15. Guarantor and Non-Guarantor Condensed Consolidated Financial Statements

The following condensed consolidating financial information presents the condensed consolidated balance sheets as of June 30, 2013 and September 30, 2012, the condensed consolidated statements of earnings and comprehensive income for the three and nine months ended June 30, 2013 and 2012, and condensed consolidated statements of cash flows for the nine months ended June 30, 2013 and 2012 of: (i) Sally Beauty Holdings, Inc., or the “Parent;” (ii) Sally Holdings LLC and Sally Capital Inc., or the “Issuers;” (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination entries necessary for consolidation purposes; and (vi) Sally Beauty on a consolidated basis.

Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been provided as management believes the following information is sufficient, as guarantor subsidiaries are 100% indirectly owned by the Parent and all guarantees are full and unconditional. Additionally, substantially all of the assets of the guarantor subsidiaries are pledged under the ABL facility and consequently may not be available to satisfy the claims of general creditors.

Condensed Consolidating Balance Sheet

June 30, 2013

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Assets
Cash and cash equivalents	$	—		$	—		$	29,110	$	24,334		$	—		$	53,444
Trade, income taxes and other accounts receivable, less allowance for doubtful accounts	9,635			—			62,305		40,670			—			112,610
Due from affiliates	—						1,141,668		2,286			(1,143,954		)	—
Inventory	—			—			585,776		194,424			—			780,200
Prepaid expenses	1,677			80			13,643		14,368			—			29,768
Deferred income tax assets, net	(408		)	(423		)	38,804		(4,381		)	—			33,592
Property and equipment, net	1			—			150,187		72,167			—			222,355
Investment in subsidiaries	157,284			2,431,639			364,033		—			(2,952,956		)	—
Goodwill and other intangible assets, net	—			—			480,467		178,289			—			658,756
Other assets	—			29,075			1,131		4,916			—			35,122
Total assets	$	168,189		$	2,460,371		$	2,867,124	$	527,073		$	(4,096,910	)	$	1,925,847

Liabilities and Stockholders’ (Deficit) Equity
Accounts payable	$	4		$	—		$	213,668	$	58,739		$	—		$	272,411
Due to affiliates	463,980			604,633			2,286		73,055			(1,143,954		)	—
Accrued liabilities	202			11,532			112,634		26,029			—			150,397
Income taxes payable	—			3,416			1		2,421			—			5,838
Long-term debt	—			1,684,113			203		6,445			—			1,690,761
Other liabilities	—			—			22,825		1,934			—			24,759
Deferred income tax liabilities, net	(1,614		)	(607		)	83,868		(5,583		)	—			76,064
Total liabilities	462,572			2,303,087			435,485		163,040			(1,143,954		)	2,220,230
Total stockholders’ (deficit) equity	(294,383		)	157,284			2,431,639		364,033			(2,952,956		)	(294,383		)
Total liabilities and stockholders’ (deficit) equity	$	168,189		$	2,460,371		$	2,867,124	$	527,073		$	(4,096,910	)	$	1,925,847

Condensed Consolidating Balance Sheet

September 30, 2012

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Assets
Cash and cash equivalents	$	—		$	155,000		$	48,582	$	36,638		$	—		$	240,220
Trade, income taxes and other accounts receivable, less allowance for doubtful accounts	23,734			—			63,964		37,792			—			125,490
Due from affiliates	—			2			934,268		3,637			(937,907		)	—
Inventory	—			—			551,017		184,339			—			735,356
Prepaid expenses	1,181			24			12,189		15,982			—			29,376
Deferred income tax assets, net	(408		)	(423		)	38,805		(4,509		)	—			33,465
Property and equipment, net	—			—			140,238		62,423			—			202,661
Investment in subsidiaries	(30,403		)	2,194,771			367,435		—			(2,531,803		)	—
Goodwill and other intangible assets, net	—			—			475,623		185,145			—			660,768
Other assets	—			32,445			1,069		4,950			—			38,464
Total assets	$	(5,896	)	$	2,381,819		$	2,633,190	$	526,397		$	(3,469,710	)	$	2,065,800

Liabilities and Stockholders’ (Deficit) Equity
Accounts payable	$	—		$	—		$	202,560	$	59,649		$	—		$	262,209
Due to affiliates	110,512			761,262			3,637		62,496			(937,907		)	—
Accrued liabilities	141			38,171			134,387		27,568			—			200,267
Income taxes payable	—			4,136			4,596		4,272			—			13,004
Long-term debt	—			1,609,308			265		7,657			—			1,617,230
Other liabilities	—			—			21,060		3,172			—			24,232
Deferred income tax liabilities, net	(1,464		)	(655		)	71,914		(5,852		)	—			63,943
Total liabilities	109,189			2,412,222			438,419		158,962			(937,907		)	2,180,885
Total stockholders’ (deficit) equity	(115,085		)	(30,403		)	2,194,771		367,435			(2,531,803		)	(115,085		)
Total liabilities and stockholders’ (deficit) equity	$	(5,896	)	$	2,381,819		$	2,633,190	$	526,397		$	(3,469,710	)	$	2,065,800

