,

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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 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.

“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, 2010, among the Parent, the Administrative Agent and Banc of America Securities LLC.

“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.

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 “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 oth er amounts are allowed claims in such proceeding.

“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 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.

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“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 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 ac counting 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 en able 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

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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).

 “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);

(e)           indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such 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.

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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.

“Indemnified Taxes” means Taxes other than Excluded 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 ther efrom; 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;

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(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;

(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;

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(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;

(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 propose d 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.

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“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.

“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 other Lender 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.

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“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.

“LIBOR Rate” means for any Interest Period with respect to a LIBOR Rate Loan, the rate per annum equal to the British Bankers Association LIBOR Rate (“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 app roximate amount of the LIBOR Rate Loan being made, continued or 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.

“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.

“Loan” means a Domestic Loan and a Canadian Loan.

“Loan Account” has the meaning assigned to such term in Section 2.11(a).

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“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.

“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.

“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.

“Maturity Date” means November 12, 2015.

“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.

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“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 Subsi diary 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-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, and any Permitted Refinancing thereof.

“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. 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.

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“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 cer tificate 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 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.

“Other Taxes” means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document, excluding, however, any such amounts imposed as a result of an assignment by a Lender of its Loan or Commitment.

“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)).

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“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, (x) Excess Availability for the 45 day period immediately preceding, and on the date of, such distribution or dividend 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 1.1:1.0.  If after giving pro forma effect to such transaction or payment, Excess Availability would be equal to or less than 50% of the Loan Cap, the Parent shall furnish the Administrative Agent with prior notice of any such transaction or payment whi ch is subject to the Payment Conditions, together with supporting documentation evidencing the satisfaction of the Excess Availability requirements and, if applicable, the satisfaction of the required Consolidated Fixed Charge Coverage Ratio, no less than five (5) Business Days prior to the consummation of any such transaction or 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 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;

(c)           After giving effect to the Acquisition, if the Acquisition is an Acquisition of Equity Interests, a Loan Party shall 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

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(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

(c)           is made to pay any other amount chargeable to any Canadian Loan Party hereunder or under any other Loan Document; and

(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 o f the applicable Borrower is incomplete, inaccurate or misleading in any material respect, or (c) creates or reasonably could be expected to create a

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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 Date in any material respect in demand for, pricing of, or product mix of Inventory; (ii) changes after the Closing 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 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:

(a)           is made to maintain, protect or preserve the Collateral and/or the 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 to maximize the amount of, repayment of any Obligation; or

(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;

(b)           carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens imposed by applicable 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

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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;

(g)           Liens existing on the date hereof 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;

(k)           Liens securing or consisting of Indebtedness of the Parent and its Subsidiaries incurred pursuant to the Senior Term 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;

(l)            Liens on property (i) of any Subsidiary that is not a Loan Party and (ii) that does not constitute Collateral;

(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 such Liens are subject to the Agents’ rights with respect to such Intellectual Property;

(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

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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;

(p)           any encumbrance or restriction (including put and call agreements) with respect to the Equity Interests of any joint 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;

(u)           Liens in favor of customs and revenues authorities imposed by applicable Laws arising in the ordinary course of 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

(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

47

Affiliate thereof, or any such investment fund or vehicle; and (v) 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:

(a)           readily marketable obligations issued or directly and fully guaranteed or insured by the United States of America or, 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;

(b)           commercial paper issued by any Person organized under the laws of any state of the United States of America or 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 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 Date, and set forth on Schedule 7.02, but not any increase in the amount thereof or any other modification of the terms thereof;

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(g)           (i) Investments by any Loan Party and their respective Subsidiaries in their respective direct and indirect Subsidiaries outstanding on the Closing 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;

(o)           Other Investments not specifically set forth above, in any Fiscal Year (i) shall not  exceed $30,000,000 in the 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;

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.

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“Permitted Pro Forma Adjustments” as applied to any Person or business unit acquired or disposed of on or after the Closing 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 t he 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 Collateral included in the Combined Borrowing Base, the Person providing such Permitted Refinancing shall have entered into an intercreditor agreement with the Agents on terms reasonably satisfactory 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, 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.

“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

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paid to the holder of a Lien on such Collateral having priority over the Lien of the Collateral Agent or Canadian Agent, as applicable;

(b)           If a Trigger Event then exists or would arise by reason of such Disposition, any Disposition (including pursuant to a 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 a Trigger Event has occurred and is 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.

“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.

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“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 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 Require ment 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

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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% 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% 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 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, 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.

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“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 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

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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 me aning 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 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.

“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&nbs p;D or any comparable regulation. The

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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 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 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 master agreement 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”), including any such obligations or liabilities under any Master Agreement.

“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

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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).

“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, 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 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.

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“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, or (ii) fifteen percent (15%) 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 or (ii) fifteen percent (15%) 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 duri ng 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 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.

“Unreimbursed Amount” has the meaning specified in Section 2.03(c)(i).

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“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 ba sed 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. 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.

“Voting Stock” means Equity Interests entitled to vote generally in the election of directors (or Persons performing similar functions).

1.02        Other Interpretive Provisions.  With reference to this Agreement and each other Loan Document, unless otherwise specified 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, suppl emented 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 provisions consolidating, amending replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, r efer 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

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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 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 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.

(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

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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).

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 8; 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 “lega l 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

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ondernemingsraden); and (B) obtaining unconditional positive advice (advies) from each competent works council;

(b)a winding-up, administration or dissolution includes a Dutch entity being: (A) declared bankrupt (failliet verklaard); 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;

(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:

(i)            after giving effect to any Domestic Committed Borrowing, the Domestic Total Outstandings shall not 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)          the Outstanding Amount of all Domestic L/C Obligations shall not at any time exceed the Domestic Letter of Credit Sublimit.

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

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(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:

(i)            after giving effect to any Canadian Committed Borrowing, the Total Canadian Outstandings shall not 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 Amount of all Swing Line Loans made to the Canadian Borrower, shall not exceed the Canadian Commitment of such Canadian Lender, and

(iii)          the Outstanding Amount of all Canadian L/C Obligations shall not at any time exceed the Canadian Letter of Credit Sublimit.

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:

(i)            the Foreign Borrower must have utilized all then remaining Distribution Availability (or the Domestic 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 Date:

(i)            Shrink (an Inventory Reserve).  In an amount to the accrual therefor in the Loan Parties’ general ledger.

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(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

(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).

(e)           Subject to the restrictions otherwise set forth in this Agreement, the Administrative Agent shall have the right, at any time and from time to time after the Closing 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 (2) 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.

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(ii)           Canadian Committed Loans made to the Canadian Borrower or the Foreign Borrower shall be either 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.

(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) one (1) Business Day prior to 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).&# 160; 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 Doll ars, 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

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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 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 Da y 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 s uch 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

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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.

(e)           Except as otherwise provided herein, a LIBOR Rate Loan, a Euribor Rate Loan or a BA Equivalent Loan may be 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.

(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.

(g)           After giving effect to all Committed Borrowings, all conversions of Committed Loans from one Type to another in 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.

(h)           None of the Agents, the Lenders, or the L/C Issuer shall have any obligation to make any Loan or to provide any 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 P ermitted 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

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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 bee n 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 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 aggreg ate 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 Date, or shall impose upon

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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;

(B)the issuance of such Letter of Credit would violate one or more policies of such L/C Issuer applicable to letters of credit generally;

(C)such Letter of Credit contains any provisions for automatic reinstatement of the Stated Amount after any drawing thereunder; or

(D)any Lender is at such time a Defaulting Lender or Deteriorating Lender hereunder, unless such L/C Issuer has entered into satisfactory arrangements with the applicable Borrowers or such Lender to eliminate such L/C Issuer’s risk with respect to such Lender.

(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.

(iv)The L/C Issuers shall act on behalf of the applicable Lenders with respect to any Letters of Credit issued by 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 additionall y provided herein with respect to the L/C Issuers.

(b)Procedures for Issuance and Amendment of Letters of Credit; Auto-Extension Letters of Credit.

(i)Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Parent on 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 Cred it 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

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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 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, 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 Auto-Extension 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 “Non-Extension 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.

(i)Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of 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 (1st) 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.

(iii)With respect to any Unreimbursed Amount that is not fully refinanced by a Committed Borrowing of Prime 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 paymen t 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 Age nt 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 m anifest 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 Percen tage 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;

(iv)any payment by the L/C Issuer under such Letter of Credit against presentation of a draft or certificate that 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 o mitted 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, th e 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 Is suer 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.

(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< /u> 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 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

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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 sec ure 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 th e 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.

(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

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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 o n 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.

2.04Swing 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 For eign 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; 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 excee d 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.  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

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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 t o, 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 t he 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.

(b)Swing Line Borrowing Procedures.  Each Swing Line Borrowing shall be made upon the irrevocable notice of the 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 borro wing 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 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 a t 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.

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(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 shal l 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.

(iii)          If any Lender fails to make available to the Administrative Agent or the Canadian Agent, as applicable, for the account of the Swing Line Lender any amount required to be paid 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.

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(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 pa rticipations 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 receives any payment on account of such Swing Line Loan, the Swing Line Lender will distribute 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 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 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 paymen ts 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.

(f)            Payments Directly to Swing Line Lender.  The Borrowers shall make all payments of principal and interest in 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.

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2.05        Prepayments.

(a)           The Borrowers may, upon irrevocable notice from the Parent to the Administrative Agent (except as set forth below) (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 Ra te 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 s uch 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 o r asset sale shall not have been consummated or shall otherwise have been delayed.

(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.

(c)           If for any reason the Domestic Total Outstandings at any time exceed the Domestic Loan Cap as then in effect, the 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

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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.

(d)           If for any reason the Total Canadian Outstandings at any time exceed the Canadian Loan Cap as then in effect, the 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 less er of the Canadian Total Commitments or the Canadian Borrowing Base, each as then in effect.

(e)           The Borrowers shall prepay the Loans in accordance with the provisions of Section 6.12 hereof but without any 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 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.

(i)            In the case of Loans and Letters of Credit denominated in Optional Currencies, the Administrative Agent shall with 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

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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.

(a)           The Domestic Borrowers may, upon irrevocable notice from the Parent to the Administrative Agent (except as set 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 gi ving 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 th e 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 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 i f, 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 o r from the proceeds of an asset sale, which refinancing or asset sale shall not have been consummated or shall otherwise have been delayed.

(c)           If, after giving effect to any reduction of the Domestic Total Commitments, the Domestic Letter of Credit Sublimit or the Domestic Swing Line Sublimit exceeds the amount of the

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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.

(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 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 thereo f 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;

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(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)           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.

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% 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 Date, and on t he 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

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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 t he 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, 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.

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2.11        Evidence of Debt.

(a)           The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by 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 Ad ministrative 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 Com mitments).

(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 ap plicable, 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

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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.

(c)           (i)            Funding by Lenders; Presumption by Administrative Agent.  Unless the Administrative Agent or the Canadian Agent, as applicable, shall have received notice from a Lender prior to 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) 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, 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) and may, in reliance upon such assumption, make available to the applicable Borrowers 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 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 Agen t 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 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.  Any payment by the Borrowers sh all 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.

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(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 s uch 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 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

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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 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.

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

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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&n bsp;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 requ est 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 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.

(d)           Effective Date and Allocations.  If the Domestic Total Commitments or the Canadian Total Commitments are increased in accordance with this Section 2.15, the Administrative

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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.

(e)           Conditions to Effectiveness of Increase.  As a condition precedent to such increase, (i) the Parent shall deliver to the 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 a re 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 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.

(f)            No Obligation to Engage Administrative Agent.  The Parent shall not be obligated to engage the Administrative 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)           Conflicting Provisions.  This Section 2.15 shall supersede any provisions in Sections 2.13 or 10.01 to the contrary.

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ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY;
APPOINTMENT OF PARENT

3.01        Taxes.

(a)           Payments Free of Taxes.  Any and all payments by or on account of any obligation of the Loan Parties hereunder or under any other 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) the sum payable shall be increased as necessary so that after making 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, 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 ti mely pay the full amount deducted to the relevant Governmental Authority in accordance with Law.

(b)           Payment of Other Taxes by the Borrowers.  Without limiting or duplicating the provisions of subsection (a) above, the Loan Parties shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable Law.

(c)           Indemnification by the Loan Parties.  The Domestic Loan Parties and the Foreign Borrower (to the 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, 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) paid by such Credit Party, as the case may be, 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 t o the amount of such payment or liability delivered to the Parent 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, shall be conclusive absent manifest error.

(d)           Evidence of Payments.  As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Loan Parties to a Governmental Authority, the Parent shall deliver to the Administrative Agent or the Canadian Borrower shall deliver to the Canadian Agent, as applicable, the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent or the Canadian Agent, as applicable.

(e)           Status of Lenders.  Any Lender that is entitled to an exemption from, or reduction of, withholding tax under the law of the 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 under any other Loan Document shall deliver to the Parent (with a copy to the Administrative Agent) or the Canadian Borrower (with a copy to 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 Borrower or the Canadian Agent, such properly completed and executed documentation prescribed by applicable Law as will permit such payments to be made without withholding or at a reduced rate of withholding.  Such delivery shall be requi red 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 requested by the Parent, the Administrative Agent, the Canadian 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 Borrower or the Canadian Agent, as will enable the Parent, the Administrative Agent, the Canadian Borrower or the Canadian Agent, to determine whether or not such Lender is subject to backup withholding or information reporting requirements.

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Without 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 deliver to the Parent 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 request of the Parent 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 claiming eligibility for benefits of an income tax treaty to which the United States is a party,

(ii)           duly completed copies of Internal Revenue Service Form W-8ECI,

(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 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 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 and (y) duly completed copies of  Internal Revenue Service Form W-8BEN, or

(iv)          any other form prescribed by applicable Law as a basis for claiming exemption from or a reduction in United States Federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable Law to permit the Parent to determine the withholding or deduction required to be made.

(f)            Treatment of Certain Refunds.  If any Credit Party determines, in its sole discretion, 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 Loan Parties have paid additional amounts pursuant to this Section 3.01, it shall pay to the Loan Parties an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by such 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 and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Loan Parties, upon the request o f the Administrative Agent or the Canadian Agent, as applicable, such Lender or the L/C Issuer, agree to repay the amount paid over to the Loan Parties (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the applicable Credit Party in the event such Credit Party is required to repay such refund to such Governmental Authority.  This subsection shall not be construed to require any Credit Party to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Loan Parties or any other Person.

3.02        Illegality.  If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that 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, any obligation of such Lender to make or continue LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loa ns, as applicable, or to convert Prime Rate Loans to LIBOR Rate Loans, Euribor Rate Loans or BA Equivalent Loans, as applicable, shall be suspended 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

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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, 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, shall be suspended 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

(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

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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.

(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 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 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), 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.

(c)           Certificates for Reimbursement.  A certificate of a Lender or the L/C Issuer setting forth the amount or amounts 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:

(a)           any continuation, conversion, payment or prepayment of any LIBOR Rate Loan, Euribor Rate Loan, or BA Equivalent Loan made to such Borrower on a day other than the last

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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;

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.

(a)           Designation of a Different Lending Office.  If any Lender or L/C Issuer requests compensation under Section 3.04, 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 Se ction 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

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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.

(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 subject to satisfaction of the following conditions precedent:

(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:

(i)            executed counterparts of this Agreement sufficient in number for distribution to the Administrative Agent, 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

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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 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 approva ls have been obtained and are in full force and effect;

(vii)         a payoff letter from the agent for the lenders under the Existing Credit Agreement satisfactory in form and substance to the Administrative Agent evidencing that the Existing Credit 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 have been or concurrently with the Closing Date are being released;

(viii)        the Security Documents and certificates evidencing any stock being pledged thereunder, together with 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

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Agents for the delivery of such termination statements and releases, satisfactions and discharges have been made;

(xi)           (A)          all documents and instruments, including Uniform Commercial Code and PPSA financing 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 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).

(f)            There shall not be pending any litigation or other proceeding, the result of which, either individually or in the 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.

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(h)           The Lenders shall have completed a due diligence investigation of the Borrowers and their Subsidiaries in scope, and 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 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 incom plete 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)            The consummation of the transactions contemplated hereby shall not violate any Law or any Organization Document.

(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.

(l)            The Borrowers shall have paid all fees, charges and disbursements of counsel to the Administrative Agent and the 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.

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4.02        Conditions to all Credit Extensions.  The obligation of each Lender to honor any Request for Credit Extension (other than a 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 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 fur nished pursuant to clauses (a) and (b), respectively, of Section 6.01.

(b)           No Default or Event of Default shall exist, or would result from such proposed Credit Extension or from the 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.

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 fu nd 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,

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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 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 fo rth, as of the Closing 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 awa rd 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 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 resp ect 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.

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5.05        Financial Statements; No Material Adverse Effect.

(a)           The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the 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.

(b)           The unaudited Consolidated balance sheet of the Parent and its Subsidiaries dated June 30, 2010, 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.

(c)           Since the date of the Audited Financial Statements, there has been no event or circumstance, either individually or in 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 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.

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5.07        No Default.  No Loan Party is in default under or with respect to, or party to, any Material Indebtedness.  No Default or 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, 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 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 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 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 Date, showing as of the date hereof the amount, obligor or issuer and maturity, if any, thereof.

(f)            Schedule 7.03 sets forth a complete and accurate list of all Material Indebtedness of each Loan Party on the Closing 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

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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 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.

(e)           Neither the Parent nor any of its Subsidiaries has entered into or agreed to any consent decree, order, or settlement or 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 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 a gainst 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

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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 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 Se ctions 4069 or 4212(c) of ERISA.

(e)           As of the Closing 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 it s 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

(g)           With respect to any Pension Plan under the laws of any foreign jurisdiction, none of the following events or conditions exists and is continuing that, either individually or in the aggregate,

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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) 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 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 Date, there are no outstanding rights to purchase any Equity Interests in any Subsidiary.  As of the Closing 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 Date, all of the outstanding Equity Interests in the Loan Parties have been validly issued, and are fully paid and non-assessable and 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 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.

5.15        Disclosure.  As of the Closing Date, each Loan Party has disclosed to the Administrative Agent and the Lenders all 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

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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 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 knowled ge 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 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 liability or obligation under the Worker Adjustment and Retraining Act or similar federal, state, provincial, territorial, municipal, local or foreign Law.  All payments due from any Loan Party, or for which any 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 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 conn ection with, or otherwise relating to the employment or termination of employment of any employee of any Loan Party. 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.

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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 o r 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 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.

(b)           Annexed hereto as Schedule 5.21(b) is a list describing all arrangements as of the Closing Date to which 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 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 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

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(whether or not covered by insurance) that, either individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

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 Date, the Parent and its Subsidiaries are in compliance with the Uniting 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:

(a)           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, 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 sub ject 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 of Holdings’ or the Parent annual report on Form 10-K for such year, as filed with the United States Securities and Exchange Commission, will satisfy the Parent’s obligation under 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 percent (50%) 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 det ail, certified by a

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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 and the absence of footnotes (it being agreed that the furnishing of filings or the Parent’s 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 percent (50%) 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 7.11 (but only if, during the Fiscal Year, Section 7.11 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 Sections 6.01(a) and (a) and (c), (commencing with the delivery of the financial statements for the Fiscal Quarter ended December 31, 2010), a duly completed Compliance Certificate signed by a Responsible Officer of the Parent, and in the event of any change in generally accepted accounting principles used in the preparation of such financial statements, the Parent 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;

(c)           (i) within ten (10) Business Days after end of each Fiscal Month (or, if such day is not a Business Day, on the next 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

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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; provided that at any time that an Trigger Event has occurred and is 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 t he 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 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;

(g)           promptly after the furnishing thereof, copies of any statement or report furnished to any holder of debt securities of 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;

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(i)            promptly after the Administrative Agent’s request therefor, copies of all documents evidencing Material Indebtedness;

(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 Section 6.01(a) or (a) or Section 6.02(d) (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 the Parent posts such documents, or provides a link thereto on the Parent’s 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 the Parent’s 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) the Parent shal l deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Parent 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) the Parent 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 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 th ey 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

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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 “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        Notices.  Promptly notify the Administrative Agent after a Responsible Officer of the Parent knows or reasonably should know thereof:

(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;

(d)           (i) of any release or discharge by the Parent or any of its Subsidiaries of any Hazardous Materials required to be 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 reasonabl y 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

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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;

(e)           the occurrence of any default or event of default under either of the Notes Indentures or the Senior Term Loan Documents;

(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;

(i)            of any collective bargaining agreement or other labor contract to which a Loan Party becomes a party, or the 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, wh ere (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

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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 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.

(a)           Maintain with financially sound and reputable insurance companies insurance on, or self insurance, all properties 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.

(c)           Ensure that at all times the Collateral Agent or the Canadian Agent, as applicable, shall be named as additional insureds with 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

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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 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

(a)           Permit representatives and independent contractors of the Administrative Agent to visit and inspect any of its 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.

(b)           Upon the request of the Administrative Agent after reasonable prior notice, permit the Administrative Agent or 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 su ch 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% 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 t hree (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,

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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% of the Loan Cap at any time, the Administrative Agent or the Canadian 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 o r 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 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 acqui red and promptly take such actions to create and perfect Liens on such Subsidiary’s personal property 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 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 L oan Party hereunder and under each applicable Canadian

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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 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 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;

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(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

(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.

(d)           The Domestic Concentration Account shall at all times be under the sole dominion and control of the Collateral 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.

(e)           Upon the request of the Administrative Agent, the Loan Parties shall cause bank statements and/or other reports to be 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 pre ceding 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.

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(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 Date, advise the Administrative Agent in writing of such revisions or updates as may be necessary or appropriate to update 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 Date that, if existing or occurring on the Closing 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 there by (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 quarte r 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.

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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 pe rfection 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, 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 LeaseholdsExcept 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.

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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;

(b)           Secured Funded Indebtedness incurred from time to time if, as of and after giving effect to incurrence of such 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, the holder of such Indebtedness shall have entered into an intercreditor agreement with the Collateral Agent and the Canadian Agent on terms reasonably acceptable to the Agents; for clarity, such intercreditor agreement shall not include provisions subordinating the debt (as opposed to the Liens) of the holder of such Secured Funded Indebtedness to the Obligations.

(c)           Secured Funded Indebtedness existing on the Closing Date and any Permitted Refinancing thereof.

7.04        Fundamental ChangesMerge, 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 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

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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;

(f)            Holdings may merge or consolidate into another Person organized under the laws of the United States so long as such transaction does not constitute a Change of Control; and

(g)           any merger, dissolution, amalgamation or consolidation to effectuate a Disposition permitted hereunder may be consummated.

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) (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

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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;

(e)           the Parent may pay, without duplication, cash dividends, payments and distributions (A) pursuant to the Tax Sharing 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) and (b) as long as no Event of Default then exists, Permitted Refinancings of any such Indebtedness.

7.08        Change in Nature of Business.  Engage in any line of business substantially different from the Business conducted by the 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, (ii) the financing of the acquisition of working capital assets, including the purchase of Inventory and Equipment in the ordinary course of business, (iii) to finance Capital Expenditures and Permitted Acquisitions (except to the extent restricted under the definit ion of Permitted Acquisitions) of the Loan Parties, and (iv) 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:

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(i)            which, in the case of the Senior Subordinated Notes Indenture, amends, supplements, waives, or otherwise modifies any subordination provisions contained therein;

(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);

(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

(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.

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 1.0:1.0.

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7.14Limitations on Currency, Commodity and Other Hedging Transactions.  Enter into, purchase or otherwise acquire 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

8.01Events 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

(b)Specific Covenants.  (i) Any Loan Party fails to perform or observe any term, covenant or agreement contained in 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 other event is to cause, or to permit the holder or holders of such Mat erial 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

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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, w ithout 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 ful ly 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

(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 proceedi ngs 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

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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 contrib ution 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 adve rsely 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

(n)Guaranty.  The termination or attempted termination of any Facility Guaranty except as expressly permitted 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 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 Borr owers 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

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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.

8.02Remedies Upon Event of Default.  If any Event of Default occurs and is continuing, the Agents, may, or, at the request of the 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.

8.03Application 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:

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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;

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)

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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 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 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 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;

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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 all of the Obligations have been indefeasibly paid in full, 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 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.

(b)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 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 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

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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 all of the Canadian Liabilities have been indefeasibly paid in full, 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 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.

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8.04Waivers 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, attac hment 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

9.01Appointment 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 t he 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 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.

(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 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.

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(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, presen t 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.

(f)The provisions of this Section 9.01 are for the benefit of the Agents, the Domestic Lenders and the L/C Issuer, 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).

9.02Rights 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 capa city.  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.

9.03Exculpatory Provisions.  The Agents shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents.  Without limiting the generality of the foregoing, the Agents:

(a)shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;

(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

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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.

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.

9.04Reliance 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 sat isfactory 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

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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.

9.05Delegation 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 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.

9.06Resignation 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 Re quired 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 o r 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 ap plicable, 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

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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.

9.07Non-Reliance on Agents and Other Lenders.  Each Lender and the L/C Issuer acknowledges that it has, 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 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 Par ties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking 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.

9.08No Other Duties, Etc.  Anything herein to the contrary notwithstanding, none of the Bookrunners, Arrangers, 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.

9.09Agents 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), 2.03(j), 2.09 and 10.04) allowed in such judicial proceeding; and

(b)to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, interim receiver, assignee, trustee, monitor, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and the L/C Issuer to make such payments to the Agents and, if the Agents shall consent to the making of such payments directly to the Lenders and the L/C Issuer, to pay to the Agents any amount due for the reasonable compensation, expenses, disbursements and advances of the Agents and its agents and counsel, and any other amounts due the Agents under Sections 2.09 and 10.04.

Nothing contained herein shall be deemed to authorize the Agents to authorize or consent to or accept or adopt on behalf of any Lender or the L/C Issuer any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or the L/C Issuer or to authorize the Agents to vote in respect of the claim of any Lender or the L/C Issuer in any such proceeding.

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9.10Collateral and Guaranty Matters.  The Credit Parties irrevocably authorize the Collateral Agent and the Canadian Agent, at their option and in their discretion to, or, in the event of any Disposition permitted hereunder, the Collateral Agent or the Canadian Agent shall,

(a)release any Lien on any property granted to or held by any Agent under any Loan Document (i) upon termination of the Aggregate Total Commitments and Payment in Full, (ii) solely with respect to any Lien on any property of the Canadian Loan Parties, upon termination of the Canadian Total Commitments and Payment in Full of all Canadian Liabilities, (iii) that is Disposed of or to be Disposed of as part of or in connection with any Disposition permitted hereunder or under any other Loan Document, or (iv) if approved, authorized or ratified in writing by the Required Lenders in accordance with Secti on 10.01;

(b)subordinate any Lien on any property granted to or held by the Administrative Agent or the Canadian Agent under any Loan Document to the holder of any Lien on such property that is permitted by clause (h) of the definition of Permitted Encumbrances; and

(c)release any Guarantor from its obligations under any Facility Guaranty and each other applicable Loan Document if such Person ceases to be a Subsidiary as a result of a transaction permitted hereunder.

Upon request by any Agent at any time, 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) will confirm in writing the Collateral Agent’s or the Canadian Agent’s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the Facility Guaranty and each other applicable Loan Document pursuant to this Section 9.10.  In each case as specified in this Section 9.10, the Collateral Agent or the Canadian Agent will, at the Loan Parties’ expense, execute and deliver to the applicable Loan Party such documents as such Loan Party may reasonably request to evidence the release of such item of Collateral from the assignment and Lien granted under the Security Documents or to subordinate its interest in such item, or to release such Guarantor from its obligations under the Facility Guaranty, in each case in accordance with the terms of the Loan Documents and this Section 9.10.

9.11Notice of Transfer.

The Agents may deem and treat a Lender party to this Agreement as the owner of such Lender’s portion of the Loans and Commitments for all purposes, unless and until, and except to the extent, an Assignment and Assumption shall have become effective as set forth in Section 10.06.

9.12Reports and Financial Statements.