Condensed Consolidating Statement of Earnings and Comprehensive Income
Three Months Ended June 30, 2013

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries

Net sales	$	—		$	—		$	731,319	$	180,782		$	—		$	912,101
Related party sales	—			—			725		—			(725		)	—
Cost of products sold and distribution expenses	—			—			358,746		96,997			(725		)	455,018
Gross profit	—			—			373,298		83,785			—			457,083
Selling, general and administrative expenses	2,328			83			225,124		68,184			—			295,719
Depreciation and amortization	—			—			13,765		5,033			—			18,798
Operating earnings (loss)	(2,328		)	(83		)	134,409		10,568			—			142,566
Interest expense	—			26,900			13		93			—			27,006
Earnings (loss) before provision for income taxes	(2,328		)	(26,983		)	134,396		10,475			—			115,560
Provision (benefit) for income taxes	(863		)	(10,481		)	51,442		2,996			—			43,094
Equity in earnings of subsidiaries, net of tax	73,931			90,433			7,479		—			(171,843		)	—
Net earnings	72,466			73,931			90,433		7,479			(171,843		)	72,466

Other comprehensive income (loss), net of tax	—			—			—		(4,157		)	—			(4,157		)
Total comprehensive income (loss)	$	72,466		$	73,931		$	90,433	$	3,322		$	(171,843	)	$	68,309

Condensed Consolidating Statement of Earnings and Comprehensive Income
Three Months Ended June 30, 2012

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries
Net sales	$	—		$	—		$	716,288	$	170,703		$	—		$	886,991
Related party sales	—			—			717		—			(717		)	—
Cost of products sold and distribution expenses	—			—			350,032		93,297			(717		)	442,612
Gross profit	—			—			366,973		77,406			—			444,379
Selling, general and administrative expenses	2,681			184			224,940		63,728			—			291,533
Depreciation and amortization	—			—			11,569		4,730			—			16,299
Operating earnings (loss)	(2,681		)	(184		)	130,464		8,948			—			136,547
Interest expense	—			26,765			23		137			—			26,925
Earnings (loss) before provision for income taxes	(2,681		)	(26,949		)	130,441		8,811			—			109,622
Provision (benefit) for income taxes	(974		)	(10,451		)	49,003		2,557			—			40,135
Equity in earnings of subsidiaries, net of tax	71,194			87,692			6,254		—			(165,140		)	—
Net earnings	$	69,487		$	71,194		$	87,692	$	6,254		$	(165,140	)	$	69,487

Other comprehensive income (loss), net of tax	—			1,027			—		(10,578		)	—			(9,551		)
Total comprehensive income (loss)	$	69,487		$	72,221		$	87,692	$	(4,324	)	$	(165,140	)	$	59,936

Condensed Consolidating Statement of Earnings and Comprehensive Income
Nine Months Ended June 30, 2013

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries

Net sales	$	—		$	—		$	2,179,608	$	536,173		$	—		$	2,715,781
Related party sales	—			—			2,195		—			(2,195		)	—
Cost of products sold and distribution expenses	—			—			1,081,329		290,742			(2,195		)	1,369,876
Gross profit	—			—			1,100,474		245,431			—			1,345,905
Selling, general and administrative expenses	7,461			258			684,671		208,388			—			900,778
Depreciation and amortization	—			—			38,322		14,531			—			52,853
Operating earnings (loss)	(7,461		)	(258		)	377,481		22,512			—			392,274
Interest expense	—			80,157			29		324			—			80,510
Earnings (loss) before provision for income taxes	(7,461		)	(80,415		)	377,452		22,188			—			311,764
Provision (benefit) for income taxes	(2,820		)	(31,234		)	142,775		6,705			—			115,426
Equity in earnings of subsidiaries, net of tax	200,979			250,160			15,483		—			(466,622		)	—
Net earnings	196,338			200,979			250,160		15,483			(466,622		)	196,338

Other comprehensive income (loss), net of tax	—			—			—		(13,292		)	—			(13,292		)
Total comprehensive income (loss)	$	196,338		$	200,979		$	250,160	$	2,191		$	(466,622	)	$	183,046