By signing this Agreement, each Lender:

(a)agrees to promptly furnish the Agents with a summary of all Other Domestic Liabilities or Other Canadian Liabilities due or to become due to such Lender. In connection with any distributions to be made hereunder, the Administrative Agent and the Canadian Agent shall be entitled to assume that no amounts are due to any Lender on account of Other Liabilities unless the Agents have received written notice thereof from such Lender;

(b)is deemed to have requested that the Administrative Agent or the Canadian Agent, as applicable, furnish such Lender, promptly after they become available, copies of all financial statements, Borrowing Base Certificates, notices or other written communications

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required to be delivered by any Loan Party hereunder and all commercial finance examinations and appraisals of the Collateral received by the Agents (collectively, the “Reports”) and the Administrative Agent and the Canadian Agent each hereby agrees to honor each such request;

(c)expressly agrees and acknowledges that neither the Administrative Agent nor the Canadian Agent makes any representation or warranty as to the accuracy of the Reports, and shall not be liable for any information contained in any Report;

(d)expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that the Agents, or any other party performing any audit or examination will inspect only specific information regarding the Loan Parties and will rely significantly upon the Loan Parties’ books and records, as well as on representations of the Loan Parties’ personnel;

(e)agrees to keep all Reports confidential in accordance with the provisions of Section 10.07 hereof; and

(f)without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold the Agents and any such other Person preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any Credit Extensions that the indemnifying Lender has made or may make to the Borrowers, or the indemnifying Lender’s participation in, or the indemnifying Lender’s purchase of, a Loan or Loans; and (ii) to pay and protect, and indemnify, defend, and hold t he Agents and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including attorney costs) incurred by the Agents and any such other Person preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender.

9.13Agency for Perfection.

Each Agent and Lender hereby appoints each other Agent and Lender as agent for the purpose of perfecting Liens for the benefit of the Agents and the Lenders, in assets which, in accordance with Article 9 of the UCC, the PPSA or any other applicable Law of the United States or Canada can be perfected only by possession.  Should any Lender (other than the Agents) obtain possession of any such Collateral, such Lender shall notify the Agents thereof, and, promptly upon the Administrative Agent’s or the Canadian Agent’s request therefor, shall deliver such Collateral to the Administrative Agent or the Canadian Agent, as applicable, or otherwise deal with such Collateral in accordance with the Administrative Agent’s or the Canadian Agent’s instructions.

9.14Indemnification of Agents.  The Lenders shall indemnify the Agents (to the extent not reimbursed by the Loan Parties and without limiting the obligations of Loan Parties hereunder), ratably according to their Applicable Percentages in effect on the date on which indemnification is sought under this subsection 10.6 (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with their Commitment Percentages immediately prior to such date ), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against any Agent in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted to be taken by any Agent in connection therewith; provided, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or

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disbursements resulting from such Agent’s gross negligence or willful misconduct as determined by a final and nonappealable judgment of a court of competent jurisdiction.

9.15Relation among Lenders.  The Lenders are not partners or co-venturers, and no Lender shall be liable for the acts or omissions of, or (except as otherwise set forth herein in case of the Agents) authorized to act for, any other Lender.

9.16Defaulting Lender.

(a)If for any reason any Lender shall fail or refuse to abide by its obligations under this Agreement, including without limitation its obligation to make available to Administrative Agent or the Canadian Agent, as applicable, its Applicable Percentage of any Loans, expenses or setoff or purchase its Applicable Percentage of a participation interest in the Swing Line Loans or L/C Borrowings and such failure is not cured within one (1) Business Day of receipt from the Administrative Agent of written notice thereof, then, in addition to the rights and remedies that may be available to the other Credit Parti es, the Loan Parties or any other party at law or in equity, and not at limitation thereof, (i) such Defaulting Lender’s right to participate in the administration of, or decision-making rights related to, the Obligations, this Agreement or the other Loan Documents shall be suspended during the pendency of such failure or refusal (other than the Defaulting Lender’s rights pursuant to Section 10.01(a)), and (ii) if any of the other Lenders have made Loans on behalf of a Defaulting Lender, a Defaulting Lender shall be deemed to have assigned any and all payments due to it from the Loan Parties, whether on account of outstanding Loans, interest, fees or otherwise, to the remaining non-Defaulting Lenders for application to, and reduction of, their proportionate shares of all outstanding Obligations until, as a result of application of such assigned payments the Lenders’ respective Applicable Percentages of all outstanding Obligations shall have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency, and (iii) at the option of the Administrative Agent, any amount payable to such Defaulting Lender hereunder (whether on account of principal, interest, fees or otherwise) shall, in lieu of being distributed to such Defaulting Lender, be retained by the Administrative Agent as cash collateral for future funding obligations of the Defaulting Lender in respect of any Loan or existing or future participating interest in any Swing Line Loan or Letter of Credit.  The Defaulting Lender’s decision-making and participation rights and rights to payments as set forth in clauses (i) and (ii) hereinabove shall be restored only upon the payment by the Defaulting Lender of its Applicable Percentage of any Obligations, any participation obligation, or expenses as to which it is delinquent, together with interest thereon at the rate set forth in Section 2.08(b) hereof from the date when originally due until the date upon which any such amounts are actually paid.

(b)The non-Defaulting Lenders shall also have the right, but not the obligation, in their respective, sole and absolute discretion, to cause the termination and assignment, without any further action by the Defaulting Lender for no cash consideration (pro rata, based on the respective Domestic Commitments of those Domestic Lenders electing to exercise such right, and the respective Canadian Commitments of those Canadian Lenders electing to exercise such right), of the Defaulting Lender’s Domestic Commitment and/or Canadian Commitment, as applicable, to fund future Loans.  Upon any such purchase of the Applicable Percentage of any Defaulting Lender, the Defaulting Lender’s share in future Credit Extensions and its rights under the Loan Documents with respect thereto shall terminate on the date of purchase, and the Defaulting Lender shall promptly execute all documents reasonably requested to surrender and transfer such interest, including, if so requested, an Assignment and Assumption.

(c)Each Defaulting Lender shall indemnify the Administrative Agent or the Canadian Agent, as applicable, and each non-Defaulting Lender from and against any and all loss, damage or expenses, including but not limited to reasonable attorneys’ fees and funds advanced by the

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Administrative Agent or the Canadian Agent, as applicable, or by any non-Defaulting Lender, on account of a Defaulting Lender’s failure to timely fund its Applicable Percentage of a Loan or to otherwise perform its obligations under the Loan Documents.

9.17Risk Participation.

(a)Upon the earlier of Substantial Liquidation or the Determination Date, if all Canadian Liabilities and the Foreign Liabilities incurred under the Canadian Borrowing Base have not been repaid in full (other than the Other Liabilities of the Canadian Borrower and its Subsidiaries), then the Domestic Lenders shall purchase from the Canadian Lenders (on the date of Substantial Liquidation or the Determination Date, as applicable) such portion of the Canadian Liabilities (other than Other Liabilities relating to the Canadian Borrower and its Subsidiaries) so that each Lender shall, after giving effect to an y such purchases, hold its Liquidation Percentage of all outstanding Canadian Liabilities and all other Obligations.

(b)Upon the earlier of Substantial Liquidation or the Determination Date, if all Obligations of the Domestic Borrowers (including the Foreign Liabilities but excluding those Obligations relating to the Canadian Liabilities or the Other Liabilities of the Domestic Borrowers) have not been repaid in full, then the Canadian Lenders shall purchase from the Domestic Lenders (on the date of Substantial Liquidation or the Determination Date, as applicable) such portion of such Obligations so that each Lender shall, after giving effect to any such purchases, hold its Liquidation Percentage of all outstanding Obligation s of the Domestic Borrowers and the Canadian Liabilities.

(c)All purchases of Obligations under this Section 9.17 shall be at par, for cash, with no premium, discount or reduction.

(d)No Lender shall be responsible for any default of any other Lender in respect of any other Lender’s obligations under this Section 9.17, nor shall the obligations of any Lender hereunder be increased as a result of such default of any other Lender.  Each Lender shall be obligated to the extent provided herein regardless of the failure of any other Lender to fulfill its obligations hereunder.

(e)Each Lender shall execute such instruments, documents and agreements and do such other actions as may be necessary or proper in order to carry out more fully the provisions and purposes of this Section 9.17 and the purchase of Obligations or the Canadian Liabilities, as applicable, as provided herein.

(f)The obligations of each Lender under this Section 9.17 are irrevocable and unconditional and shall not be subject to any qualification or exception whatsoever including, without limitation, lack of validity or enforceability of this Agreement or any of the Loan Documents or the existence of any claim, setoff, defense or other right which any Loan Party may have at any time against any of the Lenders.

(g)No fees required to be paid on any assignment pursuant to Section 10.06 of this Agreement shall be payable in connection with any assignment under this Section 9.17.

9.18Domestic Parallel Debt

(a)Each Loan Party hereby irrevocably and unconditionally undertakes to pay to the Collateral Agent as a separate and independent obligation an amount equal to the total amount owed from time to time by such Loan Party to any Credit Party in respect of its Domestic Principal Obligations as they may exist from time to time. The payment

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undertaking of each Loan Party to the Collateral Agent under this Section 9.18 (a) is hereinafter referred to as a “Domestic Parallel Debt”. Each Domestic Parallel Debt will be payable in the currency or currencies of the relevant Domestic Principal Obligations.

(b)For the avoidance of doubt it is confirmed that Section 9.18 (a) means that each Domestic Parallel Debt constitutes a payment obligation of the relevant Loan Party to the Collateral Agent which is separate and independent from, and without prejudice to, its Domestic Principal Obligations and shall become due and payable to the Collateral Agent as soon as, and to the extent that, any amount owed by such Loan Party to the relevant Credit Party under its Domestic Principal Obligations becomes due and payable.

(c)Each of the parties to this Agreement acknowledges that each Domestic Parallel Debt represents the Collateral Agent’s own claim to receive payment of such Domestic Parallel Debt from the relevant Loan Party and that the amount which may become due and payable by a Loan Party under its Domestic Parallel Debt pursuant to this Section 9.18 shall never exceed the total amount which becomes due and payable by such Loan Party to the Credit Parties under its Domestic Principal Obligations.

(d)Notwithstanding any of the other provisions of this Section 9.18:

(i)any amount due and payable by a Loan Party under its Parallel Debt shall, to the extent such Loan Party shall have paid any amounts to any Credit Party under its Domestic Principal Obligations or any Credit Party otherwise receives any amount in payment of such Domestic Principal Obligations (other than by virtue of Section 9.18 (f)), be decreased by equivalent amounts as if such amounts were received directly in payment of such Domestic Parallel Debt on the date of receipt by the relevant Credit Party of such amount in payment of such Domestic Principal Obligations; and

(ii)to the extent that any Loan Party shall have paid any amounts to the Collateral Agent under its Domestic Parallel Debt or the Collateral Agent shall have otherwise received monies in payment of such Parallel Debt, the Domestic Principal Obligations of such Loan Party to the relevant Credit Parties shall be decreased by equivalent amounts as if such amounts were received directly in payment of such Domestic Principal Obligations on the date of receipt by the Collateral Agent of such amount in payment of such Domestic Parallel Debt.

(e)For the purpose of this Section 9.18 the Collateral Agent acts in its own name and on behalf of itself but for the benefit of the Credit Parties and any security right granted to the Collateral Agent to secure the Domestic Parallel Debt is granted to the Collateral Agent in its capacity of sole creditor of the Domestic Parallel Debt.

(f)All payments received by the Collateral Agent shall be applied towards payment of the relevant Domestic Parallel Debt, whereupon the Collateral Agent shall distribute such amounts to the Credit Parties who are creditors in accordance with the terms of this Agreement.

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9.19Foreign Parallel Debt

(a)Each Loan Party hereby irrevocably and unconditionally undertakes to pay to the Canadian Agent as a separate and independent obligation an amount equal to the total amount owed from time to time by such Loan Party to any Credit Party in respect of its Foreign Principal Obligations as they may exist from time to time. The payment undertaking of each Loan Party to the Canadian Agent under this Section 9.19 (a) is hereinafter referred to as a “Foreign Parallel Debt”. Each Foreign Parallel Debt will be payable in the currency or currencies of the relevant Foreign Principal Obligations.

(b)For the avoidance of doubt it is confirmed that Section 9.19 (a) means that each Foreign Parallel Debt constitutes a payment obligation of the relevant Loan Party to the Canadian Agent which is separate and independent from, and without prejudice to, its Foreign Principal Obligations and shall become due and payable to the Canadian Agent as soon as, and to the extent that, any amount owed by such Loan Party to the relevant Credit Party under its Foreign Principal Obligations becomes due and payable.

(c)Each of the parties to this Agreement acknowledges that each Foreign Parallel Debt represents the Canadian Agent’s own claim to receive payment of such Foreign Parallel Debt from the relevant Loan Party and that the amount which may become due and payable by a Loan Party under its Foreign Parallel Debt pursuant to this Section 9.19 shall never exceed the total amount which becomes due and payable by such Loan Party to the Credit Parties under its Foreign Principal Obligations.

(d)Notwithstanding any of the other provisions of this Section 9.19:

(i)any amount due and payable by a Loan Party under its Foreign Parallel Debt shall, to the extent such Loan Party shall have paid any amounts to any Credit Party under its Foreign Principal Obligations or any Credit Party otherwise receives any amount in payment of such Foreign Principal Obligations (other than by virtue of Section 9.19 (f)), be decreased by equivalent amounts as if such amounts were received directly in payment of such Foreign Parallel Debt on the date of receipt by the relevant Credit Party of such amount in payment of such Foreign Principal Obligations; and

(ii)to the extent that any Loan Party shall have paid any amounts to the Canadian Agent under its Foreign Parallel Debt or the Canadian Agent shall have otherwise received monies in payment of such Foreign Parallel Debt, the Foreign Principal Obligations of such Loan Party to the relevant Secured Party shall be decreased by equivalent amounts as if such amounts were received directly in payment of such Foreign Principal Obligations on the date of receipt by the Canadian Agent of such amount in payment of such Foreign Parallel Debt.

(e)For the purpose of this Section 9.19 the Canadian Agent acts in its own name and on behalf of itself but for the benefit of the Credit Parties and any security right granted to the Canadian Agent to secure the Foreign Parallel Debt is granted to the Canadian Agent in its capacity of sole creditor of the Foreign Parallel Debt.

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(f)All payments received by the Canadian Agent shall be applied towards payment of the relevant Foreign Parallel Debt, whereupon the Canadian Agent shall distribute such amounts to the Credit Parties who are creditors in accordance with the terms of this Agreement.

9.20Parallel Debt Savings Clause.

Notwithstanding any provision of Section 9.18 and 9.19 or any other provision of this Agreement, neither the Canadian Loan Parties nor the Foreign Borrower shall be liable for the payment of the Obligations incurred by the Domestic Borrowers (other than the Foreign Borrower) and Domestic Loan Parties. Rather, it is the intent of Sections 9.18 and 9.19 to create parallel debts for purpose of Dutch law.

ARTICLE X
MISCELLANEOUS

10.01Amendments, Etc.  No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by any Loan Party therefrom, shall be effective unless in writing signed by the Administrative Agent, with the Consent of the Required Lenders, and the Parent or the applicable Loan Party, as the case may be, and each such waiver or Consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such amendment, waiver or consent shall:

(a)extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02) without the written Consent of such Lender;

(b)postpone any date fixed by this Agreement or any other Loan Document for (i) any scheduled payment (including the Maturity Date) of principal, interest, fees or other amounts due hereunder or under any of the other Loan Documents without the written Consent of each Lender directly affected thereby (it being understood that postponements of the date for mandatory prepayments required by Section 2.05 may be made with the consent of the Required Lenders and shall not be subject to this clause (b)) or (ii) any scheduled or mandatory reduction of the Aggregate Total Commitments hereunder or under any other Lo an Document, without the written Consent of each Lender directly affected thereby;

(c)reduce the principal of, or the rate of interest specified herein on, any Loan or L/C Borrowing, or any fees or other amounts payable hereunder or under any other Loan Document, without the written Consent of each Lender directly affected thereby; provided, however, that only the Consent of the Required Lenders shall be necessary (i) to amend the definition of “Default Rate” or to waive any obligation of the Borrowers to pay interest or Letter of Credit Fees at the Default Rate;

(d)change Section 2.13 or Section 8.03 in a manner that would alter the pro rata sharing of payments required thereby without the written Consent of each Lender directly affected thereby;

(e)change any provision of this Section or the definition of “Required Lenders”, or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, or consent to the assignment or transfer by any Loan Parties of any of its rights and obligations under this Agreement and the other Loan Documents, in each case without the written Consent of each Lender;

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(f)except as expressly permitted hereunder or under any other Loan Document, release, or limit the liability of, any Loan Party without the written Consent of each Lender;

(g)except for Dispositions permitted under Section 7.05 hereof or as provided in Section 9.10, release all or substantially all of the Collateral from the Liens of the Security Documents without the written Consent of each Lender;

(h)change the definition of the term “Domestic Borrowing Base”, “Canadian Borrowing Base”, “Combined Borrowing Base” or any component definition of either term, if as a result thereof the amount of credit available to the Borrowers hereunder would be increased without the written Consent of each Lender, provided that the foregoing shall not limit the discretion of the Administrative Agent to change, establish or eliminate any Reserves with respect to the Domestic Borrowing Base, or the Canadian Agent to change, establish or eliminate any Reserves with respect to the Cana dian Borrowing Base even if such change or elimination results in an increase in the amount of credit available to the Borrowers hereunder;

(i)modify the definition of “Domestic Permitted Overadvance” or the definition of “Canadian Permitted Overadvance” so as to increase the amount thereof or, except as provided in such definitions, the time period for a Domestic Permitted Overadvance or a Canadian Permitted Overadvance without the written Consent of each Lender; and

(j)except as expressly permitted herein or in any other Loan Document, subordinate the Obligations hereunder or the Liens granted hereunder or under the other Loan Documents, to any other Indebtedness or Lien, as the case may be without the written Consent of each Lender;

and, provided further, that (i) no amendment, waiver or Consent shall, unless in writing and signed by the L/C Issuer in addition to the Lenders required above, affect the rights or duties of the L/C Issuer under this Agreement or any Issuer Document relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or Consent shall, unless in writing and signed by the Swing Line Lender in addition to the Lenders required above, affect the rights or duties of the Swing Line Lender under this Agreement; (iii) no amendment, waiver or Consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; (iv) no amendment, waiver or Consent shall, unless in writing and signed by the Collateral Agent in addition to the Lenders requi red above, affect the rights or duties of the Collateral Agent under this Agreement or any other Loan Document, (v) no amendment, waiver or Consent shall, unless in writing and signed by the Canadian Agent in addition to the Lenders required above, affect the rights or duties of the Canadian Agent under this Agreement or any other Loan Document, and (vi) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto.  Notwithstanding anything to the contrary herein, no Deteriorating Lender or Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or Consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender.

Notwithstanding any provision herein to the contrary, this Agreement may be amended (or amended and restated) with the written consent of the Required Lenders, the Agents and the Borrowers (y) to add one or more additional credit facilities to this Agreement and to permit the extensions of credit from time to time outstanding thereunder and the accrued interest and fees in respect thereof to share ratably in the benefits of this Agreement and the other Loan Documents with the existing Obligations and the accrued interest and fees in respect thereof, and (z) to include, as appropriate, the Lenders holding such credit facilities in any required vote or action of the Applicable Lenders.

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If any Lender does not Consent (a “Non-Consenting Lender”) to a proposed amendment, waiver, consent or release with respect to any Loan Document that requires the Consent of each Lender and that has been approved by the Required Lenders, the Parent may replace such Non-Consenting Lender in accordance with Section 10.13; provided that such amendment, waiver, consent or release can be effected as a result of the assignment contemplated by such Section (together with all other such assignments required by the Parent to be made pursuant to this paragraph).

10.02Notices; Effectiveness; Electronic Communications.

(a)Notices Generally.  Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:

(i)if to the Loan Parties, the Agents, the L/C Issuer or the Swing Line Lender, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 10.02; and

(ii)if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient).  Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).

(b)Electronic Communications.  Notices and other communications to the Lenders and the L/C Issuer hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent or the Canadian Agent, as applicable, provided that the foregoing shall not apply to notices to any Lender or the L/C Issuer pursuant to Article II if such Lender or the L/C Issuer, as applicable, has notified the Administrative Agent that it is incapable of receiv ing notices under such Article by electronic communication.  The Administrative Agent or the Parent or the Canadian Agent and the Canadian Borrower may, in their discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

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(c)The Platform.  THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.”  THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS.  NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, I S MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM.  In no event shall the Agents or any of their Related Parties (collectively, the “Agent Parties”) have any liability to any Loan Party, any Lender, the L/C Issuer or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Loan Parties’ or the Agent Parties’ transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided, however, that in no event shall any Agent Party have any liability to any Loan Party, any Lender, the L/C Issuer or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct o r actual damages).

(d)Change of Address, Etc.  Each of the Loan Parties, the Agents, the L/C Issuer and the Swing Line Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto.  Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Parent, the Agents, the L/C Issuer and the Swing Line Lender.  In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.

(e)Reliance by Agents, L/C Issuer and Lenders.  The Agents, the L/C Issuer and the Lenders shall be entitled to rely and act upon any notices (including telephonic Committed Loan Notices and Swing Line Loan Notices) purportedly given by or on behalf of the Loan Parties even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof.  The Loan Partie s shall indemnify the Agents, the L/C Issuer, each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Loan Parties.  All telephonic notices to and other telephonic communications with the Agents may be recorded by the Agents, and each of the parties hereto hereby consents to such recording.

10.03No Waiver; Cumulative Remedies.  No failure by any Credit Party to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder or under any other Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.  The rights, remedies, powers and privileges provided herein and in the other Loan Documents are cumulative and not exclusive of any righ ts, remedies, powers and privileges provided by law.  Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether any Credit Party may have had notice or knowledge of such Default at the time.

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10.04Expenses; Indemnity; Damage Waiver.

(a)Costs and Expenses.  The Borrowers shall pay all Credit Party Expenses.

(b)Indemnification by the Loan Parties.  The Loan Parties shall indemnify the Agents (and any sub-agent thereof), each other Credit Party, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless (on an after tax basis) from, any and all losses, claims, causes of action, damages, liabilities, settlement payments, costs, and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), incurred by any Indemnitee or asserted against any Indemnitee by any third party or by any Borrower or any other Loan Party arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, or, in the case of the Agents (and any sub-agents thereof) and their Related Parties only, the administration of this Agreement and the other Loan Documents, (ii) any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the L/C Issuer to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any prop erty owned or operated by any Loan Party or any of its Subsidiaries, or any Environmental Liability related in any way to any Loan Party or any of its Subsidiaries, (iv) any claims of, or amounts paid by any Credit Party to, a Blocked Account Bank or other Person which has entered into a control agreement with any Credit Party hereunder, or (v) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by any Borrower or any other Loan Party or any of the Loan Parties’ directors, shareholders or creditors, and regardless of whether any Indemnitee is a party thereto, in all cases, whether or not caused by or arising, in whole or in part, out of the comparative, contributory or sole negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expense s (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the bad faith, gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by a Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other Loan Document, if the Borrowers or such Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction; provided that with respect to the Canadian Loan Parties, “Indemnitees” shall only refer to the Canadian Credit Parties and each Related Party of the Canadian Credit Parties.  provided further that reimbursement of legal expenses shall be limited to the expenses of one counsel (and any necessary local counsel) per Indemnitee.

(c)Waiver of Consequential Damages, Etc.  To the fullest extent permitted by Law, the Loan Parties shall not assert, and hereby waive, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds there of.  No Indemnitee shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed to such unintended recipients by such Indemnitee through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby other than for direct or actual damages resulting from the gross negligence or willful misconduct of such Indemnitee as determined by a final and nonappealable judgment of a court of competent jurisdiction. None of the Credit Parties, or their agents or employees shall be liable for any loss or damage insured by the insurance policies required to be maintained under this Section 6.07.  Each Loan Party shall look solely to its insurance companies or any other parties other

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than the Credit Parties for the recovery of such loss or damage and such insurance companies shall have no rights of subrogation against any Credit Party or its agents or employees.  If, however, the insurance policies do not provide waiver of subrogation rights against such parties, as required above, then the Loan Parties hereby agree, to the extent permitted by law, to waive their right of recovery, if any, against the Credit Parties and their agents and employees.

(d)Payments.  All amounts due under this Section shall be payable on demand therefor.

(e)Survival.  The agreements in this Section shall survive the resignation of any Agent, the Swingline Lender, and the L/C Issuer, the assignment of any Commitment or Loan by any Lender, the replacement of any Lender, the termination of the Aggregate Total Commitments and the repayment, satisfaction or discharge of all the other Obligations.

10.05Payments Set Aside.  To the extent that any payment by or on behalf of the Loan Parties is made to any Credit Party, or any Credit Party exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by such Credit Party in its discretion) to be repaid to a receiver, interim receiver, trustee, monitor, custodian, conservator, liquidator, rehabilitator or similar officer, or any other party, in connect ion with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, (b) each Domestic Lender and the L/C Issuer (with respect to Domestic Letters of Credit) severally agrees to pay to the Agents upon demand its Applicable Percentage (without duplication) of any amount so recovered from or repaid by the Agents, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect, and (c) each Canadian Lender and the L/C Issuer (with respect to Canadian Letters of Credit) severally agrees to pay to the Canadian Agent upon demand its Applicable Percentage (without duplication) of any amount so recovered from or repaid by the Canadian Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Canadian Prime Rate from to time in effect.  The obligations of the Lenders and the L/C Issuer under clause (b) and clause (c) of the preceding sentence shall survive the Payment in Full of the Obligations and the termination of this Agreement.

10.06Successors and Assigns.

(a)Successors and Assigns Generally.  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Loan Party may assign or otherwise transfer any of its rights or obligations hereunder or under any other Loan Document without the prior written Consent of the Agents and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the pro visions of Section 10.06(b), (ii) by way of participation in accordance with the provisions of subsection Section 10.06(d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 10.06(f) (and any other attempted assignment or transfer by any party hereto shall be null and void).  Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Credit Parties) any legal or equitable right, remedy or claim under or by reason of this Agreement.

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(b)Assignments by Lenders.  Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment(s) and the Loans (including for purposes of this Section 10.06(b), participations in L/C Obligations and in Swing Line Loans) at the time owing to it); provided that any such assignment shall be subject to the following conditions:

(i)Minimum Amounts.

(A)in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, no minimum amount need be assigned; and

(B)in any case not described in subsection (b)(i)(A)of this Section, the aggregate amount of the Domestic Commitment or Canadian Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Domestic Loans or Canadian Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000 unless each of the Administrative Agent and, so long as no Default has occurred and is continuing, the Parent otherwise consents (each such consent not to be unreasonably withheld or delayed); provided, however, that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met;

(ii)Proportionate Amounts.  Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Domestic Loans or the Domestic Commitment assigned or the Canadian Loans or the Canadian Commitment assigned, as applicable, except that this clause (ii) shall not apply to the Swing Line Lender’s rights and obligations in respect of Swing Line Loans;

(iii)Required Consents.  No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:

(A)the consent of the Parent (such consent not to be unreasonably withheld or delayed) shall be required unless (1) a Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund with respect to such Lender; and

(B)the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of any Commitment if such assignment is to a Person that is not a Lender, an Affiliate of such Lender or an Approved Fund with respect to such Lender; and

(iv)Assignment and Assumption.  The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500, provided, however, that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any

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assignment. The assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

(v)Restrictions on Canadian Lenders.  Unless otherwise agreed by the Administrative Agent, no Person may be a Canadian Lender unless it (or any of its Affiliates) also has a Domestic Commitment in an amount at least equal to its Canadian Commitment.

(vi)Assignments to Canadian Lenders.  The amount assigned by a Canadian Lender to its assignee (each such an assignee a “New Canadian Lender”) in relation to a Canadian Loan and/or commitments under this Agreement made available to any Dutch Loan Party shall be at least EUR 50,000 (or its equivalent in another currency) or, if it is less, the New Canadian Lender shall confirm in writing to the relevant Dutch Loan Party that such New Canadian Lender is a Professional Market Party

(vii)Representation by New Canadian Lender.  If on the date on which a New Canadian Lender becomes a Canadian Lender, such Canadian Lender participates in Canadian Loans that may be made available to a Dutch Loan Party and the amount of such participation shall be less than EUR 50,000 (or its equivalent in another currency) and it is a requirement under Dutch law that such New Canadian Lender be a Professional Market Party, such New Canadian Lender will make a representation that it is a Professional Market Party and will undertake, to the extent necessary, to provide its reasonable assistance to each Dutch Loan Party in verifying such New Canadian Lender’s status as a Professional Market Party.

Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.01, 3.04, 3.05, and 10.04 with respect to facts and circumstances oc curring prior to the effective date of such assignment.  Upon request, the Borrowers (at their expense) shall execute and deliver a Note to the assignee Lender.  Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 10.06(d).

(c)Register.  The Administrative Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the “Register”).  The entries in the Register shall be conclusive, absent manifest error , and the Loan Parties, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Parent and any Lender at any reasonable time and from time to time upon reasonable prior notice.

(d)Participations.  Any Lender may at any time, without the consent of, or notice to, the Loan Parties or the Administrative Agent, sell participations to any Person (other than a natural person or the Loan Parties or any of the Loan Parties’ Affiliates or Subsidiaries) (each, a “Participant”) in all or a

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portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Domestic Commitment, Canadian Commitment and/or the Loans (including such Lender’s participations in L/C Obligations and/or Swing Line Loans) owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Loan Parties, the Agents, the Lenders and the L/C Issuer shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.  Any Participant shall agree in writing to comply with all confidentiality obligations set forth in Section 10.07 as if such Participant was a Lender hereunder.

Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 10.01 that affects such Participant.  Subject to subsection (e) of this Section, the Loan Parties agree that each Participant shall be entitled to the benefits of Sections 3.01, 3.04 and 3.05 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 10.06(b).  To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.13 as though it were a Lender.

(e)Limitations upon Participant Rights.  A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Parent’s prior written consent.  A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01 unless the Parent is not ified of the participation sold to such Participant and such Participant agrees, for the benefit of the Loan Parties, to comply with Section 3.01(e) as though it were a Lender.

(f)Certain Pledges.  Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(g)Electronic Execution of Assignments.  The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Law, including the Federal Electronic Signatures in Global and Natio nal Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

(h)Resignation as L/C Issuer or Swing Line Lender after Assignment or Resignation.  Notwithstanding anything to the contrary contained herein, if at any time Bank of America or Bank of America Canada-Branch assigns all of its Commitment and Loans pursuant to subsection (b) above, or resigns as Administrative Agent or Canadian Agent in accordance with the provisions of Section 9.06, Bank of America or Bank of America Canada-Branch and its Affiliates may, (i) upon thirty (30) days’ notice to the Parent and the Lenders, resign as an L/C Issuer and/or (ii) with duplication of any notice required under Section 9.06, upon thirty (30) days’ notice to the Parent, resign as a Swing Line

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Lender.  In the event of any such resignation as L/C Issuer or Swing Line Lender, the Parent shall be entitled to appoint from among the Lenders a successor L/C Issuer or Swing Line Lender hereunder; provided, however, that no failure by the Parent to appoint any such successor shall affect the resignation of Bank of America or Bank of America Canada-Branch as an L/C Issuer or a Swing Line Lender, as the case may be.  If Bank of America or Bank of America Canada-Branch and its Affiliates resigns as L/C Issuer, it shall retain all the rights, powers, privileges and duties of the L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto (including the right to require the Lenders to make Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c)< /u>).  Upon the appointment of a successor L/C Issuer and/or Swing Line Lender, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer or Swing Line Lender, as the case may be, and (b) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to Bank of America or Bank of America Canada-Branch to effectively assume the obligations of Bank of America or Bank of America Canada-Branch and any of its Affiliates with respect to such Letters of Credit.

10.07Treatment of Certain Information; Confidentiality.  Each of the Credit Parties agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates, Approved Funds, and to its and its Affiliates’ and Approved Funds’ respective partners, directors, officers, employees, agents, funding sources, attorneys, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Informa tion confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by Laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any Swap or derivative transaction relating to any Loan Party and its obligations, (g) with the consent of the Parent or (h) to the e xtent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to any Credit Party or any of their respective Affiliates on a non-confidential basis from a source other than the Loan Parties.

For purposes of this Section, “Information” means all information received from the Loan Parties or any Subsidiary thereof relating to the Loan Parties or any Subsidiary thereof or their respective businesses, other than any such information that is available to any Credit Party on a non-confidential basis prior to disclosure by the Loan Parties or any Subsidiary thereof, provided that, in the case of information received from any Loan Party or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential.  Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential inform ation.

Each of the Credit Parties acknowledges that (a) the Information may include material non-public information concerning the Loan Parties or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with Law, including Federal and state securities Laws.

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10.08Right of Setoff.  If an Event of Default shall have occurred and be continuing or if any Lender shall have been served with a trustee process or similar attachment relating to property of a Loan Party, each Lender, the L/C Issuer and each of their respective Affiliates is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent or the Required Lenders, to the fullest extent permitted by Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) o r other property at any time held and other obligations (in whatever currency) at any time owing by such Lender, the L/C Issuer or any such Affiliate to or for the credit or the account of the Borrowers or any other Loan Party against any and all of the Obligations now or hereafter existing under this Agreement or any other Loan Document to such Lender or the L/C Issuer, regardless of the adequacy of the Collateral, and irrespective of whether or not such Lender or the L/C Issuer shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrowers or such Loan Party may be contingent or unmatured or are owed to a branch or office of such Lender or the L/C Issuer different from the branch or office holding such deposit or obligated on such indebtedness.  The rights of each Lender, the L/C Issuer and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, the L /C Issuer or their respective Affiliates may have.  Each Lender and the L/C Issuer agrees to notify the Parent and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.  Notwithstanding the foregoing, any amounts of the Canadian Loan Parties so offset shall be applied solely to the Canadian Liabilities.

10.09Interest Rate Limitation.  Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by Law (the “Maximum Rate”).  If the Administrative Agent, the Canadian Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans and the other Obligations or, if it exceeds such unpaid principal and other Obligations, refunded to the Borrowers.  In determining whether the interest contracted for, charged, or received by the Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.

10.10Counterparts; Integration; Effectiveness.  This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof.  Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto.  Delivery of an executed counterpart of a signature page of this Agreement by telecopy, pdf or other electronic transmission shall be as effective as delivery of a manually executed counterpart of this Agreement.

10.11Survival.  All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof.  Such representations and warranties have been or will be relied upon by the Credit Parties, regardless of any investigation made by any Credit Party or on their behalf and notwithstanding that any Credit Party may have had notice or knowledge of any Default at the time of any Credit Extension, and shall continue in full force and effect as long as any Loan

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or any other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding.  Further, the provisions of Sections 3.01, 3.04, 3.05 and 10.04 and Article IX shall survive and remain in full force and effect regardless of the repayment of the Obligations, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof.  In connection with the termination of this Agreement and the release and termination of the security interests in the Collateral, the Agents may require such indemnities and collateral security as they shall reasonably deem necessary or appropriate to protect the Credit Parties against (x) loss on account of credits previously applied to the Obligations that may subsequently be reversed or revoked, (y) any obligations that may thereafter ar ise with respect to the Other Liabilities, and (z) any Obligations that may thereafter arise under Section 10.04 hereof.

10.12Severability.  If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions.  The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

10.13Replacement of Lenders.  If any Lender requests compensation under Section 3.04, or if the Borrowers (other than the Foreign Borrower) are required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01, or if any Lender is a Deteriorating Lender or a Defaulting Lender or a Non-Consenting Lender, then the Borrowers may, at their sole expense and effort (in the case of the Canadian Borrower, only in respect of any Canadian Lender), upon notice to such Lender and the Administrative Age nt, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10.06), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:

(a)the Borrowers shall have paid to the Administrative Agent the assignment fee specified in Section 10.06(b);

(b)such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and L/C Advances, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.05) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts);

(c)in the case of any such assignment resulting from a claim for compensation under Section 3.04 or payments required to be made pursuant to Section 3.01, such assignment will result in a reduction in such compensation or payments thereafter; and

(d)such assignment does not conflict with Laws.

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply.

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10.14Governing Law; Jurisdiction; Etc.

(a)GOVERNING LAW.  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.

(b)SUBMISSION TO JURISDICTION.  EACH LOAN PARTY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE LOAN PARTIES HERETO IRREVOCABLY AND UNCONDITIONAL LY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT.  EACH OF THE LOAN PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT ANY CREDIT PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST ANY LOAN PARTY OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.

(c)WAIVER OF VENUE.  EACH LOAN PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION.  EACH OF THE LOAN PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN AN Y SUCH COURT.

(d)SERVICE OF PROCESS.  EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.02.  NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

(e)ACTIONS COMMENCED BY LOAN PARTIES. EACH LOAN PARTY AGREES THAT ANY ACTION COMMENCED BY ANY LOAN PARTY ASSERTING ANY CLAIM OR COUNTERCLAIM ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT SOLELY IN A COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY OR ANY FEDERAL COURT SITTING THEREIN AS THE ADMINISTRATIVE AGENT MAY ELECT IN ITS SOLE DISCRETION AND CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS WITH RESPECT TO ANY SUCH ACTION.

10.15Waiver of Jury Trial.  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON

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CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

10.16No Advisory or Fiduciary Responsibility.  In connection with all aspects of each transaction contemplated hereby, the Loan Parties each acknowledge and agree that: (i) the credit facility provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arm’s-length commercial transaction between the Loan Parties, on the one hand, and the Credit Parties, on the other hand, and each of the Loan Parties is capable of evaluating a nd understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof); (ii) in connection with the process leading to such transaction, the each Credit Party is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Loan Parties or any of their respective Affiliates, stockholders, creditors or employees or any other Person; (iii) none of the Credit Parties has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Loan Parties with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether any of the Credit Parties has advised or is currently advising any Loan Party or any of its Affiliates on other matters) and none of the Credit Parties has any obligation to any Loan Party or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; (iv) the Credit Parties and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Loan Parties and their respective Affiliates, and none of the Credit Parties has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Credit Parties have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and each of the Loan Parties has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate.  Each of the Loan Parties hereby waives and releases, to the fullest extent permitted by law, any claims that it may have against each of the Credit Parties with respect to any breach or alleged breach of agency or fiduciary duty.

10.17USA PATRIOT Act Notice; Proceeds of Crime Act.  Each Lender that is subject to the Patriot Act and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Loan Parties that pursuant to the requirements of the Patriot Act and all applicable “know your customer” rules, regulations and procedures applicable to such Lender in Canada), it is required to obtain, verify and record information that identifies each Loan Party, which information includes the name and address of each Loan Party and other information that will allow such Lender or the Administrative Agent, as applicable, to identify each Loan Party in accordance with the Act. Each Loan Party is in compliance, in all material respects, with the Patriot Act and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) (the “Proceeds of Crime Act”).  No part of the proceeds of the Loans will be used by the Loan Parties, directly or indirectly, for any purpose which would contravene or breach the Proceeds of Crime Act or for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.

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10.18Foreign Asset Control Regulations.  Neither of the advance of the Loans, the issuance of Letters of Credit nor the use of the proceeds of any thereof will violate the Trading With the Enemy Act (50 U.S.C. § 1 et seq., as amended) (the “Trading With the Enemy Act”) or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) (the “Foreign Assets Control Regulations”) or any enabling legislation or executive order relating thereto (which for the avoidance of doubt shall include, but shall not be limited to (a) Executive Order 13224 of September 21, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) (the “Executive Order”) and (b) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56)).  Furthermore, none of the Borrowers or their Affiliates (a) is or will become a “blocked person” as described in the Executive Order, the Trading With the Enemy Act or the Foreign Assets Control Regulations or (b) engages or will engage in any dealings or transactions, or be otherwise associated, with any such “blocked person” or in any manner violative of any such order.

10.19Time of the Essence.  Time is of the essence of the Loan Documents.

10.20Designation as Senior Debt.  All Obligations shall be “Designated Senior Indebtedness” for purposes of and as defined in the Senior Subordinated Note certain Indenture and all supplemental indentures thereto.

10.21Press Releases.

(a)Each Credit Party executing this Agreement agrees that neither it nor its Affiliates will in the future issue any press releases or other public disclosure using the name of any Agent or their respective Affiliates or referring to this Agreement or the other Loan Documents without at least two (2) Business Days’ prior notice to the Agents and without the prior written consent of the Agents unless (and only to the extent that) such Credit Party or Affiliate is required to do so under Law and then, in any event, such Credit Party or Affiliate will consult with the Agents before issuing such press rel ease or other public disclosure,

(b)Each Loan Party consents to the publication by any Agent or any Lender of advertising material relating to the financing transactions contemplated by this Agreement using any Loan Party’s name, product photographs, logo or trademark.  Such Agent or such Lender shall provide a draft reasonably in advance of any advertising material to the Parent for review and comment prior to the publication thereof.  The Agents reserve the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements.

10.22Additional Waivers.

(a)Except as provided herein or in any other Loan Document or pursuant to any amendment or waiver executed pursuant to Section 10.01, (i) the Obligations (including, for avoidance of doubt, the Canadian Liabilities and the Foreign Liabilities) are the joint and several obligation of each Domestic Loan Party; (ii) the Canadian Liabilities and the Foreign Liabilities are the joint and several obligation of each Canadian Loan Party; and (iii) the Foreign Liabilities are the joint and several obligations of each Loan Party.  To the fullest extent permitted by applicable Law, the obli gations of each Loan Party shall not be affected by (i) the failure of any Credit Party to assert any claim or demand or to enforce or exercise any right or remedy against any other Loan Party under the provisions of this Agreement, any other Loan Document or otherwise, (ii) any release of any other Loan Party from any of the terms or provisions of, this Agreement or any other Loan Document, or (iii) the failure to perfect any

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security interest in, or the release of, any of the Collateral or other security held by or on behalf of any Agent, the Collateral Agent or any other Credit Party.

(b)Except as provided herein or in any other Loan Document or pursuant to any amendment or waiver executed pursuant to Section 10.01, the Obligations of each Loan Party shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the indefeasible Payment in Full in cash of the Obligations after the termination of the Commitments), including any claim of waiver, release, surrender, alteration or compromise of any of the Obligations, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidi ty, illegality or unenforceability of any of the Obligations or otherwise. Without limiting the generality of the foregoing, the Obligations of each Loan Party shall not be discharged or impaired or otherwise affected by the failure of any Agent or any other Credit Party to assert any claim or demand or to enforce any remedy under this Agreement, any other Loan Document or any other agreement, by any waiver or modification of any provision of any thereof, any default, failure or delay, willful or otherwise, in the performance of any of the Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of any Loan Party or that would otherwise operate as a discharge of any Loan Party as a matter of law or equity (other than the indefeasible Payment in Full in cash of all of the Obligations after the termination of the Commitments).

(c)To the fullest extent permitted by applicable Law, each Loan Party waives any defense based on or arising out of any defense of any other Loan Party or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of any other Loan Party, other than the indefeasible Payment in Full in cash of all the Obligations after the termination of the Commitments. The Agents and the Collateral Agent may, at their election, foreclose on any security held by one or more of them by one or more judicial or non-judicial sales, accept an assignment of any s uch security in lieu of foreclosure, compromise or adjust any part of the Obligations, make any other accommodation with any other Loan Party, or exercise any other right or remedy available to them against any other Loan Party, without affecting or impairing in any way the liability of any Loan Party hereunder except to the extent that all the Obligations have been indefeasibly paid in full in cash and the Commitments have been terminated.  Each Loan Party waives any defense arising out of any such election even though such election operates, pursuant to applicable Law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of such Loan Party against any other Loan Party, as the case may be, or any security.

(d)Upon payment by any Loan Party of any Obligations, all rights of such Loan Party against any other Loan Party arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior indefeasible Payment in Full in cash of all the Obligations after the termination of the Commitments.  Any indebtedness of any Loan Party now or hereafter held by any other Loan Party is hereby subordinated in right of payment to the prior indefeasible Payment in Full of the Obligations.  If any amoun t shall erroneously be paid to any Loan Party on account of (i) such subrogation, contribution, reimbursement, indemnity or similar right or (ii) any such indebtedness of any Loan Party, such amount shall be held in trust for the benefit of the Credit Parties and shall forthwith be paid to the applicable Agent to be credited against the payment of the applicable Obligations, whether matured or unmatured, in accordance with the terms of this Agreement and the other Loan Documents.  Subject to the foregoing, to the extent that any Borrower or Guarantor shall, under this Agreement as a joint and several obligor, repay any of the Obligations constituting Loans made to another Borrower hereunder or other Obligations incurred directly and primarily by any other Borrower (an “Accommodation Payment”), then the Borrower or Guarantor making such Accommodation Payment shall be entitled to contribution and indemnification from, and be reimbursed by, each of the other Loan Parties in an am ount, (x) for each of such other Domestic Borrower, equal to a fraction of such Accommodation Payment, the numerator of

161

which fraction is such other Domestic Borrower’s Allocable Amount and the denominator of which is the sum of the Allocable Amounts of all of the Domestic Borrowers, or (y) for the Canadian Loan Parties or the Foreign Borrower, in an amount equal to such Accommodation Payment.  As of any date of determination, the “Allocable Amount” of each Domestic Borrower shall be equal to the maximum amount of liability for Accommodation Payments which could be asserted against such Domestic Borrower hereunder without (a) rendering such Domestic Borrower “insolvent” within the meaning of Section 101 (31) of the Bankruptcy Code, Section 2 of the Uniform Fraudulent Transfer Act (“UFTA”) or Section 2 of the Uniform Fraudulent Conveyance Act (“UFCA”), (b) leaving such Domestic Borrower with unreasonably small capital or assets, w ithin the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA, or Section 5 of the UFCA, or (c) leaving such Domestic Borrower unable to pay its debts as they become due within the meaning of Section 548 of the Bankruptcy Code or Section 4 of the UFTA, or Section 5 of the UFCA.

10.23Judgment Currency

(a)If, for the purposes of obtaining judgment in any court in any jurisdiction with respect to this Agreement or any other Loan Document, it becomes necessary to convert into a particular currency (the “Judgment Currency”) any amount due under this Agreement or under any other Loan Document in any currency other than the Judgment Currency (the “Currency Due”), then conversion shall be made at the rate of exchange prevailing on the Business Day before the day on which judgment is given.  For this purpose “rate of exchange” means the rate at which the applicable Ag ent is able, on the relevant date, to purchase the Currency Due with the Judgment Currency in accordance with its normal practice for the applicable currency conversion in the wholesale market.  In the event that there is a change in the rate of exchange prevailing there is a change in the rate of exchange prevailing between the conversion date and the date of actual payment of the amount due, the Loan Parties will pay such additional amount (if any, but in any event not a lesser amount) as may be necessary to ensure that the amount paid in the Judgment Currency, when converted at the rate of exchange prevailing on the date of payment, will produce the amount of Currency Due which could have been purchased with the amount of Judgment Currency stipulated in the judgment or judicial order at the rate of exchange prevailing on the conversion date.  If the amount of the Currency Due which the applicable Agent is so able to purchase is less than the amount of the Currency Due originally due to it, the a pplicable Loan Party shall indemnify and save the Agents, the L/C Issuer and the Lenders harmless from and against all loss or damage arising as a result of such deficiency.  This indemnity shall constitute an obligation separate and independent from the other obligations contained in this Agreement and the other Loan Documents, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any Agent from time to time and shall continue in full force and effect notwithstanding any judgment or order for a liquidated sum in respect of an amount due under this Agreement or any other Loan Document or under any judgment or order.

10.24No Strict Construction.

The parties hereto have participated jointly in the negotiation and drafting of this Agreement.  In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.

10.25Attachments.

The exhibits, schedules and annexes attached to this Agreement are incorporated herein and shall be considered a part of this Agreement for the purposes stated herein, except that in the event of any

162

conflict between any of the provisions of such exhibits and the provisions of this Agreement, the provisions of this Agreement shall prevail.

10.26Language.

The parties herein have expressly requested that this Agreement and all related documents be drawn up in the English language.  A la demande expresse des parties aux présentes, cette convention et tout document y afférent ont été rédigés en langue anglaise.

[SIGNATURES ON THE FOLLOWING PAGES]

163

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers 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

FOREIGN BORROWER:

SBH FINANCE B.V.

/s/ E.T. Kromhout		/s/ D. Zeelenberg
By: ANT Management (Netherland) B.V.		By: ANT Management (Netherland) B.V.
Title: Managing Director A		Title: Managing Director A
On behalf of ANT Management (Netherlands) B.V.		On behalf of ANT Management (Netherlands) B.V.
By:	ANT Management (Netherlands) B.V. Managing Director A	By:	ANT Management (Netherlands) B.V. Managing Director A
Name: E.T. Kromhout		Name: D. Zeelenberg
Title: Senior Account Manager		Title: Managing Director
Place: Rotterdam, The Netherlands		Place: Rotterdam, The Netherlands
/s/ E.T. Kromhout		/s/ D. Zeelenberg
By: Sally Beauty Worldwide Holdings B.V.		By: Sally Beauty Worldwide Holdings B.V.
Title: Managing Director A		Title: Managing Director A
On behalf of Sally Beauty Worldwide Holdings B.V.		On behalf of Sally Beauty Worldwide Holdings B.V.
By:	ANT Management (Netherlands) B.V. Managing Director A	By:	ANT Management (Netherlands) B.V. Managing Director A
Name: E.T. Kromhout		Name: D. Zeelenberg
Title: Senior Account Manager		Title: Managing Director
Place: Rotterdam, The Netherlands		Place: Rotterdam, The Netherlands
/s/ Mark Faulkner		/s/ Mark Faulkner
By: Sally Beauty Worldwide Holdings B.V.		By: Mark Faulkner
Title: Managing Director A		Title: Managing Director B
On behalf of Sally Beauty Worldwide Holdings B.V.		Place: Denton, Texas USA
By: Mark Faulkner
Title: Managing Director B
Place: Denton, Texas USA

GUARANTORS:

INNOVATIONS — SUCCESSFUL SALON SERVICES

NEKA SALON SUPPLY, INC.

PROCARE LABORATORIES, INC.

SCHOENEMAN BEAUTY SUPPLY, 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 DISTRIBUTION 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.

MODERN PANACHE, INC.

LAND OF DREAMS, INC.

COLORESSE, INC.

AERIAL COMPANY, INC.

By:	/s/ Mark J. Flaherty
Name: Mark J. Flaherty
Title: Senior Vice President and Chief Financial Officer
SALON SUCCESS INTERNATIONAL, LLC
By:	/s/ Mark J. Flaherty
Name: Mark J. Flaherty
Title: Authorized Signatory

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 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 Credit Agreement

WELLS FARGO BANK, N.A. as a Domestic
Lender
By:	/s/ Jennifer Blanchette
Name: Jennifer Blanchette
Title: Director

Signature Page to Credit Agreement

WELLS FARGO CAPITAL FINANCE
CORPORATION CANADA, as a Canadian
Lender
By:	/s/ Jennifer Blanchette
Name: Jennifer Blanchette
Title: Director

Signature Page to Credit Agreement

WELLS FARGO BANK, N.A. (LONDON
BRANCH), as European funding Agent for
Wells Fargo Bank, N.A. and Wells Fargo
Capital Corporation Canada
By:	/s/ Julian Daley
Name: Julian Daley
Title: Chief Operating Officer

Signature Page to Credit Agreement

JPMORGAN CHASE BANK, N.A., as a
Domestic Lender and as a Canadian Lender
By:	/s/ Andrew Ray
Name: Andrew Ray
Title: Vice President

Signature Page to Credit Agreement

UBS AG, STAMFORD BRANCH, as a
Domestic Lender
By:	/s/ Irja R. Otsa
Name: Irja R. Otsa
Title: Associate Director
By:	/s/ Mary E. Evans
Name: Mary E. Evans
Title: Associate Director

Signature Page to Credit Agreement

UBS AG CANADA BRANCH, as a Canadian
Lender
By:	/s/ Irja R. Otsa
Name: Irja R. Otsa
Title: Associate Director
By:	/s/ Mary E. Evans
Name: Mary E. Evans
Title: Associate Director

Signature Page to Credit Agreement

PNC BANK, NATIONAL ASSOCIATION,
as a Domestic Lender
By:	/s/ Graham Holding
Name: Graham Holding
Title: Commercial Banking Officer

Signature Page to Credit Agreement

PNC BANK CANADA BRANCH, as a
Canadian Lender
By:	/s/ Mike Danby
Name: Mike Danby
Title: Assistant Vice President
By:	/s/ Bill Hines
Name:		Bill Hines
Title:		Senior Vice President &
		Principal Officer

Signature Page to Credit Agreement

ROYAL BANK OF CANADA, as a Domestic
Lender and as a Canadian Lender
By:	/s/ G. David Cole
Name: G. David Cole
Title: Authorized Signatory

Signature Page to Credit Agreement

FIFTH THIRD BANK, as a Domestic Lender
By:	/s/ Donald R. Parker
Name: Donald R. Parker
Title: Vice President

Signature Page to Credit Agreement

CREDIT SUISSE AG, CAYMAN ISLANDS
BRANCH, as a Domestic Lender
By:	/s/ Ari Bruger
Name: Ari Bruger
Title: Vice President
By:	/s/ Kevin Buddhdew
Name: Kevin Buddhdew
Title: Associate

Signature Page to Credit Agreement

DEUTSCHE BANK AG NEW YORK
BRANCH, as a Domestic Lender
By:	/s/ Scottye Lindsey
Name: Scottye Lindsey
Title: Director
By:	/s/ Enrique Landaeta
Name: Enrique Landaeta
Title: Vice President

Signature Page to Credit Agreement

DEUTSCHE BANK AG CANADA
BRANCH, as a Canadian Lender
By:	/s/ Rod O’Hara
Name: Rod O’Hara
Title: Director
By:	/s/ Marcellus Leung
Name: Marcellus Leung
Title: Assistant Vice President

Signature Page to Credit Agreement

EX-4.14

Exhibit 4.14

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 November 12, 2010

TABLE OF CONTENTS

		Page
PREAMBLE		1
RECITALS		1
AGREEMENT		2
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1.	Definitions	2
SECTION 1.2.	Interpretation	6
SECTION 1.3.	Information Certificate	7
ARTICLE II
GRANT OF SECURITY AND SECURED OBLIGATIONS
SECTION 2.1.	Pledge	7
SECTION 2.2.	Secured Obligations	8
SECTION 2.3.	Security Interest	8
ARTICLE III
PERFECTION; SUPPLEMENTS; FURTHER ASSURANCES;
USE OF COLLATERAL
SECTION 3.1.	Delivery of Certificated Securities Collateral	8
SECTION 3.2.	Perfection of Uncertificated Securities Collateral	9
SECTION 3.3.	Financing Statements and Other Filings; Maintenance of Perfected Security Interest	9
SECTION 3.4.	Other Actions	10
SECTION 3.5.	Supplements; Further Assurances	12
SECTION 3.6.	Overriding Provisions with Respect to Term Loan	12
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 4.1.	Title	13
SECTION 4.2.	Limitation on Liens; Defense of Claims; Transferability of Collateral	13
SECTION 4.3.	Chief Executive Office; Change of Name; Jurisdiction of Organization	13

i

		Page
SECTION 4.4.	Due Authorization and Issuance	14
SECTION 4.5.	No Conflicts, Consents, etc.	14
SECTION 4.6.	Collateral	14
SECTION 4.7.	Insurance	14
SECTION 4.8.	Payment of Taxes; Compliance with Laws; Contested Liens; Claims	14
ARTICLE V
CERTAIN PROVISIONS CONCERNING SECURITIES COLLATERAL
SECTION 5.1.	Pledge of Additional Securities Collateral	15
SECTION 5.2.	Voting Rights; Distributions; etc.	15
SECTION 5.3.	Organization Documents	16
SECTION 5.4.	Defaults, Etc.	16
SECTION 5.5.	Certain Agreements of Grantors As Issuers and Holders of Equity Interests	17
ARTICLE VI
CERTAIN PROVISIONS CONCERNING INTELLECTUAL
PROPERTY COLLATERAL
SECTION 6.1.	Grant of License	17
SECTION 6.2.	Registrations	17
SECTION 6.3.	No Violations or Proceedings	17
SECTION 6.4.	Protection of Collateral Agent’s Security	17
SECTION 6.5.	After-Acquired Property	18
SECTION 6.6.	Modifications	18
SECTION 6.7.	Litigation	19
SECTION 6.8.	Third Party Consents	19
ARTICLE VII
CERTAIN PROVISIONS CONCERNING ACCOUNTS
SECTION 7.1.	Special Representations and Warranties	19
SECTION 7.2.	Maintenance of Records	19
SECTION 7.3.	Legend	20
SECTION 7.4.	Modification of Terms, Etc.	20
SECTION 7.5.	Collection	20
ARTICLE VIII
REMEDIES
SECTION 8.1.	Remedies	20
SECTION 8.2.	Notice of Sale	22
SECTION 8.3.	Waiver of Notice and Claims	22

ii

		Page
SECTION 8.4.	Certain Sales of Collateral	22
SECTION 8.5.	No Waiver; Cumulative Remedies	23
SECTION 8.6.	Certain Additional Actions Regarding Intellectual Property	23
SECTION 8.7.	Application of Proceeds	24
ARTICLE IX
MISCELLANEOUS
SECTION 9.1.	Concerning Collateral Agent	24
SECTION 9.2.	Collateral Agent May Perform; Collateral Agent Appointed Attorney-in-Fact	25
SECTION 9.3.	Expenses	25
SECTION 9.4.	Continuing Security Interest; Assignment	25
SECTION 9.5.	Termination; Release	25
SECTION 9.6.	Modification in Writing	26
SECTION 9.7.	Notices	26
SECTION 9.8.	GOVERNING LAW	27
SECTION 9.9.	CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL	27
SECTION 9.10.	Severability of Provisions	28
SECTION 9.11.	Execution in Counterparts; Effectiveness	28
SECTION 9.12.	No Release	28
SECTION 9.13.	Obligations Absolute	28
SECTION 9.14.	Intercreditor Agreement	29
EXHIBIT 1	Form of Securities Pledge Amendment
SCHEDULE I	Intercompany Notes
SCHEDULE II	Filings, Registrations and Recordings
SCHEDULE III	Pledged Interests

iii

SECURITY AGREEMENT

SECURITY AGREEMENT dated as of November 12, 2010 (as amended, restated, supplemented or otherwise modified from time to time in accordance with the provisions hereof, this “Security Agreement”) made by (i) SALLY HOLDINGS LLC, BEAUTY SYSTEMS GROUP LLC, and SALLY BEAUTY SUPPLY LLC, each a Delaware corporation having an office at 3001 Colorado Boulevard, Denton, Texas, 7620, each as a Domestic Borrower (collectively, the “Original Domestic Borrowers”), and (ii) THE OTHER DOMESTIC BORROWERS FROM TIME TO TIME PARTY HERETO BY EXECUTION OF A JOINDER AGREEMENT (the “Additional Domestic Borrowers,” and together with the Original Domestic Borrowers, the “Domestic Borrowers”), (iii) THE DOMESTIC GUARANTORS LISTED ON THE SIGNATURE PAGES HERETO (the “Original Domestic Guarantors”) AND THE OTHER GUARANTO RS FROM TIME TO TIME PARTY HERETO BY EXECUTION OF A JOINDER AGREEMENT (the “Additional Domestic Guarantors,” and together with the Original Domestic Guarantors, the “Domestic Guarantors”), as pledgors, assignors and debtors (the Domestic Borrowers, together with the Domestic Guarantors, in such capacities and together with any successors in such capacities, the “Grantors,” and each, a “Grantor”), and (iv) BANK OF AMERICA, N.A., having an office at 100 Federal Street, 9th Floor, Boston, Massachusetts  02110, in its capacity as collateral agent for the Credit Parties (as defined in the Credit Agreement defined below) pursuant to the Credit Agreement, as pledgee, assignee and secured party (in such capacities and together with any successors in such capacities, the “Collateral Agent”).