Condensed Consolidating Statement of Earnings and Comprehensive Income
Nine Months Ended June 30, 2012

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Consolidating Eliminations			Sally Beauty Holdings, Inc. and Subsidiaries

Net sales	$	—		$	—		$	2,133,523	$	507,564		$	—		$	2,641,087
Related party sales	—			—			2,202		—			(2,202		)	—
Cost of products sold and distribution expenses	—			—			1,062,538		277,729			(2,202		)	1,338,065
Gross profit	—			—			1,073,187		229,835			—			1,303,022
Selling, general and administrative expenses	7,990			473			672,652		192,621			—			873,736
Depreciation and amortization	1			—			33,886		13,905			—			47,792
Operating earnings (loss)	(7,991		)	(473		)	366,649		23,309			—			381,494
Interest expense	—			112,728			80		432			—			113,240
Earnings (loss) before provision for income taxes	(7,991		)	(113,201		)	366,569		22,877			—			268,254
Provision (benefit) for income taxes	(2,844		)	(43,903		)	139,547		8,020			—			100,820
Equity in earnings of subsidiaries, net of tax	172,581			241,879			14,857		—			(429,317		)	—
Net earnings	$	167,434		$	172,581		$	241,879	$	14,857		$	(429,317	)	$	167,434

Other comprehensive income (loss), net of tax	—			3,947			—		(1,483		)	—			2,464
Total comprehensive income	$	167,434		$	176,528		$	241,879	$	13,374		$	(429,317	)	$	169,898

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2013

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations		Sally Beauty Holdings, Inc. and Subsidiaries

Net cash provided (used) by operating activities	$	388,316		$	(230,500	)	$	26,776		$	12,535		$	—	$	197,127
Cash Flows from Investing Activities:
Capital expenditures, net of proceeds from sale of property and equipment	(1		)	—			(40,455		)	(24,095		)	—		(64,551		)
Acquisitions, net of cash acquired	—			—			(15,400		)	(670		)	—		(16,070		)
Net cash used by investing activities	(1		)	—			(55,855		)	(24,765		)	—		(80,621		)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	—			222,500			—			—			—		222,500
Repayments of long-term debt	—			(147,000		)	(62		)	(1,362		)	—		(148,424		)
Repurchases of common stock	(407,197		)	—			—			—			—		(407,197		)
Proceeds from exercises of stock options	18,722			—			—			—			—		18,722
Excess tax benefit from share-based compensation	160			—			9,669			1,487			—		11,316
Net cash (used) provided by financing activities	(388,315		)	75,500			9,607			125			—		(303,083		)
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			—			(199		)	—		(199		)
Net decrease in cash and cash equivalents	—			(155,000		)	(19,472		)	(12,304		)	—		(186,776		)
Cash and cash equivalents, beginning of period	—			155,000			48,582			36,638			—		240,220
Cash and cash equivalents, end of period	$	—		$	—		$	29,110		$	24,334		$	—	$	53,444

Condensed Consolidating Statement of Cash Flows
Nine Months Ended June 30, 2012

(In thousands)

	Parent			Sally Holdings LLC and Sally Capital Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Eliminations		Sally Beauty Holdings, Inc. and Subsidiaries

Net cash (used) provided by operating activities	$	176,920		$	(49,903	)	$	29,491		$	40,053		$	—	$	196,561
Cash Flows from Investing Activities:
Capital expenditures, net of proceeds from sale of property and equipment	—			—			(29,397		)	(14,763		)	—		(44,160		)
Acquisitions, net of cash acquired	—			—			(10,607		)	(32,547		)	—		(43,154		)
Net cash used by investing activities	—			—			(40,004		)	(47,310		)	—		(87,314		)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt	—			1,876,300			—			—			—		1,876,300
Repayments of long-term debt	—			(1,799,539		)	(69		)	(2,325		)	—		(1,801,933		)
Debt issuance costs	—			(26,858		)	—			—			—		(26,858		)
Repurchase of common stock	(200,000		)	—			—			—			—		(200,000		)
Proceeds from exercises of stock options	23,080			—			—			—			—		23,080
Excess tax benefit from share-based compensation	—			—			9,951			696			—		10,647
Net cash provided (used) by financing activities	(176,920		)	49,903			9,882			(1,629		)	—		(118,764		)
Effect of foreign exchange rate changes on cash and cash equivalents	—			—			—			10			—		10
Net decrease in cash and cash equivalents	—			—			(631		)	(8,876		)	—		(9,507		)
Cash and cash equivalents, beginning of period	—			—			22,583			40,898			—		63,481
Cash and cash equivalents, end of period	$	—		$	—		$	21,952		$	32,022		$	—	$	53,974