R E C I T A L S :

A.The Domestic Borrowers, the Collateral Agent, Bank of America, N.A., as Administrative Agent, and the Lenders party thereto, among others, have, in connection with the execution and delivery of this Security Agreement, entered into that certain Credit Agreement dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

B.The Domestic Guarantors have, pursuant to that certain Guaranty dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Guaranty”), among other things, unconditionally guaranteed the Guaranteed Obligations (as defined in the Guaranty).

C.The Domestic Borrowers and the Domestic Guarantors will receive substantial benefits from the execution, delivery and performance of the Obligations and the Guaranteed Obligations and each is, therefore, willing to enter into this Security Agreement.

D.This Security Agreement is given by each Grantor in favor of the Collateral Agent for the benefit of the Credit Parties to secure the payment and performance of all of the Secured Obligations (as hereinafter defined).

E.It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to the L/C Issuer issuing Letters of Credit under the Credit Agreement that each Grantor execute and deliver the applicable Loan Documents, including this Security Agreement.

A G R E E M E N T :

NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Grantor and the Collateral Agent hereby agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

SECTION 1.1.Definitions.

(a)Unless otherwise defined herein or in the Credit Agreement, capitalized terms used herein that are defined in the UCC shall have the meanings assigned to them in the UCC.

(b)Capitalized terms used but not otherwise defined herein that are defined in the Credit Agreement shall have the meanings given to them in the Credit Agreement.

(c)The following terms shall have the following meanings:

“Additional Domestic Borrowers” shall have the meaning assigned to such term in the Preamble hereof.

“Additional Domestic Guarantors” shall have the meaning assigned to such term in the Preamble hereof.

“Claims” shall mean any and all property taxes and other taxes, assessments and special assessments, levies, fees and all governmental charges imposed upon or assessed against, and all claims (including, without limitation, landlords’, carriers’, mechanics’, workmen’s, repairmen’s, laborers’, materialmen’s, suppliers’ and warehousemen’s Liens and other claims arising by operation of law) against, all or any portion of the Collateral.

“Collateral” shall have the meaning assigned to such term in SECTION 2.1 hereof.

“Collateral Agent” shall have the meaning assigned to such term in the Preamble hereof.

“Contracts” shall mean, collectively, with respect to each Grantor, all sale, service, performance, equipment or property lease contracts, agreements and grants and all other contracts, agreements or grants (in each case, whether written or oral, or third party or intercompany), between such Grantor and any other party, and all assignments, amendments, restatements, supplements, extensions, renewals, replacements or modifications thereof.

“Control” shall mean (i) in the case of each DDA, “control,” as such term is defined in Section 9-104 of the UCC, (ii) in the case of any security entitlement, “control,” as such term is defined in Section 8-106 of the UCC, and (iii) in the case of any commodity contract, “control” as such term is defined in Section 9-106 of the UCC.

“Control Agreements” shall mean, collectively, the Blocked Account Agreements and the Securities Account Control Agreements.

2

“Copyrights” shall mean, collectively, with respect to each Grantor, all copyrights (whether statutory or common Law, whether established or registered in the United States or any other country or any political subdivision thereof whether registered or unregistered and whether published or unpublished) and all copyright registrations and applications made by such Grantor, in each case, whether now owned or hereafter created or acquired by or assigned to such Grantor, including, without limitation, the registrations and applications listed in Section IV of the Information Certificate, together with any and all (i) rights and privileges arising under applicable Law with respect to such Grantor’s use of such copyrights, (ii) reissues, renewals, continuations and extensions thereof, (iii) income, fees, royalties, damages, claims and payments now or hereaft er due and/or payable with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) rights corresponding thereto throughout the world and (v) rights to sue for past, present or future infringements thereof.

“Credit Agreement” shall have the meaning assigned to such term in Recital A hereof.

“Domestic Borrowers” shall have the meaning assigned to such term in the Preamble hereof.

“Domestic Guarantors” shall have the meaning assigned to such term in the Preamble hereof.

“Distributions” shall mean, collectively, with respect to each Grantor, all Restricted Payments from time to time received, receivable or otherwise distributed to such Grantor in respect of or in exchange for any or all of the Pledged Securities or Intercompany Notes.

“Excluded Property” shall mean the following:

(a)any license, permit, lease, contract or agreement or General Intangible held by any Grantor, or Equipment or other property owned by the Grantor if such Equipment or other property is subject to a Lien described in clause (h) of the definition of “Permitted Encumbrances” in the Credit Agreement (i) that validly prohibits the creation by such Grantor of a security interest therein or thereon or (ii) to the extent that applicable Law prohibits the creation of a security interest therein or thereon;

(b)(i) any Equity Interests of any Foreign Subsidiary (other than up to 65% of the Equity Interests in Sally Beauty Supply BV and Sally Beauty International Holdings, C.V.), (ii) any of the Equity Interests of a Subsidiary of a Foreign Subsidiary and (iii) de minimis shares of a Foreign Subsidiary held by any Grantor as a nominee or in a similar capacity;

(c)any cash, checks, other negotiable instrument, funds and other evidence of payment held in any Deposit Account of the Parent or any of its Subsidiaries in the nature of security deposit with respect to obligations for the benefit of the Parent or any of its Subsidiaries, which must be held for or returned to the applicable counterparty under applicable law or pursuant to Contractual Obligations, which account is specifically designated for such purpose, and as to which there is no comingling with any other funds of a Grantor;

(d)any Intellectual Property Collateral consisting of intent-to-use trademark applications, for which the creation by a Grantor of a security interest therein is prohibited without the consent of third party or by applicable Law; provided, however, that in each case described in clauses (a) and (c) of this definition, such property shall constitute “Excluded Property” only to the extent and for so long as such license, permit, lease, contract, agreement,

3

General Intangible, Contractual Obligation or applicable Law validly prohibits the creation of a Lien on such property in favor of the Collateral Agent and, upon the termination of such prohibition (howsoever occurring), such property shall cease to constitute “Excluded Property”; and

(e)any non-U.S. Trademarks owned by a Grantor, so long as: (i) the ownership of such Trademarks is transferred to a Foreign Subsidiary HoldCo within sixty (60) days of: (A) registration of the Trademark outside of the United States or (B) acquisition of the Trademark by a Grantor, and (ii) the Collateral Agent has been granted a license to use such Trademarks in connection with the Collateral Agent’s exercise of remedies pursuant to Article VIII hereof during the continuance of an Event of Default.

Notwithstanding the foregoing, “Excluded Property” shall not include the right to receive any proceeds arising therefrom or any other rights referred to in Sections 9-406(f), 9-407(a) or 9-408(a) of the UCC or any Proceeds, substitutions or replacements of any Excluded Property (unless such Proceeds, substitutions or replacements would otherwise constitute Excluded Property).

“Goodwill” shall mean, collectively, with respect to each Grantor, the goodwill connected with such Grantor’s business including, without limitation, (i) all goodwill connected with the use of and symbolized by any of the Intellectual Property Collateral in which such Grantor has any interest, (ii) all know-how, trade secrets, customer and supplier lists, proprietary information, inventions, methods, procedures, formulae, descriptions, compositions, technical data, drawings, specifications, name plates, catalogs, confidential information and the right to limit the use or disclosure thereof by any Person, pricing and cost information, business and marketing plans and proposals, consulting agreements, engineering contracts and such other assets which relate to such goodwill and (iii) all product lines of such Grantor’s business.

“Grantor” shall have the meaning assigned to such term in the Preamble hereof.

“Guaranty” shall have the meaning assigned to such term in Recital B hereof.

“Information Certificate” shall mean that certain information certificate dated as of the date hereof, executed and delivered by each Grantor in favor of the Collateral Agent for the benefit of the Credit Parties, and each other Information Certificate (which shall be in form and substance reasonably acceptable to the Collateral Agent) executed and delivered by the applicable Borrower or Guarantor in favor of the Collateral Agent for the benefit of the Credit Parties contemporaneously with the execution and delivery of a joinder agreement hereto, in each case, as the same may be amended, amended and restated, restated, supplemented or otherwise modified from time to time in accordance with the Credit Agreement.

“Intellectual Property Collateral” shall mean, collectively, the Patents, Trademarks, Copyrights, Licenses and Goodwill of a Grantor, except for Excluded Property.

“Intercompany Notes” shall mean, with respect to each Grantor, all intercompany notes and/or loan agreements evidencing loans by Grantor made to Holdings or any of its Subsidiaries and described on Schedule I hereto and each intercompany note and/or loan agreements evidencing such loans hereafter acquired by such Grantor and all certificates, instruments or agreements evidencing such intercompany notes, and all assignments, amendments, restatements, supplements, extensions, renewals, replacements or modifications thereof to the extent permitted pursuant to the terms hereof.

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“Letters of Credit” unless the context otherwise requires, shall have the meaning given to such term in the UCC.

“Licenses” shall mean, collectively, with respect to each Grantor, all written license agreements with any other Person with respect to any Patent, Trademark or Copyright or any other patent, trademark or copyright, whether such Grantor is a licensor or licensee, together with any and all (i) renewals, extensions, supplements and continuations thereof, (ii) income, fees, royalties, damages, claims and payments now and hereafter due and/or payable thereunder and with respect thereto including, without limitation, damages and payments for past, present or future infringements or violations thereof, (iii) rights to sue for past, present and future infringements or violations thereof and (iv) other rights to use, exploit or practice any or all of the Patents, Trademarks or Copyrights (other than Excluded Property) or any other patent, trademark or copyright.

“Patents” shall mean, collectively, with respect to each Grantor, all patents issued or assigned to and all patent applications made by such Grantor (whether established or registered or recorded in the United States or any other country or any political subdivision thereof), including, without limitation, those patents, patent applications listed in Section IV of the Information Certificate, together with any and all (i) rights and privileges arising under applicable Law with respect to such Grantor’s use of any patents, (ii) inventions and improvements described and claimed therein, (iii) reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (iv) income, fees, royalties, damages, claims and payments now or hereafter due and/or payable thereunder and with respect thereto including, without limitation, damages and payments for past, present or future infringements thereof, (v) rights corresponding thereto throughout the world and (vi) rights to sue for past, present or future infringements thereof.

“Pledged Interests” shall mean, collectively, with respect to each Grantor, all Equity Interest in any issuer now existing or hereafter acquired or formed, including, without limitation, all Equity Interests of such issuer described in Schedule III hereof (specifically excluding a pledge of any Equity Interest in Sally Beauty International, Inc. or any domestic Subsidiary that is directly or indirectly i=owned by Sally Beauty International, Inc.), together with all rights, privileges, authority and powers of such Grantor relating to such Equity Interests issued by any such issuer under the Organization Documents of any such issuer, and the certificates, instruments and agreements representing such Equity Interests and any and all interest of such Grantor in the entries on the books of any financial intermediary pertaining to such Equity Interests, from time to time acquired by such Grantor in any manner, and all other Investment Property owned by such Grantor; provided, however, that to the extent applicable, Pledged Interests shall not include any interest possessing more than 65% of the voting power or control of all classes of interests entitled to vote of any CFC to the extent such pledge would result in an adverse tax consequence to the Grantor.

“Pledged Securities” shall mean, collectively, the Pledged Interests and the Successor Interests.

“Secured Obligations” shall mean the Obligations (as defined in the Credit Agreement) and the Guaranteed Obligations; provided, however, that Other Liabilities shall be Secured Obligations solely to the extent that there is sufficient Collateral following satisfaction of the Obligations described in clause (a) of the definition of Obligations.

“Securities Account Control Agreement” shall mean an agreement in form and substance satisfactory to the Collateral Agent with respect to any Securities Account of a Grantor.

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“Securities Act” means the Securities Exchange Act of 1934 and the applicable regulations promulgated by the Securities and Exchange Commission pursuant to such Act.

“Securities Collateral” shall mean, collectively, the Pledged Securities, the Intercompany Notes and the Distributions.

“Security Agreement” shall have the meaning assigned to such term in the Preamble hereof.

“Successor Interests” shall mean, collectively, with respect to each Grantor, all shares of each class of the capital stock of the successor corporation or interests or certificates of the successor limited liability company, partnership or other entity owned by such Grantor (unless such successor is such Grantor itself) formed by or resulting from any consolidation or merger in which any Person listed in Section I of the Information Certificate is not the surviving entity; provided, however, that Successor Interests shall not include shares or interests possessing more than 65% of the voting power or control of all classes of capital stock or interests entitled to vote of any foreign Subsidiaries to the extent such pledge would result in an adverse tax consequence to such Grantor.

“Term Priority Collateral” shall mean any of the Collateral in which the Term Agent has a Lien that is prior in priority to the Lien and Security Interest of the Administrative Agent therein under the terms of the Intercreditor Agreement.

“Trademarks” shall mean, collectively, with respect to each Grantor, all trademarks (including service marks), slogans, logos, certification marks, trade dress, uniform resource locations (URLs), domain names, corporate names and trade names, whether registered or unregistered, owned by or assigned to such Grantor and all registrations and applications for the foregoing (whether statutory or common Law and whether established or registered in the United States or any other country or any political subdivision thereof), including, without limitation, the registrations and applications listed in Section IV of the Information Certificate, together with any and all (i) rights and privileges arising under applicable Law with respect to such Grantor’s use of any trademarks, (ii) reissues, continuations, extensions and renewals thereof, (iii) income, fees, ro yalties, damages and payments now and hereafter due and/or payable thereunder and with respect thereto, including, without limitation, damages, claims and payments for past, present or future infringements thereof, (iv) rights corresponding thereto and all other rights of any kind whatsoever of such Grantor accruing thereunder or pertaining thereto in the United States and Canada and (v) rights to sue for past, present and future infringements thereof, but excluding Excluded Property.

“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 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 per fection or non-perfection or availability of such remedy, as the case may be.

SECTION 1.2.Interpretation.  The rules of interpretation specified in Article I of the Credit Agreement shall be applicable to this Security Agreement.

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SECTION 1.3.Information Certificate.  The Collateral Agent and each Grantor agree that the Information Certificate, and all schedules, amendments and supplements thereto are and shall at all times remain a part of this Security Agreement.

ARTICLE II

GRANT OF SECURITY AND SECURED OBLIGATIONS

SECTION 2.1.Pledge; Grant of Security Interest.  As collateral security for the payment and performance in full of all the Secured Obligations, each Grantor hereby pledges and grants, subject to existing licenses to use the Intellectual Property Collateral granted by such Grantor in the ordinary course of business, to the Collateral Agent for its benefit and for the benefit of the other Credit Parties, a lien on and security interest in and to all of the right, title and interest of such Grantor in, to and under all personal property and interests in such personal property, wherever located, and whether now existing or hereafter arising or acquired from time to time (collectively, the “Collateral”), including, without limitation:

(i)all Accounts;

(ii)all Goods, including Equipment, Inventory and Fixtures;

(iii)all Documents, Instruments and Chattel Paper;

(iv)all Letters of Credit and Letter-of-Credit Rights;

(v)all Securities Collateral;

(vi)all Investment Property;

(vii)all Intellectual Property Collateral;

(viii)all Commercial Tort Claims, including, without limitation, those described in Section V of the Information Certificate;

(ix)all General Intangibles;

(x)all Deposit Accounts;

(xi)all Supporting Obligations;

(xii)all books and records relating to the Collateral; and

(xiii)to the extent not covered by clauses (i) through (xii) of this sentence, all other personal property of such Grantor, whether tangible or intangible and all Proceeds and products of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of, each of the foregoing, any and all proceeds of any insurance, indemnity, warranty or guaranty payable to such Grantor from time to time with respect to any of the foregoing.

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Notwithstanding anything to the contrary contained in clauses (i) through (xiii) above, the security interest created by this Security Agreement shall not extend to, and the term “Collateral” shall not include, any Excluded Property and the Grantors shall from time to time at the request of the Collateral Agent give written notice to the Collateral Agent identifying in reasonable detail the Excluded Property and shall provide to the Collateral Agent such other information regarding the Excluded Property as the Collateral Agent may reasonably request.

SECTION 2.2.Secured Obligations.  This Security Agreement secures, and the Collateral is collateral security for, the payment and performance in full when due of the Secured Obligations.

SECTION 2.3.Security Interest.  (a)  Each Grantor hereby irrevocably authorizes the Collateral Agent at any time and from time to time to authenticate and file in any relevant jurisdiction any financing statements (including fixture filings) and amendments thereto that contain the information required by Article 9 of the Uniform Commercial Code of each applicable jurisdiction for the filing of any financing statement or amendment relating to the Collateral, including, without limitation, (i) whether such Grantor is an organization, the type of organization and any organizational identification number issued to such Grantor, (ii) a description of the Collateral as “all assets of the Grantor, wherever located, whether now owned or hereafter acquired” and (iii) in the case of a financing statement filed as a fixture filing, a sufficient description of the real property to which such Collateral relates.  Each Grantor agrees to provide all information described in the immediately preceding sentence to the Collateral Agent promptly upon request.

(b)Each Grantor hereby ratifies its prior authorization for the Collateral Agent to file in any relevant jurisdiction any financing statements or amendments thereto relating to the Collateral if filed prior to the date hereof.

(c)Each Grantor hereby further authorizes the Collateral Agent to file filings with the United States Patent and Trademark Office and United States Copyright Office (or any successor office or any similar office in any other country) or other necessary documents for the purpose of perfecting, confirming, continuing, enforcing or protecting the security interest granted by such Grantor hereunder in any Intellectual Property Collateral, without the signature of such Grantor, and naming such Grantor, as debtor, and the Collateral Agent, as secured party.

ARTICLE III

PERFECTION; SUPPLEMENTS; FURTHER ASSURANCES;
USE OF COLLATERAL

SECTION 3.1.Delivery of Certificated Securities Collateral.  Each Grantor represents and warrants that all certificates, agreements or instruments representing or evidencing the Securities Collateral in existence on the date hereof have been delivered to the Collateral Agent in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank and that the Collateral Agent has a perfected security interest therein, subject only to Permitted Encumbrances having priority by operation of applicable Law and except as otherwise provided in the Intercreditor Agreement.  Each Grantor hereby agrees that all certificates, agreements or instruments representing or evidencing Securities Collateral acquired by such Grantor after the date hereof, shall promptly (and in any event within fifteen (15) days) upon receipt thereof by such Grantor be delivered to and held by or on behalf of the Collateral Agent pursuant hereto, except in connection with a

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Permitted Acquisition, in which case such deliveries shall be made in accordance with the terms of the Credit Agreement.  All certificated Securities Collateral shall be in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Collateral Agent.  The Collateral Agent shall have the right, at any time during the continuance of any Event of Default, to endorse, assign or otherwise transfer to or to register in the name of the Collateral Agent or any of its nominees or endorse for negotiation any or all of the Securities Collateral, without any indication that such Securities Collateral is subject to the security interest hereunder.  In addition, the Collateral Agent shall have the right with written notice to exchange certificates representing or evidencing Securities Co llateral for certificates of smaller or larger denominations, accompanied by instruments of transfer or assignment and letters of direction duly executed in blank.

SECTION 3.2.Perfection of Uncertificated Securities Collateral.  Each Grantor represents and warrants that the Collateral Agent has a perfected security interest in all uncertificated Pledged Securities pledged by it hereunder that is in existence on the date hereof (subject only to Permitted Encumbrances having priority by operation of applicable Law and except as otherwise provided in the Intercreditor Agreement) and that the applicable Organization Documents do not require the consent of the other shareholders, members, partners or other Person to permit the Collateral Agent or its designee to be substituted for the applicable Grantor as a shareholder, member, partner or other equity owner, as applicable, thereto.  Each Grantor hereby agrees that if any of the Pledged Securities are at any time not evidenced by certificates of ownership, then each applicable Grantor shall, to the extent permitted by applicable Law and upon the request of the Collateral Agent, cause such pledge to be recorded on the equity holder register or the books of the issuer, execute customary pledge forms or other documents necessary or reasonably requested to complete the pledge and give the Collateral Agent the right to transfer such Pledged Securities under the terms hereof.

SECTION 3.3.Financing Statements and Other Filings; Maintenance of Perfected Security Interest.  Except with respect to non-U.S. and non-Canadian Intellectual Property Collateral, each Grantor represents and warrants that the only filings, registrations and recordings necessary and appropriate to create, preserve, protect, publish notice of and perfect the security interest granted by each Grantor to the Collateral Agent (for the benefit of the Credit Parties) pursuant to this Security Agreement in respect of the Collateral are listed on Schedule II hereto.  Each Grantor represents and warrants that all such filings, registrations and recordings (other than with respect to non-U.S. and non-Canadian Intellectual Property Collateral) have been delivered to the Collateral Agent in completed and, to the extent necessary or appropriate, duly executed form for filing in each governmental, municipal or other office specified in Schedule II.  Each Grantor agrees that at the sole cost and expense of the Grantors, (i) such Grantor will maintain the security interest created by this Security Agreement in the Collateral (other than with respect to non-U.S. and non-Canadian Intellectual Property Collateral) as a perfected security interest (subject only to Permitted Encumbrances having priority by operation of applicable Law and except as otherwise provided in the Intercreditor Agreement) and shall defend such security interest against the claims and demands of all Persons (other than with respect to Permitted Encumbrances and (non-U.S. and non-Canadian Intellectual Property Collateral), (ii) except with respect to non-U.S. and non-Canadian Intellectual Property Collateral, s uch Grantor shall furnish to the Collateral Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail and (iii) at any time and from time to time, upon the written request of the Collateral Agent, such Grantor shall promptly and duly execute and deliver, and file and have recorded, such further instruments and documents and take such further action as the Collateral Agent may  reasonably request, including the filing of any financing statements, continuation statements and other documents (including this Security Agreement) under the UCC (or other applicable Laws) in effect in any jurisdiction with respect to the security interest created hereby (other than with respect to non-U.S. and non-Canadian Intellectual

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Property Collateral) and the execution and delivery of Control Agreements, all in form reasonably satisfactory to the Collateral Agent and in such offices (including, without limitation, the United States Patent and Trademark Office and the United States Copyright Office) wherever required by applicable Law in each case to perfect, continue and maintain a valid, enforceable, security interest in the Collateral (other than with respect to non-U.S. and non-Canadian Intellectual Property Collateral) as provided herein and to preserve the other rights and interests granted to the Collateral Agent hereunder, as against the Grantors and third parties (other than with respect to Permitted Encumbrances), with respect to the Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral).

SECTION 3.4.Other Actions.  In order to further evidence the attachment, perfection and priority of, and the ability of the Collateral Agent to enforce, the Collateral Agent’s security interest in the Collateral, each Grantor represents, warrants and agrees, in each case at such Grantor’s own expense, with respect to the following Collateral that:

(a)Instruments and Tangible Chattel Paper.  As of the date hereof (i) no amount payable under or in connection with any of the Collateral is evidenced by any Instrument or Tangible Chattel Paper other than such Instruments and Tangible Chattel Paper listed in Section II. D. of the Information Certificate and (ii) each Instrument and each item of Tangible Chattel Paper listed in Section II. D. of the Information Certificate, to the extent requested by the Collateral Agent, has been properly endorsed, assigned and delivered to the Collateral Agent, accompanied by instruments of transfer or assignment and letters of direction duly executed in blank.  If an y amount payable under or in connection with any of the Collateral in excess of $3,000,000 shall be evidenced by any Instrument or Tangible Chattel Paper, the Grantor acquiring such Instrument or Tangible Chattel Paper shall forthwith endorse, assign and deliver the same to the Collateral Agent, accompanied by such instruments of transfer or assignment duly executed in blank as the Collateral Agent.

(b)Investment Property.  (i) As of the date hereof (1) it has no Securities Accounts other than those listed in Section II.B. of the Information Certificate, (2) it does not hold, own or have any interest in any certificated securities or uncertificated securities other than those constituting Pledged Securities with respect to which the Collateral Agent has a perfected security interest in such Pledged Securities (subject only to Permitted Encumbrances having priority by operation of applicable Law and except as otherwise provided in the Intercreditor Agreement), or Excluded Property, and (3) it has entered into a duly authorized, executed and delivere d Securities Account Control Agreement with respect to each Securities Account listed in Section II.B. of the Information Certificate with respect to which the Collateral Agent has a perfected security interest in such Securities Accounts by Control (subject only to Permitted Encumbrances having priority by operation of applicable Law and except as otherwise provided in the Intercreditor Agreement).

(ii)If any Grantor shall at any time hold or acquire any certificated securities, other than any securities of any CFC not required to be pledged hereunder and Excluded Property, such Grantor shall promptly (a) notify the Collateral Agent thereof and endorse, assign and deliver the same to the Collateral Agent, accompanied by such instruments of transfer or assignment duly executed in blank, all in form and substance reasonably satisfactory to the Collateral Agent or (b) deliver such securities into a Securities Account with respect to which a Securities Account Control Agreement is in effect in favor of the Collateral Agent.  If any securities now or hereafter acquired by any Grantor, other than any securities of any CFC not required to be pledged hereunder and Excluded Property, are uncertificated, such Grantor shall promptly notify the Collateral Agent thereof and pursuant to an agreement in form and substance reasonably satisfactory to the Collateral Agent, either (a) grant Control to the Collateral Agent

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and cause the issuer to agree to comply with instructions from the Collateral Agent as to such securities, without further consent of any Grantor or such nominee, (b) cause a security entitlement with respect to such uncertificated security to be held in a Securities Account with respect to which the Collateral Agent has Control or (c) arrange for the Collateral Agent to become the registered owner of the securities.  Grantor shall not hereafter establish and maintain any Securities Account with any Securities Intermediary unless (1) the applicable Grantor shall have given the Collateral Agent five (5) Business Days’ prior written notice of its intention to establish such new Securities Account with such Securities Intermediary and (2) such Securities Intermediary and such Grantor shall have duly executed and delivered a Control Agreement with respect to such Securities A ccount.  Each Grantor shall accept any cash and Investment Property which are proceeds of the Pledged Interests in trust for the benefit of the Collateral Agent and promptly upon receipt thereof, deposit any cash received by it into an account in which the Collateral Agent has Control, or with respect to any Investment Properties or additional securities, take such actions as required above with respect to such securities.  The Collateral Agent agrees with each Grantor that the Collateral Agent shall not give any entitlement orders or instructions or directions to any issuer of uncertificated securities or Securities Intermediary, and shall not withhold its consent to the exercise of any withdrawal or dealing rights by such Grantor, unless a Trigger Event has occurred and is continuing.  Except as required pursuant to the Intercreditor Agreement, No Grantor shall grant control over any Pledged Securities to any Person other than the Collateral Agent.

(iii)As between the Collateral Agent and the Grantors, the Grantors shall bear the investment risk with respect to the Investment Property and Pledged Securities, and the risk of loss of, damage to, or the destruction of the Investment Property and Pledged Securities, whether in the possession of, or maintained as a security entitlement or deposit by, or subject to the control of, the Collateral Agent, a Securities Intermediary, any Grantor or any other Person; provided, however, that nothing contained in this SECTION 3.4(b) shall release or relieve any Securities Intermediary of its duties and obligations to the Grantors or any other Person under any Control Agreement or under applicable Law.   Each Grantor shall promptly pay all Claims and fees of whatever kind or nature with respect to the Pledged Securities pledged by it under this Security Agreement, except those which are being contested in good faith by appropriate proceedings.

(c)Electronic Chattel Paper and Transferable Records.  As of the date hereof no amount payable under or in connection with any of the Collateral is evidenced by any Electronic Chattel Paper or any “transferable record” (as that term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction).  If any amount payable under or in connection with any of the Collateral in excess of $3,000,000 shall be evidenced by any Electronic Chattel Paper or any transferable record, the Grantor acquiring such Electronic Chattel Pa per or transferable record shall promptly notify the Collateral Agent thereof and shall take such action as the Collateral Agent may reasonably request to vest in the Collateral Agent control under UCC Section 9-105 of such Electronic Chattel Paper or control under Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.  The Collateral Agent agrees with such Grantor that the Collateral Agent will arrange, pursuant to procedures reasonably satisfactory to the Collateral Agent and so long as such procedures will not result in the Collateral Agent’s loss of control, for the Grantor to make alterations to the Electronic Chattel Paper or transferable record permitted under UCC Section 9-105 or, as the case may be, Section 201 of the Federal Electronic Signatures in Global and National Commerce Act of Sectio n 16 of the Uniform Electronic Transactions Act for a party

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in control to allow without loss of control, unless an Event of Default has occurred and is continuing or would occur after taking into account any action by such Grantor with respect to such Electronic Chattel Paper or transferable record.

(d)Letter-of-Credit Rights.  If such Grantor is at any time a beneficiary under a Letter of Credit in an amount in excess of $3,000,000 now or hereafter issued in favor of such Grantor, (which, for the avoidance of doubt, shall not include any Letter of Credit issued pursuant to the Credit Agreement), such Grantor shall promptly notify the Collateral Agent thereof and such Grantor shall, at the request of the Collateral Agent, pursuant to an agreement in form and substance reasonably satisfactory to the Collateral Agent, either (i) use commercially reasonable efforts to arrange for the issuer and any confirmer of such Letter of Credit to consent to an assignment to the Col lateral Agent of, and to pay to the Collateral Agent, the proceeds of, any drawing under the Letter of Credit or (ii) use commercially reasonable efforts to arrange for the Collateral Agent to become the beneficiary of such Letter of Credit, with the Collateral Agent agreeing, in each case, that the proceeds of any drawing under the Letter of Credit are to be applied as provided in Section 2.05 and Section 6.12 of the Credit Agreement.

(e)Commercial Tort Claims.   As of the date hereof it holds no Commercial Tort Claims other than those listed in Section V of the Information Certificate.  If any Grantor shall at any time hold or acquire a Commercial Tort Claim in an amount in excess of $3,000,000, such Grantor shall promptly (and in any event, within fifteen (15) days) notify the Collateral Agent in writing signed by such Grantor of the brief details thereof and grant to the Collateral Agent in such writing a security interest therein and in the Proceeds thereof, all upon the terms of this Security Agreement, with such writing to be in form and substance reasonably satisfactory to the Collatera l Agent.

SECTION 3.5.Supplements; Further Assurances.  Each Grantor shall take such further actions, and execute and deliver to the Collateral Agent such additional assignments, agreements, supplements, powers and instruments, as the Collateral Agent may in its reasonable judgment deem necessary, wherever required by Law, in order to perfect, preserve and protect the security interest in the Collateral (other than with respect to non-U.S. and non-Canadian Intellectual Property Collateral) as provided herein and the rights and interests granted to the Collateral Agent hereunder, to carry into effect the purposes hereof or better to assure and confirm unto the Collateral Agent or permit the Collateral Ag ent to exercise and enforce its rights, powers and remedies hereunder with respect to any Collateral.  Without limiting the generality of the foregoing, each Grantor shall make, execute, endorse, acknowledge, file or refile and/or deliver to the Collateral Agent from time to time upon reasonable request such lists, descriptions and designations of the Collateral (other than with respect to non-U.S. and non-Canadian Intellectual Property Collateral), copies of warehouse receipts, receipts in the nature of warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, supplements, additional security agreements, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments.  If an Event of Default has occurred and is continuing, the Collateral Agent may institute and maintain, in its own name or in the name of any Grantor, such suits and proceedings as the Collateral Agent may be advised by counsel shall be necessary or expedient to prevent any impairment of the security interest in or the perfection thereof in the Collateral.  All of the foregoing shall be at the sole cost and expense of the Grantors.  The Grantors and the Collateral Agent acknowledge that this Security Agreement is intended to grant to the Collateral Agent for the benefit of the Credit Parties a security interest in and Lien upon the Collateral and shall not constitute or create a present assignment of any of the Collateral.

SECTION 3.6.Overriding Provisions with Respect to Term Loan.  Notwithstanding anything contained in this Article III, or elsewhere in this Agreement or any other Security

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Document, to the extent that the provisions of this Agreement (or any other Security Document) require the delivery of, or granting of control over, any Term Priority Collateral to the Administrative Agent, then delivery of such Collateral (or control with respect thereto) shall instead be made to the Term Agent, to be held in accordance with Term Loan Agreement or any collateral and/or security documents entered into in connection therewith and the Intercreditor Agreement, and any Grantor’s obligations hereunder with respect to such delivery shall be deemed satisfied.  Furthermore, at all times prior to the Discharge of Term Obligations (as defined in the Intercreditor Agreement) or any Permitted Refinancing thereof, the Administrative Agent is authorized by the parties hereto to effect transfers of such Collateral at any time in its possession (and any “control” or similar agreements with respect to such Collateral) to the Term Agent.

ARTICLE IV

REPRESENTATIONS, WARRANTIES AND COVENANTS

In addition to, and without limitation of, each of the representations, warranties and covenants set forth in the Credit Agreement and the other Loan Documents, each Grantor represents, warrants and covenants as follows:

SECTION 4.1.Title.  No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Collateral Agent pursuant to this Security Agreement or as are permitted by the Credit Agreement.  Except as provided in the Intercreditor Agreement or the Credit Agreement, no Person other than the Collateral Agent has control or possession of all or any part of the Collateral.

SECTION 4.2.Limitation on Liens; Defense of Claims; Transferability of Collateral.  Each Grantor is as of the date hereof, and, as to Collateral acquired by it from time to time after the date hereof, such Grantor will be, the sole direct and beneficial owner of all Collateral pledged by it hereunder free from any Lien or other right, title or interest of any Person other than the Liens and security interest created by this Security Agreement and Permitted Encumbrances.  Each Grantor shall, at its own cost and expense, defend title to the Collateral pledged by it hereunder and the security interest therein and Lien thereon granted to the Collateral Agent and the priority thereof agai nst all claims and demands of all Persons, at its own cost and expense, at any time claiming any interest therein adverse to the Collateral Agent or any other Credit Party other than Permitted Encumbrances.  There is no agreement, and no Grantor shall enter into any agreement or take any other action, that would restrict the transferability of any of the Collateral or otherwise impair or conflict with such Grantors’ obligations or the rights of the Collateral Agent hereunder.

SECTION 4.3.Chief Executive Office; Change of Name; Jurisdiction of Organization.  (a)  The exact legal name, type of organization, jurisdiction of organization, federal taxpayer identification number, organizational identification number and chief executive office of such Grantor is indicated next to its name in Sections I.A. and I.B. of the Information Certificate.  Such Grantor shall furnish to the Collateral Agent prompt written notice of any change in (i) its corporate name, (ii) the location of its chief executive 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 w hich Collateral owned by it is located (including the establishment of any such new office or facility), (iii) its identity or type of organization or corporate structure, (iv) its federal taxpayer identification number or organizational identification number or (v) its jurisdiction of organization (in each case, including,

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without limitation, by merging with or into any other entity, reorganizing, dissolving, liquidating, reincorporating or incorporating in any other jurisdiction).

(b)The Collateral Agent may rely on opinions of counsel as to whether any or all UCC financing statements of the Grantors need to be amended as a result of any of the changes described in SECTION 4.3(a).  If any Grantor fails to provide information to the Collateral Agent about such changes on a timely basis, the Collateral Agent shall not be liable or responsible to any party for any failure to maintain a perfected security interest in such Grantor’s property constituting Collateral, for which the Collateral Agent needed to have information relating to such changes.  The Collateral Agent shall have no duty to inquire about such changes if any Grantor does not inform the Collateral Agent of such changes, the parties ackn owledging and agreeing that it would not be feasible or practical for the Collateral Agent to search for information on such changes if such information is not provided by any Grantor.

SECTION 4.4.Due Authorization and Issuance.  All of the Pledged Interests have been duly authorized, validly issued and, to the extent applicable, fully paid and non-assessable.  All of the Pledged Interests have been fully paid for, and there is no amount or other obligation owing by any Grantor to any issuer of the Pledged Interests in exchange for or in connection with the issuance of the Pledged Interests or any Grantor’s status as a partner or a member of any issuer of the Pledged Interests.

SECTION 4.5.No Conflicts, Consents, etc.  No consent of any party (including, without limitation, equity holders or creditors of such Grantor) and no consent, authorization, approval, license or other action by, and no notice to or filing with, any Governmental Authority or regulatory body or other Person is required (A) for the grant of the security interest by such Grantor of the Collateral pledged by it pursuant to this Security Agreement or for the execution, delivery or performance hereof by such Grantor, (B) for the exercise by the Collateral Agent of the voting or other rights provided for in this Security Agreement or (C) for the exercise by the Collateral Agent of the remedies in respect of the Collateral pursuant to this Security Agreement except, in each case, for such consents which have been obtained prior to the date hereof.  During the continuation of an Event of Default, if the Collateral Agent desires to exercise any remedies, voting or consensual rights or attorney-in-fact powers set forth in this Security Agreement and determines it necessary to obtain any approvals or consents of any Governmental Authority or any other Person therefor, then, upon the reasonable request of the Collateral Agent, such Grantor agrees to use commercially reasonable efforts to assist and aid the Collateral Agent to obtain as soon as commercially practicable any necessary approvals or consents for the exercise of any such remedies, rights and powers.

SECTION 4.6.Collateral.  All information set forth herein, including the schedules annexed hereto, and all information contained in any documents, schedules and lists heretofore delivered to any Credit Party in connection with this Security Agreement, in each case, relating to the Collateral, is accurate and complete in all material respects.  The Collateral described on the schedules annexed hereto constitutes all of the property of such type of Collateral owned or held by the Grantors.

SECTION 4.7.Insurance.  Such Grantor shall (i) maintain or shall cause to be maintained such insurance as is required pursuant to Section 6.07 of the Credit Agreement; (ii) maintain such other insurance as may be required by applicable Law; and (iii) pursuant to the Credit Agreement, furnish to the Collateral Agent, upon written request, full information as to the insurance carried.

SECTION 4.8.Payment of Taxes; Compliance with Laws; Contested Liens; Claims.  Each Grantor represents and warrants that all material Claims imposed upon or assessed against the Collateral have been paid and discharged except to the extent such material Claims constitute a Lien not yet due and payable or a Permitted Encumbrance.  Each Grantor shall comply with all applicable Law

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relating to the Collateral the failure to comply with which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.  Each Grantor may at its own expense contest the validity, amount or applicability of any Claims so long as the contest thereof shall be conducted in accordance with, and permitted pursuant to the provisions of, the Credit Agreement.  Notwithstanding the foregoing provisions of this SECTION 4.8, no contest of any such obligation may be pursued by such Grantor if such contest would expose the Collateral Agent or any other Credit Party to (i) any possible criminal liability or (ii) any additional material civil liability for failure to comply with such obligations unless such Grantor shall have furnished a bond or other security therefor satisfactory to the Collateral Agent, or such other Credit Party, as the case may be.

ARTICLE V

CERTAIN PROVISIONS CONCERNING SECURITIES COLLATERAL

SECTION 5.1.         Pledge of Additional Securities Collateral.  Each Grantor shall, upon obtaining any Pledged Securities or Intercompany Notes in a principal amount in excess of $3,000,000 of any Person required to be pledged hereunder, accept the same in trust for the benefit of the Collateral Agent and promptly (and in any event within fifteen (15) days) deliver to the Collateral Agent a pledge amendment, duly executed by such Grantor, in substantially the form of Exhibit 1 annexed hereto (each, a “Pledge Amendment”), and the certificates and other documents required under SECTION 3.1 and SECTION 3.2 hereof in respect of the additional Pledged Securities or Intercompany Notes which are to be pledged pursuant to this Security Agreement, and confirming the attachment of the Lien hereby created on and in respect of such additional Pledged Securities or Intercompany Notes.  Each Grantor hereby authorizes the Collateral Agent to attach each Pledge Amendment to this Security Agreement and agrees that all Pledged Securities or Intercompany Notes listed on any Pledge Amendment delivered to the Collateral Agent shall for all purposes hereunder be considered Collateral.

SECTION 5.2.         Voting Rights; Distributions; etc.

(i)            So long as no Event of Default shall have occurred and be continuing, each Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Securities Collateral or any part thereof for any purpose not inconsistent with the terms or purposes hereof, the Credit Agreement or any other Loan Document evidencing the Secured Obligations.  The Collateral Agent shall be deemed without further action or formality to have granted to each Grantor all necessary consents relating to voting rights and shall, if necessary, upon written request of any Grantor and at the sole cost and expense of the Grantors, from time to time execute and deliver (or cause to be executed and delivered) to such Grantor all such instruments as such Grantor may reasonably request in order to permit such Grantor to exercise the voting and other rights which it is entitled to exercise pursuant to this SECTION 5.2(i).

(ii)           During the continuance of any Event of Default and upon the receipt of written notice by such Grantor, all rights of each Grantor to exercise the voting and other consensual rights it would otherwise be entitled to exercise pursuant to SECTION 5.2(i) hereof shall immediately cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall thereupon have the sole right to exercise such voting and other consensual rights; provided that the Collateral Agent shall have the right, in its sole discretion, from time to time following the occurrence and continuance of an Event of Default to permit such Grantor to exercise such rights under SECTION 5.2(i).  After such Event of Default is no longer continuing, each Grantor shall have the right to exercise the voting, managerial and

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other consensual rights and powers that it would otherwise be entitled to pursuant to SECTION 5.2(i) hereof.

(iii)          So long as no Trigger Event shall have occurred and be continuing, each Grantor shall be entitled to receive and retain, and to utilize free and clear of the Lien hereof, any and all Distributions, but only if and to the extent made in accordance with, and to the extent permitted by, the provisions of the Credit Agreement; provided, however, that any and all such Distributions consisting of rights or interests in the form of securities shall be promptly (and in any event within ten (10) days) delivered to the Collateral Agent to hold as Collateral and shall, if received by any Grantor, be received in trust for the benefit of the Collateral Agent, be segregated from the other property or funds of such Grantor and be forthwith delivered to the Collateral Agent as Collateral in the same form as so received (with any ne cessary endorsement).  The Collateral Agent shall, if necessary, upon written request of any Grantor and at the sole cost and expense of the Grantors, from time to time execute and deliver (or cause to be executed and delivered) to such Grantor all such instruments as such Grantor may reasonably request in order to permit such Grantor to receive the Distributions which it is authorized to receive and retain pursuant to this SECTION 5.2(iii).

(iv)          Upon the occurrence and during the continuance of any Trigger Event, all rights of each Grantor to receive Distributions which it would otherwise be authorized to receive and retain pursuant to SECTION 5.2(iii) hereof shall cease and all such rights shall thereupon become vested in the Collateral Agent, which shall thereupon have the sole right to receive and hold as Collateral such Distributions.  After such Trigger Event is no longer continuing, each Grantor shall have the right to receive the Distributions which it would be authorized to receive and retain pursuant to SECTION 5.2(ii).

(v)           Each Grantor shall, at its sole cost and expense, from time to time execute and deliver to the Collateral Agent appropriate instruments as the Collateral Agent may reasonably request in order to permit the Collateral Agent to exercise the voting and other rights which it may be entitled to exercise pursuant to SECTION 5.2(ii) hereof and to receive all Distributions which it may be entitled to receive under SECTION 5.2(iii) hereof.

(vi)          All Distributions which are received by any Grantor contrary to the provisions of SECTION 5.2(ii) hereof shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of such Grantor and shall immediately be paid over to the Collateral Agent as Collateral in the same form as so received (with any necessary endorsement).

SECTION 5.3.         Organization Documents.  Each Grantor has delivered to the Collateral Agent true, correct and complete copies of its Organization Documents.  The Organization Documents are in full force and effect.  Except as permitted in the Credit Agreement, no Grantor will terminate or agree to terminate any Organization Documents or make any amendment or modification to any Organization Documents which may have a Material Adverse Effect including electing to treat any Pledged Interests of such Grantor as a security under Section 8-103 of the UCC.

SECTION 5.4.         Defaults, Etc.  Such Grantor is not in default in the payment of any portion of any mandatory capital contribution, if any, required to be made under any agreement to which such Grantor is a party relating to the Pledged Securities pledged by it, and such Grantor is not in violation of any other provisions of any such agreement to which such Grantor is a party, or otherwise in default or violation thereunder.  No Securities Collateral pledged by such Grantor is subject to any defense, offset or counterclaim, nor have any of the foregoing been asserted or alleged against such Grantor by any Person with respect thereto, and as of the date hereof, there are no certificates, instruments, documents or other writings (other than the Organization Documents and certificates, if any, delivered to the Collateral Agen t) which evidence any Pledged Securities of such Grantor.

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SECTION 5.5.         Certain Agreements of Grantors As Issuers and Holders of Equity Interests.

(i)            In the case of each Grantor which is an issuer of Securities Collateral, such Grantor agrees to be bound by the terms of this Security Agreement relating to the Securities Collateral issued by it and will comply with such terms insofar as such terms are applicable to it.

(ii)           In the case of each Grantor which is a partner in a partnership, limited liability company or other entity, such Grantor hereby consents to the extent required by the applicable Organization Documents to the pledge by each other Grantor, pursuant to the terms hereof, of the Pledged Interests in such partnership, limited liability company or other entity and, during the continuance of an Event of Default, to the transfer of such Pledged Interests to the Collateral Agent or its nominee and to the substitution of the Collateral Agent or its nominee as a substituted partner or member in such partnership, limited liability company or other entity with all the rights, powers and duties of a general partner or a limited partner or member, as the case may be.

ARTICLE VI

CERTAIN PROVISIONS CONCERNING INTELLECTUAL

PROPERTY COLLATERAL

SECTION 6.1.         Grant of License.  Without limiting the rights of Collateral Agent as the holder of a Lien on the Intellectual Property Collateral, for the purpose of enabling the Collateral Agent, during the continuance of an Event of Default, to exercise rights and remedies under Article IX hereof at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, each Grantor hereby grants to the Collateral Agent, to the extent assignable, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to such Grantor) to use, assign, license or sublicense any of the Intellectual Property Collateral now owned or hereafter acquired by such Grantor, wherever the same may be located, including in such license access to all med ia in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout hereof.

SECTION 6.2.         Registrations.  Except pursuant to licenses and other user agreements entered into by any Grantor in the ordinary course of business that are listed in Section IV of the Information Certificate, on and as of the date hereof (i) each Grantor owns and possesses the right to use, and has done nothing to authorize or enable any other Person to use, any material Intellectual Property Collateral listed in Section IV of the Information Certificate, and (ii) all registrations listed in Section IV of the Information Certificate are valid and in full force and effect.

SECTION 6.3.         No Violations or Proceedings.  To each Grantor’s knowledge, on and as of the date hereof, there is no material infringement by others of any right of such Grantor with respect to any Intellectual Property Collateral listed in Section IV of the Information Certificate, respectively, pledged by it under the name of such Grantor.

SECTION 6.4.         Protection of Collateral Agent’s Security.  On a continuing basis, each Grantor shall, at its sole cost and expense, (i) promptly following its becoming aware thereof, notify the Collateral Agent of (A) any adverse determination in any proceeding in the United States Patent and Trademark Office or the United States Copyright Office with respect to any Intellectual Property Collateral necessary for the conduct of business of such Grantor or (B) the institution of any proceeding

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or any adverse determination in any federal, state or local court or administrative body regarding such Grantor’s claim of ownership in or right to use any of the Intellectual Property Collateral material to the use and operation of the Collateral, its right to register such Intellectual Property Collateral or its right to keep and maintain such registration in full force and effect, (ii) maintain and protect the Intellectual Property Collateral necessary for the conduct of business of such Grantor, (iii) not permit to lapse or become abandoned any Intellectual Property Collateral necessary for the conduct of business of such Grantor, and not settle or compromise any pending or future litigation or administrative proceeding with respect to such Intellectual Property Collateral necessary for the conduct of business of such Grantor, in each case except as shall be consistent with commercially reaso nable business judgment and, if any Event of Default is continuing, with the prior approval of the Collateral Agent (such approval not to be unreasonably withheld), (iv) upon such Grantor’s obtaining knowledge thereof, promptly notify the Collateral Agent in writing of any event which may be reasonably expected to materially and adversely affect the value or utility of the Intellectual Property Collateral or any portion thereof material to the use and operation of the Collateral, taken as a whole, the ability of such Grantor or the Collateral Agent to dispose of the Intellectual Property Collateral or any portion thereof or the rights and remedies of the Collateral Agent in relation thereto including, without limitation, a levy or threat of levy or any legal process against the Intellectual Property Collateral or any portion thereof, (v) not license the Intellectual Property Collateral other than licenses entered into by such Grantor in, or incidental to, the ordinary course of business, or am end or permit the amendment of any of the material licenses in a manner that would materially impair the value of the Intellectual Property Collateral taken as a whole, or the Lien on and security interest in the Intellectual Property Collateral intended to be granted to the Collateral Agent for the benefit of the Credit Parties, without the consent of the Collateral Agent, (vi) until the Collateral Agent exercises its rights to make collection, diligently keep adequate records respecting the Intellectual Property Collateral and (vii) furnish to the Collateral Agent from time to time upon the Collateral Agent’s reasonable request therefor detailed statements and amended schedules further identifying and describing the Intellectual Property Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral) and such other materials evidencing or reports pertaining to the Intellectual Property Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral) as th e Collateral Agent may from time to time request.  Notwithstanding the foregoing, nothing herein shall prevent any Grantor from selling, disposing of or otherwise using any Intellectual Property Collateral as permitted under the Credit Agreement.

SECTION 6.5.         After-Acquired Property.  If any Grantor shall, at any time before this Security Agreement shall have been terminated in accordance with SECTION 9.5(a), (i) obtain any rights to any additional Intellectual Property Collateral or (ii) become entitled to the benefit of any additional Intellectual Property Collateral or any renewal or extension thereof, including any reissue, division, continuation, or continuation-in-part of any Intellectual Property Collateral, or any improvement on any Intellectual Property Collateral, the provisions hereof shall automatically apply thereto and any such item enumerated in clause (i) or (ii) of this SECTION 6.5 with respect to such Grantor shall automatically constitute Intellectual Property Collateral if such would have constituted Intellectual Property Collateral at the time of execution hereof and be subject to the Lien and security interest created by this Security Agreement without further action by any party.  With respect to any federally registered Intellectual Property Collateral, each Grantor shall within ninety (90) days after the end of each calendar year, provide to the Collateral Agent, written notice of any of the foregoing and upon request of the Collateral Agent, take such actions as are necessary to perfect the security interests granted to the Collateral Agent pursuant to this Agreement.

SECTION 6.6.         Modifications.  Each Grantor authorizes the Collateral Agent to modify this Security Agreement by amending Section IV of the Information Certificate to include any Intellectual Property Collateral acquired or arising after the date hereof of such Grantor including, without limitation, any of the items listed in SECTION 6.5 hereof.

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SECTION 6.7.         Litigation.  Unless an Event of Default has occurred and is continuing, each Grantor shall have the right to commence and prosecute in its own name, as the party in interest, for its own benefit and at the sole cost and expense of the Grantors, such applications for protection of the Intellectual Property Collateral and suits, proceedings or other actions to prevent the infringement, counterfeiting, unfair competition, dilution, diminution in value or other damage as are necessary to protect the Intellectual Property Collateral.  During the continuance of any Event of Default, the Collateral Agent (and the appropriate Grantor) shall have the right but shall in no way be obligated to file applications for protection of the Intellectual Property Collateral and/or bring suit in the name of any Grantor, the Collater al Agent or the other Credit Parties to enforce the Intellectual Property Collateral and any license thereunder.  In the event of such suit, each Grantor shall, at the reasonable request of the Collateral Agent, do any and all lawful acts and execute any and all documents requested by the Collateral Agent in aid of such enforcement and the Grantors shall promptly reimburse and indemnify the Collateral Agent, as the case may be, for all costs and expenses incurred by the Collateral Agent in the exercise of its rights under this SECTION 6.7 in accordance with SECTION 9.3 hereof.  In the event that the Collateral Agent shall elect not to bring suit to enforce the Intellectual Property Collateral, each Grantor agrees, at the request of the Collateral Agent, to take all commercially reasonable actions necessary, whether by suit, proceeding or other action, to prevent the infringement, counterfeiting, unfair competition, dilution, diminution in value of or other damage to any of the Intellectua l Property Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral) by others and for that purpose agrees to diligently maintain any suit, proceeding or other action against any Person so infringing necessary to prevent such infringement.

SECTION 6.8.         Third Party Consents.  Other than with respect to those trademarks set forth on Schedule 6.8 hereof, each Grantor shall use reasonable commercial efforts to obtain the consent of third parties to the extent such consent is necessary or desirable to create a valid, perfected security interest in favor of the Collateral Agent in any Intellectual Property Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral).

ARTICLE VII

CERTAIN PROVISIONS CONCERNING ACCOUNTS

SECTION 7.1.         Special Representations and Warranties.  As of the time when each of its Accounts is included in the Borrowing Base as an Eligible Credit Card Receivable or an Eligible Trade Receivable each Grantor shall be deemed to have represented and warranted that such Account and all records, papers and documents relating thereto (i) are genuine and correct and what they purport to be, in each case in all material respects, (ii) represent the legal, valid and binding obligation of the account debtor, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to or limiting creditors’ rights generally or by equitable principles relating to enforceability, evidencing indebtedness unpaid and owed by such account debtor, arising out of the performance of labor or services or the sale, lease, license, assignment or other disposition and delivery of the goods or other property listed therein or out of an advance or a loan, and (iii) are in all material respects in compliance and conform with all applicable material federal, state and local Laws and applicable Laws of any relevant foreign jurisdiction.

SECTION 7.2.         Maintenance of Records.  Each Grantor shall keep and maintain at its own cost and expense materially complete records of each Account, in a manner consistent with prudent business practice, including, without limitation, records of all payments received, all credits granted thereon, all merchandise returned and all other documentation relating thereto.  Each Grantor shall, at

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such Grantor’s sole cost and expense, upon the Collateral Agent’s demand made at any time during the continuance of any Event of Default, deliver all tangible evidence of Accounts, including, without limitation, all documents evidencing Accounts and any books and records relating thereto to the Collateral Agent or to its representatives (copies of which evidence and books and records may be retained by such Grantor).  During the continuance of any Event of Default, the Collateral Agent may transfer a full and complete copy of any Grantor’s books, records, credit information, reports, memoranda and all other writings relating to the Accounts to and for the use by any Person that has acquired or is contemplating acquisition of an interest in the Accounts or the Collateral Agent’s security interest therein in accordance with applicable Law without the consent of any Grantor.

SECTION 7.3.         Legend.  Each Grantor shall legend, at the request of the Collateral Agent made at any time during the continuance of any Event of Default and in form and manner reasonably satisfactory to the Collateral Agent, the Accounts and the other books, records and documents of such Grantor evidencing or pertaining to the Accounts with an appropriate reference to the fact that the Accounts have been collaterally assigned to the Collateral Agent for the benefit of the Credit Parties and that the Collateral Agent has a security interest therein.

SECTION 7.4.         Modification of Terms, Etc.  No Grantor shall rescind or cancel any indebtedness evidenced by any Account or modify any term thereof or make any adjustment with respect thereto except in the ordinary course of business consistent with prudent business practice, or extend or renew any such indebtedness except in the ordinary course of business consistent with prudent business practice or compromise or settle any dispute, claim, suit or legal proceeding relating thereto or sell any Account or interest therein except in the ordinary course of business consistent with prudent business practice or in accordance with the Credit Agreement without the prior written consent of the Collateral Agent.

SECTION 7.5.         Collection.  Subject to Section 7.4 hereof, each Grantor shall cause to be collected from the account debtor of each of the Accounts, as and when due in the ordinary course of business consistent with prudent business practice (including, without limitation, Accounts that are delinquent, such Accounts to be collected in accordance with generally accepted commercial collection procedures), any and all amounts owing under or on account of such Account, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Account.  The costs and expenses (including, without limitation, attorneys’ fees) of collection, in any case, whether incurred by any Grantor, the Collateral Agent or any other Credit Party, shall be paid by the Grantors.

ARTICLE VIII

REMEDIES

SECTION 8.1.         Remedies.   During the continuance of any Event of Default the Collateral Agent may, and at the direction of the Required Lenders, shall, from time to time in respect of the Collateral, in addition to the other rights and remedies provided for herein, under applicable Law or otherwise available to it:

(i)            Personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof, from any Grantor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon any Grantor’s premises where any of the Collateral is located, remove such Collateral, remain present at such premises to receive copies of all communications and remittances relating to the Collateral and use in connection with such removal and possession any and all services, supplies, aids and other facilities of any Grantor;

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(ii)           Demand, sue for, collect or receive any money or property at any time payable or receivable in respect of the Collateral including, without limitation, instructing the obligor or obligors on any agreement, instrument or other obligation constituting part of the Collateral to make any payment required by the terms of such agreement, instrument or other obligation directly to the Collateral Agent, and in connection with any of the foregoing, compromise, settle, extend the time for payment and make other modifications with respect thereto; provided, however, that in the event that any such payments are made directly to any Grantor, prior to receipt by any such obligor of such instruction, such Grantor shall segregate all amounts received pursuant thereto in trust for the benefit of the Collateral Agent and shall prompt ly pay such amounts to the Collateral Agent;

(iii)          Sell, assign, grant a license to use or otherwise liquidate, or direct any Grantor to sell, assign, grant a license to use or otherwise liquidate, any and all investments made in whole or in part with the Collateral or any part thereof, and take possession of the proceeds of any such sale, assignment, license or liquidation;

(iv)          Take possession of the Collateral or any part thereof, by directing any Grantor in writing to deliver the same to the Collateral Agent at any place or places so designated by the Collateral Agent, in which event such Grantor shall at its own expense:  (A) forthwith cause the same to be moved to the place or places designated by the Collateral Agent and therewith delivered to the Collateral Agent, (B) store and keep any Collateral so delivered to the Collateral Agent at such place or places pending further action by the Collateral Agent and (C) while the Collateral shall be so stored and kept, provide such security and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition.  Each Grantor’s obligation to deliver the Collateral as contemplated in thi s SECTION 8.1 is of the essence hereof.  Upon application to a court of equity having jurisdiction, the Collateral Agent shall be entitled to a decree requiring specific performance by any Grantor of such obligation;

(v)           Withdraw all moneys, instruments, securities and other property in any bank, financial securities, deposit or other account of any Grantor constituting Collateral for application to the Secured Obligations;

(vi)          Retain and apply the Distributions to the Secured Obligations as provided in Article IX hereof;

(vii)         Exercise any and all rights as beneficial and legal owner of the Collateral, including, without limitation, perfecting assignment of and exercising any and all voting, consensual and other rights and powers with respect to any Collateral; and

(viii)        Exercise all the rights and remedies of a secured party under the UCC, and the Collateral Agent may also in its sole discretion, without notice except as specified in SECTION 8.2 hereof, sell, assign or grant a license to use the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker’s board or at any of the Collateral Agent’s offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Collateral Agent may deem commercially reasonable.  The Collateral Agent or any other Credit Party or any of their respective Affiliates may be the purchaser, licensee, assignee or recipient of any or all of the Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the p urchase price for all or any portion of the Collateral sold, assigned or licensed at such sale, to use and apply any of the Secured Obligations owed to such Person as a credit on account of the purchase price of any Collateral payable by such Person at such sale.  Each purchaser, assignee, licensee or recipient at any such sale shall acquire the property sold, assigned or licensed absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives, to the

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fullest extent permitted by Law, all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.  The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given.  The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.  To the fullest extent permitted by Law, each Grantor hereby waives any claims against the Collateral Agent arising by reason of the fact that the price at which any Collateral may have been sold, assigned or licensed at such a private sale was less than the price which might have been obtained at a public sale, even if the Collateral Age nt accepts the first offer received and does not offer such Collateral to more than one offeree.

SECTION 8.2.         Notice of Sale.  Each Grantor acknowledges and agrees that, to the extent notice of sale or other disposition of Collateral shall be required by applicable Law and unless the Collateral is perishable or threatens to decline speedily in value, or is of a type customarily sold on a recognized market (in which event the Collateral Agent shall provide such Grantor such advance notice as may be practicable under the circumstances), ten (10) days’ prior notice to such Grantor of the time and place of any public sale or of the time after which any private sale or other intended disposition is to take place shall be commercially reasonable notification of such matters.  No notification need be given to any Grantor if it has signed, after the occurrence of an Event of Default, a statement renouncing or modifyin g (as permitted under Law) any right to notification of sale or other intended disposition.

SECTION 8.3.         Waiver of Notice and Claims.  Each Grantor hereby waives, to the fullest extent permitted by applicable Law, notice or judicial hearing in connection with the Collateral Agent’s taking possession or the Collateral Agent’s disposition of any of the Collateral, including, without limitation, any and all prior notice and hearing for any prejudgment remedy or remedies and any such right which such Grantor would otherwise have under law, and each Grantor hereby further waives, to the fullest extent permitted by applicable Law:  (i) all damages occasioned by such taking of possession (other than those damages caused by the gross negligence or willful misconduct of the Collateral Agent), (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enf orcement of the Collateral Agent’s rights hereunder and (iii) all rights of redemption, appraisal, valuation, stay, extension or moratorium now or hereafter in force under any applicable Law.  The Collateral Agent shall not be liable for any incorrect or improper payment made pursuant to this Article VIII in the absence of gross negligence or willful misconduct.  Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the applicable Grantor therein and thereto, and shall be a perpetual bar both at law and in equity against such Grantor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through or under such Grantor.

SECTION 8.4.         Certain Sales of Collateral.

(i)            Each Grantor recognizes that, by reason of certain prohibitions contained in law, rules, regulations or orders of any Governmental Authority, the Collateral Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who meet the requirements of such Governmental Authority.  Each Grantor acknowledges that any such sales may be at prices and on terms less favorable to the Collateral Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such restricted sale shall be deemed to have been made in a commercially reasonable manner and that, except as may be required by applicable Law, the Collateral Agent shall have no obligation to engage in public sales.

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(ii)           Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act, and applicable state securities Laws, the Collateral Agent may be compelled, with respect to any sale of all or any part of the Securities Collateral and Investment Property, to limit purchasers to Persons who will agree, among other things, to acquire such Securities Collateral or Investment Property for their own account, for investment and not with a view to the distribution or resale thereof.  Each Grantor acknowledges that any such private sales may be at prices and on terms less favorable to the Collateral Agent than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under the Securities Act), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Securities Collateral or Investment Property for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities Laws, even if such issuer would agree to do so.

(iii)          If the Collateral Agent determines to exercise its right to sell any or all of the Securities Collateral or Investment Property, upon written request, the applicable Grantor shall from time to time furnish to the Collateral Agent all such information as the Collateral Agent may reasonably request in order to determine the number of securities included in the Securities Collateral or Investment Property which may be sold by the Collateral Agent as exempt transactions under the Securities Act and the rules of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.

(iv)          Each Grantor further agrees that a breach of any of the covenants contained in this SECTION 8.4 will cause irreparable injury to the Collateral Agent and the other Credit Parties, that the Collateral Agent and the other Credit Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this SECTION 8.4 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing.

SECTION 8.5.        No Waiver; Cumulative Remedies.

(i)            No failure on the part of the Collateral Agent to exercise, no course of dealing with respect to, and no delay on the part of the Collateral Agent in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy; nor shall the Collateral Agent be required to look first to, enforce or exhaust any other security, collateral or guaranties.  The remedies herein provided are cumulative and are not exclusive of any remedies provided by law.

(ii)           In the event that the Collateral Agent shall have instituted any proceeding to enforce any right, power or remedy under this Security Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case, the Grantors, the Collateral Agent and each other Credit Party shall be restored to their respective former positions and rights hereunder with respect to the Collateral, and all rights, remedies and powers of the Collateral Agent and the other Credit Parties shall continue as if no such proceeding had been instituted.

SECTION 8.6.        Certain Additional Actions Regarding Intellectual Property.  If any Event of Default shall have occurred and be continuing, upon the written demand of Collateral Agent,

23

each Grantor shall execute and deliver to Collateral Agent an assignment or assignments of the registered Patents, Trademarks and/or Copyrights (other than Excluded Property) and such other documents as are necessary or appropriate to carry out the intent and purposes hereof to the extent such assignment does not result in any loss of rights therein under applicable Law.  Within five (5) Business Days of written notice thereafter from Collateral Agent, each Grantor shall use commercially reasonable efforts to make available to Collateral Agent, such personnel in such Grantor’s employ on the date of the Event of Default as Collateral Agent may reasonably designate to permit such Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold by such Grantor under the registered Patents, Trademarks and/or Copyrights (other than Excluded Property), and such Persons shall be available to perform their prior functions on Collateral Agent’s behalf.

SECTION 8.7.        Application of Proceeds.  The proceeds received by the Collateral Agent in respect of any sale of, collection from or other realization upon all or any part of the Collateral pursuant to the exercise by the Collateral Agent of its remedies shall be applied, together with any other sums then held by the Collateral Agent pursuant to this Security Agreement, in accordance with and as set forth in Section 8.03 of the Credit Agreement.

ARTICLE IX

MISCELLANEOUS

SECTION 9.1.        Concerning Collateral Agent.

(i)            The Collateral Agent has been appointed as collateral agent pursuant to the Credit Agreement.  The actions of the Collateral Agent hereunder are subject to the provisions of the Credit Agreement.  The Collateral Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of the Collateral), in accordance with this Security Agreement and the Credit Agreement.  The Collateral Agent may employ agents and attorneys-in-fact in connection herewith and shall not be liable for the negligence or misconduct of any such agents or attorneys-in-fact.  The Collateral Agent may resign and a successor Collateral Agent may be appointed in the manner provided in the Credit Agreement.  Upon the acceptance of any appointment as the Collateral Agent by a successor Collateral Agent, that successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent under this Security Agreement, and the retiring Collateral Agent shall thereupon be discharged from its duties and obligations under this Security Agreement.  After any retiring Collateral Agent’s resignation, the provisions hereof shall inure to its benefit as to any actions taken or omitted to be taken by it under this Security Agreement while it was the Collateral Agent.

(ii)           The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if such Collateral is accorded treatment substantially equivalent to that which the Collateral Agent, in its individual capacity, accords its own property consisting of similar instruments or interests, it being understood that neither the Collateral Agent nor any of the other Credit Parties shall have responsibility for, without limitation (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Securities Collateral, whether or not the Collateral Agent or any other Credit Party has or is deemed to have knowledge of such matters or (ii) taking any necessary steps to preserve rights against any Person with r espect to any Collateral.

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(iii)          The Collateral Agent shall be entitled to rely upon any written notice, statement, certificate, order or other document or any telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper Person, and, with respect to all matters pertaining to this Security Agreement and its duties hereunder, upon advice of counsel selected by it.

(iv)          If any item of Collateral also constitutes collateral granted to Collateral Agent under any other deed of trust, mortgage, security agreement, pledge or instrument of any type, in the event of any conflict between the provisions hereof and the provisions of such other deed of trust, mortgage, security agreement, pledge or instrument of any type in respect of such collateral, Collateral Agent, in its sole discretion, shall select which provision or provisions shall control.

SECTION 9.2.        Collateral Agent May Perform; Collateral Agent Appointed Attorney-in-Fact.  If any Grantor shall fail to perform any covenants contained in this Security Agreement or in the Credit Agreement (including, without limitation, such Grantor’s covenants to (i) pay the premiums in respect of all required insurance policies hereunder, (ii) pay Claims, (iii) make repairs, (iv) discharge Liens or (v) pay or perform any other obligations of such Grantor with respect to any Collateral) or if any warranty on the part of any Grantor contained herein shall be breached, the Collateral Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach, and may expend funds for such purpose; provided, however, that Collateral Agent shall in no event be boun d to inquire into the validity of any tax, lien, imposition or other obligation which such Grantor fails to pay or perform as and when required hereby.  Any and all amounts so expended by the Collateral Agent shall be paid by the Grantors in accordance with the provisions of SECTION 9.3 hereof.  Neither the provisions of this SECTION 9.2 nor any action taken by Collateral Agent pursuant to the provisions of this SECTION 9.2 shall prevent any such failure to observe any covenant contained in this Security Agreement nor any breach of warranty from constituting an Event of Default.  Each Grantor hereby appoints the Collateral Agent its attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, or otherwise, from time to time after the occurrence and during the continuation of an Event of Default in the Collateral Agent’s discretion to take any action and to execute any instrument consistent with the terms of the Credit Agreeme nt and the other Security Documents which the Collateral Agent may deem necessary to accomplish the purposes hereof.  The foregoing grant of authority is a power of attorney coupled with an interest and such appointment shall be irrevocable for the term hereof.  Each Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof.

SECTION 9.3.        Expenses.  Each Grantor will upon demand pay to the Collateral Agent the amount of any and all amounts required to be paid pursuant to Section 10.04 of the Credit Agreement.

SECTION 9.4.        Continuing Security Interest; Assignment.  This Security Agreement shall create a continuing security interest in the Collateral and shall (i) be binding upon the Grantors, their respective successors and assigns, and (ii) inure, together with the rights and remedies of the Collateral Agent hereunder, to the benefit of the Collateral Agent and the other Credit Parties and each of their respective successors, transferees and assigns.  No other Persons (including, without limitation, any other creditor of any Grantor) shall have any interest herein or any right or benefit with respect hereto.  Without limiting the generality of the foregoing clause (ii), any Credit Party may assign or otherwise transfer any indebtedness held by it secured by this Security Agreement to any other Person, and such other Pers on shall thereupon become vested with all the benefits in respect thereof granted to such Credit Party, herein or otherwise, subject, however, to the provisions of the Credit Agreement.

SECTION 9.5.        Termination; Release.                (a) This Security Agreement, the Lien in favor of the Collateral Agent (for the benefit of itself and the other Credit Parties) and all other

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security interests granted hereby shall terminate with respect to all Secured Obligations when (i) the Commitments shall have expired or been terminated, (ii) the principal of and interest on each Loan and all fees and other Secured Obligations shall have been indefeasibly paid in full in cash, (iii) all Letters of Credit (as defined in the Credit Agreement) shall have (A) expired or terminated and have been reduced to zero, (B) been Cash Collateralized to the extent required by the Credit Agreement, or (C) been supported by another letter of credit in a manner reasonably satisfactory to the L/C Issuer and the Administrative Agent, and (iv) all Unreimbursed Amounts shall have been indefeasibly paid in full in cash, provided, however, that in connection with the termination of this Security Agreement, the Collateral Agent may require such indemnities as it sh all reasonably deem necessary or appropriate to protect the Credit Parties against (x) loss on account of credits previously applied to the Secured Obligations that may subsequently be reversed or revoked, (y) any obligations that may thereafter arise with respect to the Other Liabilities, and (z) any Secured Obligations that may thereafter arise under Section 10.04 of the Credit Agreement.

(b)           The Collateral shall be released from the Lien of this Security Agreement in accordance with the provisions of the Credit Agreement.  Upon termination hereof or any release of Collateral in accordance with the provisions of the Credit Agreement, the Collateral Agent shall, upon the request and at the sole cost and expense of the Grantors, assign, transfer and deliver to the Grantors, against receipt and without recourse to or warranty by the Collateral Agent, such of the Collateral to be released (in the case of a release) or all of the Collateral (in the case of termination of this Security Agreement) as may be in possession of the Collateral Agent and as shall not have been sold or otherwise applied pursuant to the terms hereof, and, with respect to any other Collateral, proper documents and instruments (including UCC-3 termination statements or releases) acknowledging the termination hereof or the release of such Collateral, as the case may be.

(c)           At any time that the respective Grantor desires that the Collateral Agent take any action described in clause (b) of this SECTION 9.5, such Grantor shall, upon request of the Collateral Agent, deliver to the Collateral Agent an officer’s certificate certifying that the release of the respective Collateral is permitted pursuant to clause (a) or (b) of this SECTION 9.5.  The Collateral Agent shall have no liability whatsoever to any other Credit Party as the result of any release of Collateral by it as permitted (or which the Collateral Agent in good faith believes to be permitted) by this SECTION 9.5.

SECTION 9.6.        Modification in Writing.  No amendment, modification, supplement, termination or waiver of or to any provision hereof, nor consent to any departure by any Grantor therefrom, shall be effective unless the same shall be made in accordance with the terms of the Credit Agreement and unless in writing and signed by the Collateral Agent and the Grantors.  Any amendment, modification or supplement of or to any provision hereof, any waiver of any provision hereof and any consent to any departure by any Grantor from the terms of any provision hereof shall be effective only in the specific instance and for the specific purpose for which made or given.  Except where notice is specifically required by this Security Agreement or any other document evidencing the Secured Obligations, no notice to or demand on any Grantor in an y case shall entitle any Grantor to any other or further notice or demand in similar or other circumstances.

SECTION 9.7.        Notices.  Unless otherwise provided herein or in the Credit Agreement, any notice or other communication herein required or permitted to be given shall be given in the manner and become effective as set forth in the Credit Agreement, as to any Grantor, addressed to it at the address of the Domestic Borrowers set forth in the Credit Agreement and as to the Collateral Agent, addressed to it at the address set forth in the Credit Agreement, or in each case at such other address as

26

shall be designated by such party in a written notice to the other parties hereto complying as to delivery with the terms of this SECTION 9.7.

SECTION 9.8.        GOVERNING LAW.  THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF.

SECTION 9.9.        CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL.

(a)           EACH GRANTOR IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH GRANTOR IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT.  EACH GRANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY  ;BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS SECURITY AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT ANY CREDIT PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST ANY GRANTOR OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.

(b)           EACH GRANTOR IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (A) OF THIS SECTION.  EACH GRANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.

(c)           EACH GRANTOR AGREES THAT ANY ACTION COMMENCED BY ANY GRANTOR ASSERTING ANY CLAIM OR COUNTERCLAIM ARISING UNDER OR IN CONNECTION WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT SOLELY IN A COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY OR ANY FEDERAL COURT SITTING THEREIN AS THE COLLATERAL AGENT MAY ELECT IN ITS SOLE DISCRETION AND CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS WITH RESPECT TO ANY SUCH ACTION.

(d)           EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 9.7.  NOTHING IN THIS SECURITY AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

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(e)           EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY AND WHETHER INITIATED BY OR AGAINST ANY SUCH PERSON OR IN WHICH ANY SUCH PERSON IS JOINED AS A PARTY LITIGANT).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS SECURI TY AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 9.10.     Severability of Provisions.  Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

SECTION 9.11.     Execution in Counterparts; Effectiveness.  This Security Agreement may be executed in any number of counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  Delivery of an executed counterpart of a signature page of this Security Agreement by telecopy, pdf or other electronic transmission shall be as effective as delivery of a manually executed counterpart of this Security Agreement.

SECTION 9.12.     No Release.  Nothing set forth in this Security Agreement shall relieve any Grantor from the performance of any term, covenant, condition or agreement on such Grantor’s part to be performed or observed under or in respect of any of the Collateral or from any liability to any Person under or in respect of any of the Collateral or shall impose any obligation on the Collateral Agent or any other Credit Party to perform or observe any such term, covenant, condition or agreement on such Grantor’s part to be so performed or observed or shall impose any liability on the Collateral Agent or any other Credit Party for any act or omission on the part of such Grantor relating thereto or for any breach of any representation or warranty on the part of such Grantor contained in this Security Agreement, the Credit Agreement or the other Loan Do cuments, or under or in respect of the Collateral or made in connection herewith or therewith.  The obligations of each Grantor contained in this SECTION 9.12 shall survive the termination hereof and the discharge of such Grantor’s other obligations under this Security Agreement, the Credit Agreement and the other Loan Documents.

SECTION 9.13.     Obligations Absolute.  All obligations of each Grantor hereunder shall be absolute and unconditional irrespective of:

(i)        any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of any Grantor;

(ii)       any lack of validity or enforceability of the Credit Agreement or any other Loan Document, or any other agreement or instrument relating thereto;

(iii)      any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure

28

from the Credit Agreement or any other Loan Document or any other agreement or instrument relating thereto;

(iv)      any pledge, exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Secured Obligations;

(v)       any exercise, non-exercise or waiver of any right, remedy, power or privilege under or in respect hereof, the Credit Agreement or any other Loan Document except as specifically set forth in a waiver granted pursuant to the provisions of SECTION 9.6 hereof; or

(vi)      any other circumstances which might otherwise constitute a defense available to, or a discharge of, any Grantor (other than the termination of this Security Agreement in accordance with SECTION 9.5(a) hereof).

SECTION 9.14.     Intercreditor Agreement.  Notwithstanding anything herein to the contrary, the Lien and Security Interest granted to the Administrative Agent pursuant to this Agreement and the exercise of any right or remedy by the Administrative Agent hereunder are subject to the provisions of the Intercreditor Agreement.  In the event of any conflict between the terms of the Intercreditor Agreement and the terms of this Agreement, the terms of the Intercreditor Agreement shall govern and control.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the Grantors and the Collateral Agent have caused this Security Agreement to be duly executed and delivered by their duly authorized officers 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

Signature Page to Security Agreement

GUARANTORS:

INNOVATIONS — SUCCESSFUL SALON SERVICES

NEKA SALON SUPPLY, INC.

PROCARE LABORATORIES, INC.

SCHOENEMAN BEAUTY SUPPLY, 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 DISTRIBUTION 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.

MODERN PANACHE, INC.

LAND OF DREAMS, INC.

COLORESSE, INC.

AERIAL COMPANY, INC.

By:	/s/ Mark J. Flaherty
Name:	Mark J. Flaherty
Title:	Senior Vice President and Chief Financial Officer
SALON SUCCESS INTERNATIONAL, LLC
By:	/s/ Mark J. Flaherty
Name:	Mark J. Flaherty
Title:	Authorized Signatory

Signature Page to Security Agreement

COLLATERAL AGENT:
BANK OF AMERICA, N.A.
By:	/s/ Matthew Potter
Name: Matthew Potter
Title: Vice President

Signature Page to Security Agreement

EX-4.15

Exhibit 4.15

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 November 12, 2010

TABLE OF CONTENTS

		Page
PREAMBLE		1
RECITALS		1
AGREEMENT		1
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1.	Definitions	2
SECTION 1.2.	Interpretation	5
SECTION 1.3.	Information Certificate	5
ARTICLE II
GRANT OF SECURITY AND SECURED OBLIGATIONS
SECTION 2.1.	Pledge	5
SECTION 2.2.	Secured Obligations	6
SECTION 2.3.	Security Interest	6
ARTICLE III
PERFECTION; SUPPLEMENTS; FURTHER ASSURANCES;
USE OF COLLATERAL
SECTION 3.1.	Intentionally Deleted	6
SECTION 3.2.	Intentionally Deleted	6
SECTION 3.3.	Financing Statements and Other Filings; Maintenance of Perfected Security Interest	6
SECTION 3.4.	Other Actions	7
SECTION 3.5.	Supplements; Further Assurances	8
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 4.1.	Title	8
SECTION 4.2.	Limitation on Liens; Defense of Claims; Transferability of Collateral	8
SECTION 4.3.	Chief Executive Office; Change of Name; Jurisdiction of Organization	9
SECTION 4.4.	Intentionally Deleted	9
SECTION 4.5.	No Conflicts, Consents, etc.	9

i

		Page
SECTION 4.6.	Collateral	10
SECTION 4.7.	Insurance	10
SECTION 4.8.	Payment of Taxes; Compliance with Laws; Contested Liens; Claims	10
ARTICLE V
CERTAIN PROVISIONS CONCERNING GRANTOR
SECTION 5.1.	Intentionally Deleted	10
SECTION 5.2.	Intentionally Deleted	10
SECTION 5.3.	Organization Documents	10
SECTION 5.4.	Intentionally Deleted	10
SECTION 5.5.	Intentionally Deleted	10
ARTICLE VI
CERTAIN PROVISIONS CONCERNING INTELLECTUAL PROPERTY AND LICENSE OF PROPERTY
SECTION 6.1.	Grant of License	11
SECTION 6.2.	Registrations	11
SECTION 6.3.	No Violations or Proceedings	11
SECTION 6.4.	Protection of Agent’s Rights	11
SECTION 6.5.	After-Acquired Property	12
SECTION 6.6.	Modifications	12
SECTION 6.7.	Litigation	12
SECTION 6.8.	Third Party Consents	13
ARTICLE VII
CERTAIN PROVISIONS CONCERNING ACCOUNTS
SECTION 7.1.	Special Representations and Warranties	13
SECTION 7.2.	Maintenance of Records	13
SECTION 7.3.	Legend	13
SECTION 7.4.	Modification of Terms, Etc.	13
SECTION 7.5.	Collection	14
ARTICLE VIII
REMEDIES
SECTION 8.1.	Remedies	14
SECTION 8.2.	Notice of Sale	15
SECTION 8.3.	Waiver of Notice and Claims	16
SECTION 8.4.	Certain Sales of Collateral	16
SECTION 8.5.	No Waiver; Cumulative Remedies	17

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		Page
SECTION 8.6.	Certain Additional Actions Regarding Intellectual Property	17
SECTION 8.7.	Application of Proceeds	17
ARTICLE IX
MISCELLANEOUS
SECTION 9.1.	Concerning Agent	17
SECTION 9.2.	Agent May Perform; Agent Appointed Attorney-in-Fact	18
SECTION 9.3.	Expenses	19
SECTION 9.4.	Continuing Security Interest; Assignment	19
SECTION 9.5.	Termination; Release	19
SECTION 9.6.	Modification in Writing	20
SECTION 9.7.	Notices	20
SECTION 9.8.	GOVERNING LAW	20
SECTION 9.9.	CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL	20
SECTION 9.10.	Severability of Provisions	21
SECTION 9.11.	Execution in Counterparts; Effectiveness	21
SECTION 9.12.	No Release	21
SECTION 9.13.	Obligations Absolute	21
SCHEDULE I	Filings, Registrations and Recordings

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SECURITY AGREEMENT

SECURITY AGREEMENT dated as of November 12, 2010 (as amended, restated, supplemented or otherwise modified from time to time in accordance with the provisions hereof, this “Security Agreement”) made by (i) BEAUTY SYSTEMS GROUP (CANADA), INC., a New Brunswick corporation having its chief executive office and principal place of business at 2345 Argentia Road, Suite 102, Mississauga, Ontario, Canada, L5N 8K4, as the Canadian Borrower, herein acting as pledgor, assignor and debtor (such Canadian Borrower, in such capacities and together with any successors in such capacities, “Grantor”), and (ii) BANK OF AMERICA, N.A. (acting through its Canada branch), having an office at 200 Front Street West, Suite 2700, Toronto, Ontario, Canada, M5V 3L2, in its capacity as Canadian Agent for the Canadian Credit Parties (as defined in the Credit Agreement defined be low) pursuant to the Credit Agreement, as pledgee, assignee and secured party (in such capacities and together with any successors in such capacities, the “Agent”).

RECITALS:

A.The Canadian Borrower, the Domestic Borrowers, the Collateral Agent, Bank of America, N.A., as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Agent, and the Lenders party thereto, among others, have, in connection with the execution and delivery of this Security Agreement, entered into that certain Credit Agreement dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

B.The Canadian Borrower has, pursuant to that certain Guaranty dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Guaranty”), among other things, unconditionally guaranteed the Guaranteed Obligations (as defined in the Guaranty).

C.The Canadian Borrower will receive substantial benefits from the execution, delivery and performance of the Canadian Liabilities and the Guaranteed Obligations and is, therefore, willing to enter into this Security Agreement.

D.This Security Agreement is given by Grantor in favor of the Agent for the benefit of the Canadian Credit Parties to secure the payment and performance of all of the Secured Obligations (as hereinafter defined).

E.It is a condition to the obligations of the Lenders to make the Loans under the Credit Agreement and a condition to the L/C Issuer issuing Letters of Credit under the Credit Agreement that Grantor execute and deliver the applicable Loan Documents, including this Security Agreement.

AGREEMENT:

NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor and the Agent hereby agree as follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

SECTION 1.1.Definitions.

(a)Unless otherwise defined herein or in the Credit Agreement, capitalized terms used herein that are defined in the PPSA shall have the meanings assigned to them in the PPSA.  Without limiting the foregoing, the following terms used herein shall have the meanings given to them in the PPSA: “Chattel Paper”, “Documents of Title”, “Intangible”, “Instrument” and “Investment Property”.

(b)Capitalized terms used but not otherwise defined herein that are defined in the Credit Agreement shall have the meanings given to them in the Credit Agreement.

(c)The following terms shall have the following meanings:

“Agent” shall have the meaning assigned to such term in the Preamble hereof.

“Claims” shall mean any and all property taxes and other taxes, assessments and special assessments, levies, fees and all governmental charges imposed upon or assessed against, and all claims (including, without limitation, landlords’, carriers’, mechanics’, workmen’s, repairmen’s, laborers’, materialmen’s, suppliers’ and warehousemen’s Liens and other claims arising by operation of law) against, all or any portion of the Collateral.

“Collateral” shall have the meaning assigned to such term in SECTION 2.1 hereof.

“Contracts” shall mean, collectively, with respect to Grantor, all sale, service, performance, equipment or property lease contracts, agreements and grants and all other contracts, agreements or grants (in each case, whether written or oral, or third party or intercompany), between Grantor and any other party, and all assignments, amendments, restatements, supplements, extensions, renewals, replacements or modifications thereof.

“Control” shall mean “control” as such term is understood under the Securities Transfer Act  (Ontario), or any other similar law of any other jurisdiction.

“Control Agreements” shall mean the Blocked Account Agreements or any other agreement pursuant to which “Control” is granted to the Agent in respect of any Collateral.

“Copyrights” shall mean, collectively, with respect to Grantor, all copyrights (whether statutory or common Law, whether established or registered in Canada or any other country or any political subdivision thereof whether registered or unregistered and whether published or unpublished) and all copyright registrations and applications made by Grantor, in each case, whether now owned or hereafter created or acquired by or assigned to Grantor, including, without limitation, the registrations and applications listed in Section IV of the Information Certificate, together with any and all (i) rights and privileges arising under applicable Law with respect to Grantor’s use of such copyrights, (ii) reissues, renewals, continuations and extensions thereof, (iii) income, fees, royalties, damages, claims and payments now or hereafter due and/or payable with resp ect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) rights corresponding thereto throughout the world and (v) rights to sue for past, present or future infringements thereof.

“Credit Agreement” shall have the meaning assigned to such term in Recital A hereof.

“Deposit Account” shall mean any demand, time, savings, checking, passbook, deposit, collection, lock-box or other similar account maintained with any financial institution.

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“Excluded Property” shall mean the following:

(a)any license, permit, lease, contract or agreement or Intangible held by Grantor    (i) that validly prohibits the creation by Grantor of a security interest therein or thereon or (ii) to the extent that applicable Law prohibits the creation of a security interest therein or thereon;

(b)any cash, checks, other negotiable instrument, funds and other evidence of payment held in any Deposit Account of Grantor in the nature of security deposit with respect to obligations for the benefit of Grantor, which must be held for or returned to the applicable counterparty under applicable law or pursuant to Contractual Obligations, which account is specifically designated for such purpose, and as to which there is no commingling with any other funds of Grantor;

provided, however, that such property shall constitute “Excluded Property” only to the extent and for so long as such license, permit, lease or applicable Law validly prohibits the creation of a Lien on such property in favor of the Agent and, upon the termination of such prohibition (howsoever occurring), such property shall cease to constitute “Excluded Property”; provided further, that “Excluded Property” shall not include the right to receive any proceeds arising therefrom or any Proceeds, substitutions or replacements of any Excluded Property (unless such Proceeds, substitutions or replacements would otherwise constitute Excluded Property); and provided further, that notwithstanding any other provision herein, no Account which would otherwise constitute Excluded Property or which is o r becomes due, accruing due or otherwise in connection with any Account, and no Lien therein, shall be limited or restricted in any manner by virtue of this definition or otherwise, whether or not such security interest or Lien or the grant thereof shall be limited or restricted in any manner or shall result in any breach, acceleration or termination and the security interest and Lien in all Accounts shall attach and be valid notwithstanding any such restriction or limitation.

“Goodwill” shall mean, collectively, with respect to Grantor, the goodwill connected with Grantor’s business including, without limitation, (i) all goodwill connected with the use of and symbolized by any of the Intellectual Property Collateral in which Grantor has any interest, (ii) all know-how, trade secrets, customer and supplier lists, proprietary information, inventions, methods, procedures, formulae, descriptions, compositions, technical data, drawings, specifications, name plates, catalogs, confidential information and the right to limit the use or disclosure thereof by any Person, pricing and cost information, business and marketing plans and proposals, consulting agreements, engineering contracts and such other assets which relate to such goodwill and (iii) all product lines of Grantor’s business.

“Grantor” shall have the meaning assigned to such term in the Preamble hereof.

“Guaranty” shall have the meaning assigned to such term in Recital B hereof.

“Information Certificate” shall mean that certain information certificate dated as of the date hereof, executed and delivered by Grantor among others in favor of, inter alia,  the Administrative Agent for the benefit of the Credit Parties, as the same may be amended, amended and restated, restated, supplemented or otherwise modified from time to time in accordance with the Credit Agreement.

“Intellectual Property Collateral” shall mean, collectively, the Patents, Trademarks, Copyrights, Licenses and Goodwill.

“Letters of Credit” shall mean any letter of credit or similar instrument.

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“Letter-of-Credit Right” shall mean a right to payment or performance under a Letter of Credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment of performance.

“Licenses” shall mean, collectively, with respect to Grantor, all license agreements with any other Person with respect to any Patent, Trademark or Copyright or any other patent, trademark or copyright, whether Grantor is a licensor or licensee together with any and all (i) renewals, extensions, supplements and continuations thereof, (ii) income, fees, royalties, damages, claims and payments now and hereafter due and/or payable thereunder and with respect thereto including, without limitation, damages and payments for past, present or future infringements or violations thereof, (iii) rights to sue for past, present and future infringements or violations thereof and (iv) other rights to use, exploit or practice any or all of the Patents, Trademarks or Copyrights or any other patent, trademark or copyright.

“Patents” shall mean, collectively, with respect to Grantor, all patents issued or assigned to and all patent applications made by Grantor (whether established or registered or recorded in Canada or any other country or any political subdivision thereof), including, without limitation, those patents, patent applications listed in Section IV of the Information Certificate, together with any and all (i) rights and privileges arising under applicable Law with respect to Grantor’s use of any patents, (ii) inventions and improvements described and claimed therein, (iii) reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (iv) income, fees, royalties, damages, claims and payments now or hereafter due and/or payable thereunder and with respect thereto including, without limitation, damages and payments for past, pr esent or future infringements thereof, (v) rights corresponding thereto throughout the world and (vi) rights to sue for past, present or future infringements thereof.

“Secured Obligations” shall mean the Canadian Liabilities (as defined in the Credit Agreement) and the Guaranteed Obligations; provided, however, that Other Canadian Liabilities shall be Secured Obligations solely to the extent that there is sufficient Collateral following satisfaction of the Canadian Liabilities described in clauses (a) and (c) of the definition of Canadian Liabilities.

“Security Agreement” shall have the meaning assigned to such term in the Preamble hereof.

“Supporting Obligations” means a Letter-of-Credit Right or secondary obligation that supports the payment or performance of an Account, Chattel Paper, Document of Title, Intangible, Instrument or Investment Property, including, but not limited to, securities, Investment Property, bills, notes, lien notes, judgments, chattel mortgages, mortgages, security interests, hypothecs, assignments, guarantees, suretyships, accessories, bills of exchange, negotiable instruments, invoices and all other rights, benefits and documents now or hereafter taken, vested in or held by Grantor in respect of or as security for the same and the full benefit and advantage thereof, and all rights of action or claims which Grantor now has or may at any time hereafter have against any Person in respect thereof, including rights of Grantor in its capacity as seller of any property or asset s returned, repossessed or recovered, under an instalment or conditional sale or otherwise.

“Trademarks” shall mean, collectively, with respect to Grantor, all trademarks (including service marks), slogans, logos, certification marks, trade dress, uniform resource locations (URLs), domain names, corporate names and trade names, whether registered or unregistered, owned by or assigned to Grantor and all registrations and applications for the foregoing (whether statutory or common Law and whether established or registered in Canada or any other country or any political subdivision thereof), including, without limitation, the registrations and applications listed in Section IV of the Information Certificate, together with any and all (i) rights and privileges arising under applicable Law

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with respect to Grantor’s use of any trademarks, (ii) reissues, continuations, extensions and renewals thereof, (iii) income, fees, royalties, damages and payments now and hereafter due and/or payable thereunder and with respect thereto, including, without limitation, damages, claims and payments for past, present or future infringements thereof, (iv) rights corresponding thereto and all other rights of any kind whatsoever of Grantor accruing thereunder or pertaining thereto in the United States and Canada, and (v) rights to sue for past, present and future infringements thereof.

SECTION 1.2.Interpretation.  The rules of interpretation specified in Article I of the Credit Agreement shall be applicable to this Security Agreement.

SECTION 1.3.Information Certificate.  The Agent and Grantor agree that the Information Certificate, and all schedules, amendments and supplements thereto are and shall at all times remain a part of this Security Agreement.

ARTICLE II

GRANT OF SECURITY AND SECURED OBLIGATIONS

SECTION 2.1.Pledge; Grant of Security Interest.  As collateral security for the payment and performance in full of all the Secured Obligations, Grantor hereby pledges and grants to the Agent, for its benefit and for the benefit of the other Canadian Credit Parties, a lien on and security interest in and to all of the right, title and interest of Grantor in, to and under the following personal property and interests in such personal property, wherever located, and whether now existing or hereafter arising or acquired from time to time (collectively, the “Collateral”):

(i)all Accounts;

(ii)all Inventory;

(iii)all Documents of Title, Instruments and Chattel Paper relating to any of the foregoing, or evidencing payment for any of the foregoing;

(iv)all Intangibles (other than Intellectual Property Collateral) relating to any of the foregoing;

(v)all right, title and interest in any Contracts relating to any of the foregoing;

(vi)all Deposit Accounts together with all credits and balances, monies, cash, cash equivalents and other assets in any such Deposit Accounts;

(vii)all Supporting Obligations and Letter-of-Credit Rights relating to any of the foregoing;

(viii)all money, cash, cash equivalents, securities and other property of any kind held directly or indirectly by the Agent or any Lender;

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(ix)all books, records and property relating to, or referring to, the Collateral, including, books, records, account ledgers, data processing records, computer software and other property; and

(x)to the extent not covered by clauses (i) through (ix) of this sentence, all Proceeds and products of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of, each of the foregoing, any and all proceeds of any insurance, indemnity, warranty or guarantee payable to Grantor from time to time with respect to any of the foregoing, including, but not limited to, proceeds of any insurance policies and claims against third parties.

Notwithstanding anything to the contrary contained in clauses (i) through (ix) above, the security interest created by this Security Agreement shall not extend to, and the term “Collateral” shall not include, any Excluded Property and Grantor shall from time to time at the request of the Agent give written notice to the Agent identifying in reasonable detail the Excluded Property and shall provide to the Agent such other information regarding the Excluded Property as the Agent may reasonably request.

SECTION 2.2.Secured Obligations.  This Security Agreement secures, and the Collateral is collateral security for, the payment and performance in full when due of the Secured Obligations.

SECTION 2.3.Security Interest.  (a)  Grantor hereby irrevocably authorizes the Agent at any time and from time to time to authenticate and file in any relevant jurisdiction any financing statements (including fixture filings) and amendments thereto that contain the information required by the PPSA of each applicable jurisdiction for the filing of any financing statement or amendment relating to the Collateral, including, without limitation, (i) whether Grantor is an organization, the type of organization and any organizational identification number issued to Grantor, (ii) a description of the Collateral as “all assets of Grantor, wherever located, whether now owned or hereafter acquired” and (iii) in the case of a financing statement filed as a fixture filing, a sufficient description of the real property to which such Collateral relates.  Grantor agrees to provide all information described in the immediately preceding sentence to the Agent promptly upon request.

(b)Grantor hereby ratifies its prior authorization for the Agent to file in any relevant jurisdiction any financing statements or amendments thereto relating to the Collateral if filed prior to the date hereof.

ARTICLE III

PERFECTION; SUPPLEMENTS; FURTHER ASSURANCES;
USE OF COLLATERAL

SECTION 3.1.Intentionally Deleted.

SECTION 3.2.Intentionally Deleted.

SECTION 3.3.Financing Statements and Other Filings; Maintenance of Perfected Security Interest.  Grantor represents and warrants that the only filings, registrations and recordings

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necessary and appropriate to create, preserve, protect, publish notice of and perfect the security interest granted by Grantor to the Agent (for the benefit of the Canadian Credit Parties) pursuant to this Security Agreement in respect of the Collateral in which a security interest may be perfected by Control or by the filing of a PPSA financing statement are listed on Schedule I hereto.  Grantor represents and warrants that all such filings, registrations and recordings have been delivered to the Agent in completed and, to the extent necessary or appropriate, duly executed form for filing in each governmental, municipal or other office specified in Schedule I.  Grantor agrees that at the sole cost and expense of Grantor, (i)  Grantor will maintain the security interest created by this Security Agreement in the Collateral as a perfected security interest (subject only to Permitted E ncumbrances having priority by operation of applicable Law) and shall defend such security interest against the claims and demands of all Persons (other than with respect to Permitted Encumbrances), (ii) such Grantor shall furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail and (iii) at any time and from time to time, upon the written request of the Agent, Grantor shall promptly and duly execute and deliver, and file and have recorded, such further instruments and documents and take such further action as the Agent may  reasonably request, including the filing of any financing statements, continuation statements and other documents (including this Security Agreement) under the PPSA (or other applicable Laws) in effect in any jurisdiction with respect to the security interest created hereby and the execution and deli very of Control Agreements, all in form reasonably satisfactory to the Agent and in such offices wherever required by applicable Law in each case to perfect, continue and maintain a valid, enforceable, security interest in the Collateral as provided herein and to preserve the other rights and interests granted to the Agent hereunder, as against Grantor and third parties (other than with respect to Permitted Encumbrances), with respect to the Collateral.

SECTION 3.4.Other Actions.  In order to further evidence the attachment, perfection and priority of, and the ability of the Agent to enforce, the Agent’s security interest in the Collateral, Grantor represents, warrants and agrees, in each case at Grantor’s own expense, with respect to the following Collateral that:

(a)Instruments and Chattel Paper.  As of the date hereof (i) no amount payable under or in connection with any of the Collateral is evidenced by any Instrument or Chattel Paper other than such Instruments and Chattel Paper listed in Section II. D. of the Information Certificate and (ii) each Instrument and each item of Chattel Paper listed in Section II. D. of the Information Certificate, to the extent requested by the Agent, has been properly endorsed, assigned and delivered to the Agent, accompanied by instruments of transfer or assignment and letters of direction duly executed in blank.  If any amount payable under or in connection with any of the Co llateral in excess of $3,000,000 shall be evidenced by any Instrument or Chattel Paper, Grantor acquiring such Instrument or Chattel Paper shall forthwith endorse, assign and deliver the same to the Agent, accompanied by such instruments of transfer or assignment duly executed in blank as the Agent may reasonably request.

(b)Intentionally Deleted.

(c)Intentionally Deleted.

(d)Letter-of-Credit Rights.  If Grantor is at any time a beneficiary under a Letter of Credit forming part of the Collateral in an amount in excess of $3,000,000 now or hereafter issued in favor of Grantor (which, for the avoidance of doubt, shall not include any Canadian Letter of Credit issued pursuant to the Credit Agreement), Grantor shall promptly notify the Agent thereof and such Grantor shall, at the request of the Agent, pursuant to an agreement in

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form and substance reasonably satisfactory to the Agent, either (i) use commercially reasonable efforts to arrange for the issuer and any confirmer of such Letter of Credit to consent to an assignment to the Agent of, and to pay to the Agent, the proceeds of, any drawing under the Letter of Credit or (ii) use commercially reasonable efforts to arrange for the Agent to become the beneficiary of such Letter of Credit, with the Agent agreeing, in each case, that the proceeds of any drawing under the Letter of Credit are to be applied as provided in Section 2.05 and Section 6.12 of the Credit Agreement.

(e)Intentionally Deleted.

SECTION 3.5.Supplements; Further Assurances.  Grantor shall take such further actions, and execute and deliver to the Agent such additional assignments, agreements, supplements, powers and instruments, as the Agent may in its reasonable judgment deem necessary or appropriate, wherever required by Law, in order to perfect, preserve and protect the security interest in the Collateral as provided herein and the rights and interests granted to the Agent hereunder, to carry into effect the purposes hereof or better to assure and confirm unto the Agent or permit the Agent to exercise and enforce its rights, powers and remedies hereunder with respect to any Collateral.  Without limiting the gene rality of the foregoing, Grantor shall make, execute, endorse, acknowledge, file or refile and/or deliver to the Agent from time to time upon reasonable request such lists, descriptions and designations of the Collateral, copies of warehouse receipts, receipts in the nature of warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, supplements, additional security agreements, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments.  If an Event of Default has occurred and is continuing, the Agent may institute and maintain, in its own name or in the name of Grantor, such suits and proceedings as the Agent may be advised by counsel shall be necessary or expedient to prevent any impairment of the security interest in or the perfection thereof in the Collateral.  All of the foregoing shall be at the sole cost and expense of Grantor.  Grantor and the Agent ackno wledge that this Security Agreement is intended to grant to the Agent for the benefit of the Canadian Credit Parties a security interest in and Lien upon the Collateral and shall not constitute or create a present assignment of any of the Collateral.

ARTICLE IV

REPRESENTATIONS, WARRANTIES AND COVENANTS

In addition to, and without limitation of, each of the representations, warranties and covenants set forth in the Credit Agreement and the other Loan Documents, Grantor represents, warrants and covenants as follows:

SECTION 4.1.Title.  No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Agent pursuant to this Security Agreement or as are permitted by the Credit Agreement.  Except as provided in the Intercreditor Agreement or the Credit Agreement, no Person other than the Agent has control or possession of all or any part of the Collateral.

SECTION 4.2.Limitation on Liens; Defense of Claims; Transferability of Collateral.  Grantor is as of the date hereof, and, as to Collateral acquired by it from time to time after

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the date hereof, Grantor will be, the sole direct and beneficial owner of all Collateral pledged by it hereunder free from any Lien or other right, title or interest of any Person other than the Liens and security interest created by this Security Agreement and Permitted Encumbrances.  Grantor shall, at its own cost and expense, defend title to the Collateral pledged by it hereunder and the security interest therein and Lien thereon granted to the Agent and the priority thereof against all claims and demands of all Persons, at its own cost and expense, at any time claiming any interest therein adverse to the Agent or any other Canadian Credit Party other than Permitted Encumbrances.  There is no agreement, and Grantor shall not enter into any agreement or take any other action, that would restrict the transferability of any of the Collateral or otherwise impair or conflict with Grantor’s obl igations or the rights of the Agent hereunder.

SECTION 4.3.Chief Executive Office; Change of Name; Jurisdiction of Organization.  (a)  The exact legal name, type of organization, jurisdiction of organization, federal taxpayer identification number, organizational identification number, chief executive office and registered office of Grantor is indicated next to its name in Sections I.A. and I.B. of the Information Certificate.  Grantor shall furnish to the Agent prompt written notice of any change in (i) its corporate name, (ii) the location of its chief executive office, its principal place of business, its registered office, any office in which it maintains books or records relating to Collateral owned by it or any of fice or facility at which Collateral owned by it is located (including the establishment of any such new office or facility), (iii) its identity or type of organization or corporate structure, (iv) its federal taxpayer identification number or organizational identification number or (v) its jurisdiction of organization (in each case, including, without limitation, by merging with or into any other entity, reorganizing, dissolving, liquidating, reincorporating or incorporating in any other jurisdiction).

(b)The Agent may rely on opinions of counsel as to whether any or all PPSA financing statements of Grantor need to be amended as a result of any of the changes described in SECTION 4.3(a).  If Grantor fails to provide information to the Agent about such changes on a timely basis, the Agent shall not be liable or responsible to any party for any failure to maintain a perfected security interest in Grantor’s property constituting Collateral, for which the Agent needed to have information relating to such changes.  The Agent shall have no duty to inquire about such changes if Grantor does not inform the Agent of such changes, the parties acknowledging and agreeing that it would not be feasible or practical for the Agent to search for information on such changes if such information is not provided by Grantor.

SECTION 4.4.Intentionally Deleted.

SECTION 4.5.No Conflicts, Consents, etc.  No consent of any party (including, without limitation, equity holders or creditors of Grantor) and no consent, authorization, approval, license or other action by, and no notice to or filing with, any Governmental Authority or regulatory body or other Person is required (A) for the grant of the security interest by Grantor of the Collateral pledged by it pursuant to this Security Agreement or for the execution, delivery or performance hereof by Grantor, (B) for the exercise by the Agent of the voting or other rights provided for in this Security Agreement or (C) for the exercise by the Agent of the remedies in respect of the Collat eral pursuant to this Security Agreement except, in each case, for such consents which have been obtained prior to the date hereof.  Following the occurrence and during the continuation of an Event of Default, if the Agent desires to exercise any remedies, voting or consensual rights or attorney-in-fact powers set forth in this Security Agreement and determines it necessary to obtain any approvals or consents of any Governmental Authority or any other Person therefor, then, upon the reasonable request of the Agent, such Grantor agrees to use commercially reasonable efforts to assist and aid the Agent to obtain as soon as

9

commercially practicable any necessary approvals or consents for the exercise of any such remedies, rights and powers.

SECTION 4.6.Collateral.  All information set forth herein, including the schedules annexed hereto, and all information contained in any documents, schedules and lists heretofore delivered to any Canadian Credit Party in connection with this Security Agreement, in each case, relating to the Collateral, is accurate and complete in all material respects.  The Collateral described on the schedules annexed hereto constitutes all of the property of such type of Collateral owned or held by Grantor.

SECTION 4.7.Insurance.  Grantor shall (i) maintain or shall cause to be maintained such insurance as is required pursuant to Section 6.07 of the Credit Agreement; (ii) maintain such other insurance as may be required by applicable Law; and (iii) pursuant to the Credit Agreement, furnish to the Agent, upon written request, full information as to the insurance carried.

SECTION 4.8.Payment of Taxes; Compliance with Laws; Contested Liens; Claims.  Grantor represents and warrants that all material Claims imposed upon or assessed against the Collateral have been paid and discharged except to the extent such material Claims constitute a Lien not yet due and payable or a Permitted Encumbrance.  Grantor shall comply with all applicable Law relating to the Collateral the failure to comply with which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.  Grantor may at its own expense contest the validity, amount or applicability of any Claims so long as the contest thereof shall be conducted in accordance with, and permitted pursuant to the provisions of, the Credit Agreement.  Notwithstanding the foregoing provisions of this SECTION 4.8, no contest of any such obligation may be pursued by Grantor if such contest would expose the Agent or any other Canadian Credit Party to (i) any possible criminal liability or (ii) any additional material civil liability for failure to comply with such obligations unless Grantor shall have furnished a bond or other security therefor satisfactory to the Agent, or such other Canadian Credit Party, as the case may be.

ARTICLE V

CERTAIN PROVISIONS CONCERNING GRANTOR

SECTION 5.1.Intentionally Deleted

SECTION 5.2.Intentionally Deleted

SECTION 5.3.Organization Documents.

Grantor has delivered to the Agent true, correct and complete copies of its Organization Documents.  The Organization Documents are in full force and effect.  Except as permitted in the Credit Agreement, Grantor will not terminate or agree to terminate any Organization Documents or make any amendment or modification to any Organization Documents which may have a Material Adverse Effect.

SECTION 5.4.Intentionally Deleted

SECTION 5.5.Intentionally Deleted

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ARTICLE VI

CERTAIN PROVISIONS CONCERNING INTELLECTUAL PROPERTY AND LICENSE OF PROPERTY

SECTION 6.1.Grant of License.  For the purpose of enabling the Agent, during the continuance of an Event of Default, to exercise rights and remedies under Article VIII hereof at such time as the Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, Grantor hereby grants to the Agent, to the extent assignable, an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to such Grantor) to use, assign, license or sublicense any Intellectual Property Collateral as well as any other assets or property, now owned or hereafter acquired by Grantor, wherever the same may be located, which is reasonably requi red for the exercise of the Agent’s rights and remedies hereunder, including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout hereof.

SECTION 6.2.Registrations.  Except pursuant to licenses and other user agreements entered into by any Grantor in the ordinary course of business that are listed in Section IV of the Information Certificate, on and as of the date hereof (i) Grantor owns and possesses the right to use, and has done nothing to authorize or enable any other Person to use, any material Copyright, Patent or Trademark listed in Section IV of the Information Certificate, and (ii) all registrations listed in Section IV of the Information Certificate are valid and in full force and effect.

SECTION 6.3.No Violations or Proceedings.  To Grantor’s knowledge, on and as of the date hereof, there is no material infringement by others of any right of Grantor with respect to any Copyright, Patent or Trademark listed in Section IV of the Information Certificate, respectively, pledged by it under the name of such Grantor.

SECTION 6.4.Protection of Agent’s Rights.  On a continuing basis, Grantor shall, at its sole cost and expense, (i) promptly following its becoming aware thereof, notify the Agent of (A) any adverse determination in any proceeding in the United States Patent and Trademark Office or the United States Copyright Office or the Canadian Intellectual Property Office with respect to any Patent, Trademark or Copyright necessary for the conduct of business of Grantor or (B) the institution of any proceeding or any adverse determination in any federal, state, provincial, territorial or local court or administrative body regarding Grantor’s claim of ownership in or right to use an y of the Intellectual Property Collateral material to the use and operation of the Collateral, its right to register such Intellectual Property Collateral or its right to keep and maintain such registration in full force and effect, (ii) maintain and protect the Intellectual Property Collateral necessary for the conduct of business of Grantor, (iii) not permit to lapse or become abandoned any Intellectual Property Collateral necessary for the conduct of business of Grantor, and not settle or compromise any pending or future litigation or administrative proceeding with respect to such Intellectual Property Collateral necessary for the conduct of business of Grantor, in each case except as shall be consistent with commercially reasonable business judgment and, if any Event of Default has occurred and is continuing, with the prior approval of the Agent (such approval not to be unreasonably withheld), (iv) upon Grantor’s obtaining knowledge thereof, promptly notify the Agent in writing of any event which may be reasonably expected to materially and adversely affect the value or utility of the Intellectual Property Collateral or any portion thereof material to the use and operation of the Collateral, taken as a whole, the ability of Grantor or to dispose of the Intellectual Property Collateral or any portion thereof or the rights and remedies of the Agent in relation thereto including, without limitation, a levy or threat of levy or any legal process against the Intellectual Property

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Collateral or any portion thereof, (v) not license the Intellectual Property Collateral other than licenses entered into by Grantor in, or incidental to, the ordinary course of business, or amend or permit the amendment of any of the material licenses in a manner that would materially impair the value of the Intellectual Property Collateral, taken as a whole, or the rights in the Intellectual Property Collateral intended to be granted to the Agent for the benefit of the Credit Parties, without the consent of the Agent, (vi) until the Agent exercises its rights to make collection, diligently keep adequate records respecting the Intellectual Property Collateral and (vii) furnish to the Agent from time to time upon the Agent’s reasonable request therefor detailed statements and amended schedules further identifying and describing the Intellectual Property Collateral (other than non-U.S. and non - -Canadian Intellectual Property Collateral) and such other materials evidencing or reports pertaining to the Intellectual Property Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral) as the Agent may from time to time request.  Notwithstanding the foregoing, nothing herein shall prevent Grantor from selling, disposing of or otherwise using any Intellectual Property Collateral as permitted under the Credit Agreement.

SECTION 6.5.After-Acquired Property.  If Grantor shall, at any time before this Security Agreement shall have been terminated in accordance with SECTION 9.5(a), (i) obtain any rights to any additional Intellectual Property Collateral or (ii) become entitled to the benefit of any additional Intellectual Property Collateral or any renewal or extension thereof, including any reissue, division, continuation, or continuation-in-part of any Intellectual Property Collateral, or any improvement on any Intellectual Property Collateral, the provisions hereof shall automatically apply thereto and any such item enumerated in clause (i) or (ii) of this SECTION 6.5 with respect to Grantor shall automatically constitute Intellectual Property Collateral if such would have constituted Intellectual Property Collateral at the time of execution hereof and be subject to the rights of Agent as provided by this Security Agreement without further action by any party.

SECTION 6.6.Modifications.  Grantor authorizes the Agent to modify this Security Agreement by amending Section IV of the Information Certificate to include any Intellectual Property Collateral acquired or arising after the date hereof of Grantor including, without limitation, any of the items listed in SECTION 6.5 hereof.

SECTION 6.7.Litigation.  Unless an Event of Default has occurred and is continuing, Grantor shall have the right to commence and prosecute in its own name, as the party in interest, for its own benefit and at the sole cost and expense of Grantor, such applications for protection of the Intellectual Property Collateral and suits, proceedings or other actions to prevent the infringement, counterfeiting, unfair competition, dilution, diminution in value or other damage as are necessary to protect the Intellectual Property Collateral.  Upon the occurrence and during the continuance of any Event of Default, the Agent shall have the right but shall in no way be obligated to file applications fo r protection of the Intellectual Property Collateral and/or bring suit in the name of Grantor, the Agent or the other Credit Parties to enforce the Intellectual Property Collateral and any license thereunder.  In the event of such suit, Grantor shall, at the reasonable request of the Agent, do any and all lawful acts and execute any and all documents requested by the Agent in aid of such enforcement and Grantor shall promptly reimburse and indemnify the Agent, as the case may be, for all costs and expenses incurred by the Agent in the exercise of its rights under this SECTION 6.7 in accordance with SECTION 9.3 hereof.  In the event that the Agent shall elect not to bring suit to enforce the Intellectual Property Collateral, Grantor agrees, at the request of the Agent, to take all commercially reasonable actions necessary, whether by suit, proceeding or other action, to prevent the infringement, counterfeiting, unfair competition, dilution, diminution in value of or other damage to any of the Intellectual Property Collateral by others and for that purpose agrees to diligently maintain any suit, proceeding or other action against any Person so infringing necessary to prevent such infringement.

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SECTION 6.8.Third Party Consents.  Grantor shall use reasonable commercial efforts to obtain the consent of third parties to the extent such consent is necessary or desirable to create a valid, perfected security interest in favor of the Agent in any Intellectual Property Collateral (other than non-U.S. and non-Canadian Intellectual Property Collateral).

ARTICLE VII

CERTAIN PROVISIONS CONCERNING ACCOUNTS

SECTION 7.1.Special Representations and Warranties.  As of the time when each of its Accounts is included in the Borrowing Base as an Eligible Credit Card Receivable or an Eligible Trade Receivable Grantor shall be deemed to have represented and warranted that such Account and all records, papers and documents relating thereto (i) are genuine and correct and what they purport to be, in each case, in all material respects, (ii) represent the legal, valid and binding obligation of the account debtor, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to or limiting creditors’ rights generally or by equitable principles relating to enforceability, evidencing indebtedness unpaid and owed by such account debtor, arising out of the performance of labor or services or the sale, lease, license, assignment or other disposition and delivery of the goods or other property listed therein or out of an advance or a loan, and (iii) are in all material respects in compliance and conform with all applicable material federal, state and local Laws and applicable Laws of any relevant foreign jurisdiction.

SECTION 7.2.Maintenance of Records.  Grantor shall keep and maintain at its own cost and expense materially complete records of each Account, in a manner consistent with prudent business practice, including, without limitation, records of all payments received, all credits granted thereon, all merchandise returned and all other documentation relating thereto.  Grantor shall, at Grantor’s sole cost and expense, upon the Agent’s demand made at any time after the occurrence and during the continuance of any Event of Default, deliver all tangible evidence of Accounts, including, without limitation, all documents evidencing Accounts and any books and records relating thereto to the A gent or to its representatives (copies of which evidence and books and records may be retained by Grantor).  Upon the occurrence and during the continuance of any Event of Default, the Agent may transfer a full and complete copy of Grantor’s books, records, credit information, reports, memoranda and all other writings relating to the Accounts to and for the use by any Person that has acquired or is contemplating acquisition of an interest in the Accounts or the Agent’s security interest therein in accordance with applicable Law without the consent of Grantor.

SECTION 7.3.Legend.  Grantor shall legend, at the request of the Agent made at any time after the occurrence and during the continuance of any Event of Default and in form and manner reasonably satisfactory to the Agent, the Accounts and the other books, records and documents of Grantor evidencing or pertaining to the Accounts with an appropriate reference to the fact that the Accounts have been collaterally assigned to the Agent for the benefit of the Canadian Credit Parties and that the Agent has a security interest therein.

SECTION 7.4.Modification of Terms, Etc.  Grantor shall not rescind or cancel any indebtedness evidenced by any Account or modify any term thereof or make any adjustment with respect thereto except in the ordinary course of business consistent with prudent business practice, or extend or renew any such indebtedness except in the ordinary course of business consistent with prudent business

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practice or compromise or settle any dispute, claim, suit or legal proceeding relating thereto or sell any Account or interest therein except in the ordinary course of business consistent with prudent business practice or in accordance with the Credit Agreement without the prior written consent of the Agent.

SECTION 7.5.Collection.  Grantor shall cause to be collected from the account debtor of each of the Accounts, as and when due in the ordinary course of business consistent with prudent business practice (including, without limitation, Accounts that are delinquent, such Accounts to be collected in accordance with generally accepted commercial collection procedures), any and all amounts owing under or on account of such Account, and apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Account.  The costs and expenses (including, without limitation, attorneys’ fees) of collection, in any case, whether incurred by Grantor, the Agent or any other Canadian Credit Party, shall be paid by Grantor.

ARTICLE VIII
REMEDIES

SECTION 8.1.Remedies.   Upon the occurrence and during the continuance of any Event of Default the Agent may, and at the direction of the Required Lenders, shall, from time to time in respect of the Collateral, in addition to the other rights and remedies provided for herein, under applicable Law or otherwise available to it:

(i)Personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof, from Grantor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon Grantor’s premises where any of the Collateral is located, remove such Collateral, remain present at such premises to receive copies of all communications and remittances relating to the Collateral and use in connection with such removal and possession any and all services, supplies, aids and other facilities of Grantor;

(ii)Demand, sue for, collect or receive any money or property at any time payable or receivable in respect of the Collateral including, without limitation, instructing the obligor or obligors on any agreement, instrument or other obligation constituting part of the Collateral to make any payment required by the terms of such agreement, instrument or other obligation directly to the Agent, and in connection with any of the foregoing, compromise, settle, extend the time for payment and make other modifications with respect thereto; provided, however, that in the event that any such payments are made directly to Grantor, prior to receipt by any such obligor of such instruction, Grantor shall segregate all amounts received pursuan t thereto in trust for the benefit of the Agent and shall promptly pay such amounts to the Agent;

(iii)Sell, assign, grant a license to use or otherwise liquidate, or direct Grantor to sell, assign, grant a license to use or otherwise liquidate, any and all investments made in whole or in part with the Collateral or any part thereof, and take possession of the proceeds of any such sale, assignment, license or liquidation;

(iv)Take possession of the Collateral or any part thereof, by directing Grantor in writing to deliver the same to the Agent at any place or places so designated by the Agent, in which event such Grantor shall at its own expense:  (A) forthwith cause the same to be moved to the place or places designated by the Agent and therewith delivered to the Agent, (B) store and keep any Collateral so delivered to the Agent at such place or places pending further action by the Agent and (C) while the

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Collateral shall be so stored and kept, provide such security and maintenance services as shall be necessary to protect the same and to preserve and maintain them in good condition.  Grantor’s obligation to deliver the Collateral as contemplated in this SECTION 8.1 is of the essence hereof.  Upon application to a court of equity having jurisdiction, the Agent shall be entitled to a decree requiring specific performance by any Grantor of such obligation;

(v)Withdraw all moneys, instruments, securities and other property in any bank, financial securities, deposit or other account of any Grantor constituting Collateral for application to the Secured Obligations;

(vi)Intentionally Deleted;

(vii)Exercise any and all rights as beneficial and legal owner of the Collateral, including, without limitation, perfecting assignment of and exercising any and all voting, consensual and other rights and powers with respect to any Collateral; and

(viii)Exercise all the rights and remedies of a secured party under the PPSA, and the Agent may also in its sole discretion, without notice except as specified in SECTION 8.2 hereof, sell, assign or grant a license to use the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker’s board or at any of the Agent’s offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable.  The Agent or any other Canadian Credit Party or any of their respective Affiliates may be the purchaser, licensee, assignee or recipient of any or all of the Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold, assigned or licensed at such sale, to use and apply any of the Secured Obligations owed to such Person as a credit on account of the purchase price of any Collateral payable by such Person at such sale.  Each purchaser, assignee, licensee or recipient at any such sale shall acquire the property sold, assigned or licensed absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives, to the fullest extent permitted by Law, all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.  The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given.  The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, wi thout further notice, be made at the time and place to which it was so adjourned.  To the fullest extent permitted by Law, Grantor hereby waives any claims against the Agent arising by reason of the fact that the price at which any Collateral may have been sold, assigned or licensed at such a private sale was less than the price which might have been obtained at a public sale, even if the Agent accepts the first offer received and does not offer such Collateral to more than one offeree.

SECTION 8.2.Notice of Sale.  Grantor acknowledges and agrees that, to the extent notice of sale or other disposition of Collateral shall be required by applicable Law and unless the Collateral is perishable or threatens to decline speedily in value, or is of a type customarily sold on a recognized market (in which event the Agent shall provide Grantor such advance notice as may be practicable under the circumstances), ten (10) days’ prior notice to Grantor of the time and place of any public sale or of the time after which any private sale or other intended disposition is to take place shall be commercially reasonable notification of such matters.  No notification need be given to Grantor if it has signed, after the occurrence of an Event of Default, a statement renouncing or modifying (as permitted under Law) any right to notification of sale or other intended disposition.

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SECTION 8.3.Waiver of Notice and Claims.  Grantor hereby waives, to the fullest extent permitted by applicable Law, notice or judicial hearing in connection with the Agent’s taking possession or the Agent’s disposition of any of the Collateral, including, without limitation, any and all prior notice and hearing for any prejudgment remedy or remedies and any such right which Grantor would otherwise have under law, and Grantor hereby further waives, to the fullest extent permitted by applicable Law:  (i) all damages occasioned by such taking of possession (other than those damages caused by the gross negligence or willful misconduct of the Agent), (ii) all other requirem ents as to the time, place and terms of sale or other requirements with respect to the enforcement of the Agent’s rights hereunder and (iii) all rights of redemption, appraisal, valuation, stay, extension or moratorium now or hereafter in force under any applicable Law.  The Agent shall not be liable for any incorrect or improper payment made pursuant to this Article VIII in the absence of gross negligence or willful misconduct.  Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of Grantor therein and thereto, and shall be a perpetual bar both at law and in equity against Grantor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through or under Grantor.

SECTION 8.4.Certain Sales of Collateral.

(i)Grantor recognizes that, by reason of certain prohibitions contained in law, rules, regulations or orders of any Governmental Authority, the Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who meet the requirements of such Governmental Authority.  Grantor acknowledges that any such sales may be at prices and on terms less favorable to the Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such restricted sale shall be deemed to have been made in a commercially reasonable manner and that, except as may be required by applicable Law, the Agent shall have no obligation to engage in public sales.

(ii)Grantor recognizes that, by reason of certain prohibitions contained in the Securities Exchange Act of 1934 or the Securities Act (Ontario), or other similar applicable Law, the Agent may be compelled, with respect to any sale of all or any part of Investment Property, if any, forming part of the Collateral, to limit purchasers to Persons who will agree, among other things, to acquire such Collateral for their own account, for investment and not with a view to the distribution or resale thereof.  Grantor acknowledges that any such private sales may be at prices and on terms less favorable to the Agent than those obtainable through a public sale without such restrictions (including, without limitation, a public offering made pursuant to a registration statement under applicable securities Law), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any such Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under applicable securities Law, even if such issuer would agree to do so.

(iii)If the Agent determines to exercise its right to sell any or all Investment Property forming part of the Collateral, upon written request, Grantor shall from time to time furnish to the Agent all such information as the Agent may reasonably request in order to determine the number of securities included in such Investment Property which may be sold by the Agent as exempt transactions under applicable securities Law and the rules of the Securities and Exchange Commission (or other similar Governmental Authority) thereunder, as the same are from time to time in effect.

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(iv)Grantor further agrees that a breach of any of the covenants contained in this SECTION 8.4 will cause irreparable injury to the Agent and the other Canadian Credit Parties, that the Agent and the other Canadian Credit Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this SECTION 8.4 shall be specifically enforceable against Grantor, and Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing.

SECTION 8.5.        No Waiver; Cumulative Remedies.

(i)No failure on the part of the Agent to exercise, no course of dealing with respect to, and no delay on the part of the Agent in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy; nor shall the Agent be required to look first to, enforce or exhaust any other security, collateral or guaranties.  The remedies herein provided are cumulative and are not exclusive of any remedies provided by law.

(ii)In the event that the Agent shall have instituted any proceeding to enforce any right, power or remedy under this Security Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Agent, then and in every such case, Grantor, the Agent and each other Canadian Credit Party shall be restored to their respective former positions and rights hereunder with respect to the Collateral, and all rights, remedies and powers of the Agent and the other Canadian Credit Parties shall continue as if no such proceeding had been instituted.

SECTION 8.6.Certain Additional Actions Regarding Intellectual Property.  Within five (5) Business Days of written notice thereafter from Agent, Grantor shall use commercially reasonable efforts to make available to Agent such personnel in Grantor’s employ on the date of the Event of Default as Agent may reasonably designate to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold by Grantor under the registered Patents, Trademarks and/or Copyrights, and such Persons shall be available to perform their prior functions on Agent’s behalf.

SECTION 8.7.Application of Proceeds.  The proceeds received by the Agent in respect of any sale of, collection from or other realization upon all or any part of the Collateral pursuant to the exercise by the Agent of its remedies shall be applied, together with any other sums then held by the Agent pursuant to this Security Agreement, in accordance with and as set forth in Section 8.03 of the Credit Agreement.

ARTICLE IX

MISCELLANEOUS

SECTION 9.1.Concerning Agent.

(i)The Agent has been appointed as Canadian Agent and collateral agent pursuant to the Credit Agreement.  The actions of the Agent hereunder are subject to the provisions of the Credit Agreement.  The Agent shall have the right hereunder to make demands, to give notices, to exercise or

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refrain from exercising any rights, and to take or refrain from taking action (including, without limitation, the release or substitution of the Collateral), in accordance with this Security Agreement and the Credit Agreement.  The Agent may employ agents and attorneys-in-fact in connection herewith and shall not be liable for the negligence or misconduct of any such agents or attorneys-in-fact.  The Agent may resign and a successor Agent may be appointed in the manner provided in the Credit Agreement.  Upon the acceptance of any appointment as the Agent by a successor Agent, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent under this Security Agreement, and the retiring Agent shall thereupon be discharged from its duties and obligations under this Security Agreement.  After any retiring Agent’s re signation, the provisions hereof shall inure to its benefit as to any actions taken or omitted to be taken by it under this Security Agreement while it was the Agent.

(ii)The Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if such Collateral is accorded treatment substantially equivalent to that which the Agent, in its individual capacity, accords its own property consisting of similar instruments or interests, it being understood that neither the Agent nor any of the other Canadian Credit Parties shall have responsibility for, without limitation taking any necessary steps to preserve rights against any Person with respect to any Collateral.

(iii)The Agent shall be entitled to rely upon any written notice, statement, certificate, order or other document or any telephone message believed by it to be genuine and correct and to have been signed, sent or made by the proper Person, and, with respect to all matters pertaining to this Security Agreement and its duties hereunder, upon advice of counsel selected by it.

(iv)If any item of Collateral also constitutes collateral granted to Agent under any other deed of trust, mortgage, security agreement, pledge or instrument of any type, in the event of any conflict between the provisions hereof and the provisions of such other deed of trust, mortgage, security agreement, pledge or instrument of any type in respect of such collateral, Agent, in its sole discretion, shall select which provision or provisions shall control.

SECTION 9.2.Agent May Perform; Agent Appointed Attorney-in-Fact.  If Grantor shall fail to perform any covenants contained in this Security Agreement or in the Credit Agreement (including, without limitation, Grantor’s covenants to (i) pay the premiums in respect of all required insurance policies hereunder, (ii) pay Claims, (iii) make repairs, (iv) discharge Liens or (v) pay or perform any other obligations of Grantor with respect to any Collateral) or if any warranty on the part of Grantor contained herein shall be breached, the Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach, and may expend funds for s uch purpose; provided, however, that Agent shall in no event be bound to inquire into the validity of any tax, lien, imposition or other obligation which Grantor fails to pay or perform as and when required hereby.  Any and all amounts so expended by the Agent shall be paid by Grantor in accordance with the provisions of SECTION 9.3 hereof.  Neither the provisions of this SECTION 9.2 nor any action taken by Agent pursuant to the provisions of this SECTION 9.2 shall prevent any such failure to observe any covenant contained in this Security Agreement nor any breach of warranty from constituting an Event of Default.  Grantor hereby appoints the Agent its attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, or otherwise, from time to time after the occurrence and during the continuation of an Event of Default in the Agent’s discretion to take any action and to execute any instrument consistent with the terms of the C redit Agreement and the other Security Documents which the Agent may deem necessary to accomplish the purposes hereof.  The foregoing grant of authority is a power of attorney coupled with an interest and such appointment shall be irrevocable for the term hereof.  Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof.

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SECTION 9.3.Expenses.  Grantor will upon demand pay to the Agent the amount of any and all amounts required to be paid pursuant to Section 10.04 of the Credit Agreement.

SECTION 9.4.Continuing Security Interest; Assignment.  This Security Agreement shall create a continuing security interest in the Collateral and shall (i) be binding upon Grantor, its successors and assigns, and (ii) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and the other Canadian Credit Parties and each of their respective successors, transferees and assigns.  No other Persons (including, without limitation, any other creditor of Grantor) shall have any interest herein or any right or benefit with respect hereto.  Without limiting the generality of the foregoing clause (ii), any Canadian Credit Party may assign or othe rwise transfer any indebtedness held by it secured by this Security Agreement to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Canadian Credit Party, herein or otherwise, subject, however, to the provisions of the Credit Agreement.

SECTION 9.5.Termination; Release

(a)This Security Agreement, the Lien in favor of the Agent (for the benefit of itself and the other Canadian Credit Parties) and all other security interests granted hereby shall terminate with respect to all Secured Obligations when (i) the Commitments shall have expired or been terminated, (ii) the principal of and interest on each Loan and all fees and other Secured Obligations shall have been indefeasibly paid in full in cash, (iii) all Canadian Letters of Credit (as defined in the Credit Agreement) shall have (A) expired or terminated and have been reduced to zero, (B) been Cash Collateralized to the extent required by the Credit Agreement, or (C) been supported by another letter of credit in a manner reasonably satisfactory to the L/C Issuer and the Administrative Agent, and (iv) all Unreimbursed Amounts shall have been indefeasibly paid in full in cash, provided, however, that in connection with the termination of this Security Agreement, the Agent may require such indemnities as it shall reasonably deem necessary or appropriate to protect the Canadian Credit Parties against (x) loss on account of credits previously applied to the Secured Obligations that may subsequently be reversed or revoked, (y) any obligations that may thereafter arise with respect to the Other Liabilities, and (z) any Secured Obligations that may thereafter arise under Section 10.04 of the Credit Agreement.

(b)The Collateral shall be released from the Lien of this Security Agreement in accordance with the provisions of the Credit Agreement.  Upon termination hereof or any release of Collateral in accordance with the provisions of the Credit Agreement, the Agent shall, upon the request and at the sole cost and expense of Grantor, assign, transfer and deliver to Grantor, against receipt and without recourse to or warranty by the Agent, such of the Collateral to be released (in the case of a release) or all of the Collateral (in the case of termination of this Security Agreement) as may be in possession of the Agent and as shall not have been sold or otherwise applied pursuant to the terms hereof, and, with respect to any other Collatera l, proper documents and instruments (including PPSA termination statements or releases) acknowledging the termination hereof or the release of such Collateral, as the case may be.

(c)At any time that Grantor desires that the Agent take any action described in clause (b) of this SECTION 9.5, Grantor shall, upon request of the Agent, deliver to the Agent an officer’s certificate certifying that the release of the respective Collateral is permitted pursuant to clause (a) or (b) of this SECTION 9.5.  The Agent shall have no liability whatsoever to any other Canadian Credit Party as the result of any release of Collateral by it as permitted (or which the Collateral Agent in good faith believes to be permitted) by this SECTION 9.5.

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SECTION 9.6.Modification in Writing.  No amendment, modification, supplement, termination or waiver of or to any provision hereof, nor consent to any departure by Grantor therefrom, shall be effective unless the same shall be made in accordance with the terms of the Credit Agreement and unless in writing and signed by the Agent and Grantor.  Any amendment, modification or supplement of or to any provision hereof, any waiver of any provision hereof and any consent to any departure by Grantor from the terms of any provision hereof shall be effective only in the specific instance and for the specific purpose for which made or given.  Except where notice is specifically required by this Security Agreement or any other document evidencing the Secured Obligations, no notice to or demand on Grantor in any case shall entitle Grantor to any other or further notice or demand in similar or other circumstances.

SECTION 9.7.Notices.  Unless otherwise provided herein or in the Credit Agreement, any notice or other communication herein required or permitted to be given shall be given in the manner and become effective as set forth in the Credit Agreement, as to Grantor, addressed to it at the address set forth in the Credit Agreement and as to the Agent, addressed to it at the address set forth in the Credit Agreement, or in each case at such other address as shall be designated by such party in a written notice to the other parties hereto complying as to delivery with the terms of this SECTION 9.7.

SECTION 9.8.GOVERNING LAW.  THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE PROVINCE OF ONTARIO AND THE FEDERAL LAWS OF CANADA APPLICABLE THEREIN.

SECTION 9.9.CONSENT TO JURISDICTION; SERVICE OF PROCESS; WAIVER OF JURY TRIAL.

(a)GRANTOR IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE PROVINCE OF ONTARIO, AND ANY APPELLATE COURT THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND GRANTOR IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURT.  GRANTOR AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.  NOTHING IN THIS SECURITY AGREEMENT OR IN ANY OTHE R LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT ANY CANADIAN CREDIT PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST GRANTOR OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.

(b)GRANTOR IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (A) OF THIS SECTION.  GRANTOR HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.

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(c)GRANTOR AGREES THAT ANY ACTION COMMENCED BY GRANTOR ASSERTING ANY CLAIM OR COUNTERCLAIM ARISING UNDER OR IN CONNECTION WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT SOLELY IN A COURT OF THE PROVINCE OF ONTARIO OR ANY OTHER COURT AS THE AGENT MAY ELECT IN ITS SOLE DISCRETION AND CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS WITH RESPECT TO ANY SUCH ACTION.

(d)EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 9.7.  NOTHING IN THIS SECURITY AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

SECTION 9.10.Severability of Provisions.  Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

SECTION 9.11.Execution in Counterparts; Effectiveness.  This Security Agreement may be executed in any number of counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  Delivery of an executed counterpart of a signature page of this Security Agreement by telecopy, pdf or other electronic transmission shall be as effective as delivery of a manually executed counterpart of this Security Agreement.

SECTION 9.12.No Release.  Nothing set forth in this Security Agreement shall relieve Grantor from the performance of any term, covenant, condition or agreement on Grantor’s part to be performed or observed under or in respect of any of the Collateral or from any liability to any Person under or in respect of any of the Collateral or shall impose any obligation on the Agent or any other Canadian Credit Party to perform or observe any such term, covenant, condition or agreement on Grantor’s part to be so performed or observed or shall impose any liability on the Agent or any other Canadian Credit Party for any act or omission on the part of Grantor relating thereto or for any breach of any represe ntation or warranty on the part of Grantor contained in this Security Agreement, the Credit Agreement or the other Loan Documents, or under or in respect of the Collateral or made in connection herewith or therewith.  The obligations of Grantor contained in this SECTION 9.12 shall survive the termination hereof and the discharge of Grantor’s other obligations under this Security Agreement, the Credit Agreement and the other Loan Documents.

SECTION 9.13.Obligations Absolute.  All obligations of Grantor hereunder shall be absolute and unconditional irrespective of:

(i)any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or the like of Grantor;

(ii)any lack of validity or enforceability of the Credit Agreement or any other Loan Document, or any other agreement or instrument relating thereto;

(iii)any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from the Credit Agreement or any other Loan Document or any other agreement or instrument relating thereto;

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(iv)any pledge, exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to any departure from any guarantee, for all or any of the Secured Obligations;

(v)any exercise, non-exercise or waiver of any right, remedy, power or privilege under or in respect hereof, the Credit Agreement or any other Loan Document except as specifically set forth in a waiver granted pursuant to the provisions of SECTION 9.6 hereof; or

(vi)any other circumstances which might otherwise constitute a defense available to, or a discharge of, Grantor (other than the termination of this Security Agreement in accordance with SECTION 9.5(a) hereof).

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, Grantor and the Agent have caused this Security Agreement to be duly executed and delivered by their duly authorized officers as of the date first above written.

GRANTOR:
BEAUTY SYSTEMS GROUP (CANADA), INC.
By:	/s/ Mark Flaherty
Name:	Mark Flaherty
Title:	SVP & CFO
AGENT:
BANK OF AMERICA, N.A.
(ACTING THROUGH ITS CANADA BRANCH)
By:	/s/ Medina Sales de Andrade
Name:	Median Sales de Andrade
Title:	Vice President

Signature Page to Security Agreement

EX-31.1

Exhibit 31.1

CERTIFICATION
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Gary G. Winterhalter, certify that:

(1)           I have reviewed this quarterly report on Form 10-Q for the quarterly period ended December 31, 2010 of Sally Beauty Holdings, Inc.;

(2)           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)           The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.             Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.             Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)           The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.             All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 3, 2011

By:	/s/ Gary G. Winterhalter
Gary G. Winterhalter
Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION
PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark J. Flaherty, certify that:

(1)           I have reviewed this quarterly report on Form 10-Q for the quarterly period ended December 31, 2010 of Sally Beauty Holdings, Inc.;

(2)           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)           The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.             Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.             Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.             Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.             Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)           The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.             All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.             Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   February 3, 2011

By:	/s/ Mark J. Flaherty
Mark J. Flaherty
Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sally Beauty Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gary G. Winterhalter, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ Gary G. Winterhalter
	Gary G. Winterhalter
	Chief Executive Officer
February 3, 2011

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sally Beauty Holdings, Inc. (the “Company”) on Form 10-Q for the quarterly period ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark J. Flaherty, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ Mark J. Flaherty
	Mark J. Flaherty
	Senior Vice President and Chief Financial Officer
February 3, 2011