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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from             to            

Commission File Number: 333-123927

 

 

EASTON-BELL SPORTS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-1636283
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

7855 Haskell Avenue, Suite 200

Van Nuys, California 91406

(Address of Principal Executive Offices)(Zip Code)

(818) 902-5800

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x.

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  ¨.

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. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

As of May 11, 2012, 100 shares of Easton-Bell Sports, Inc. common stock were outstanding.

 

 

 


Table of Contents

EXPLANATORY NOTE

The Company is a voluntary filer of reports required of companies with public securities under Sections 13 or 15(d) of the Securities Exchange Act of 1934.

 

2


Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

INDEX

 

     Page  
PART I. FINANCIAL INFORMATION:   

Item 1. Financial Statements

  

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     4   

Consolidated Statements of Comprehensive Income for the Fiscal Quarter Ended March  31, 2012 (unaudited) and April 2, 2011 (unaudited)

     5   

Consolidated Statements of Cash Flows for the Fiscal Quarter Ended March  31, 2012 (unaudited) and April 2, 2011 (unaudited)

     6   

Notes to Consolidated Financial Statements

     7   

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

     24   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4. Controls and Procedures

     36   
PART II. OTHER INFORMATION:   

Item 1. Legal Proceedings

     36   

Item 1A. Risk Factors

     36   

Item 6. Exhibits

     37   

SIGNATURES

     38   

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

 

     March 31,
2012
     December 31,
2011
 
     (Unaudited)         
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 30,553       $ 29,505   

Accounts receivable, net

     262,407         250,183   

Inventories, net

     144,945         145,815   

Prepaid expenses

     7,301         6,942   

Deferred taxes, net

     17,779         17,798   

Other current assets

     10,603         9,645   
  

 

 

    

 

 

 

Total current assets

     473,588         459,888   

Property, plant and equipment, net

     55,246         54,329   

Deferred financing fees, net

     11,958         12,622   

Intangible assets, net

     271,195         270,458   

Goodwill

     208,697         208,697   

Other assets

     1,189         1,617   
  

 

 

    

 

 

 

Total assets

   $ 1,021,873       $ 1,007,611   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY      

Current liabilities:

     

Revolving credit facility

   $ 66,000       $ 42,000   

Current portion of capital lease obligations

     26         26   

Accounts payable

     71,220         88,689   

Accrued expenses

     65,068         63,291   
  

 

 

    

 

 

 

Total current liabilities

     202,314         194,006   

Long-term debt, less current portion

     346,804         346,670   

Capital lease obligations, less current portion

     45         52   

Deferred taxes

     59,571         58,928   

Other noncurrent liabilities

     21,765         18,330   
  

 

 

    

 

 

 

Total liabilities

     630,499         617,986   
  

 

 

    

 

 

 

Stockholder’s equity:

     

Common stock: $0.01 par value, 100 shares authorized, 100 shares issued and outstanding at March 31, 2012 and December 31, 2011

     —           —     

Additional paid-in capital

     364,334         363,730   

Retained earnings

     26,779         25,429   

Accumulated other comprehensive income

     261         466   
  

 

 

    

 

 

 

Total stockholder’s equity

     391,374         389,625   
  

 

 

    

 

 

 

Total liabilities and stockholder’s equity

   $ 1,021,873       $ 1,007,611   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and amounts in thousands)

 

     Fiscal Quarter Ended  
     March 31,
2012
    April 2,
2011
 

Net sales

   $ 216,281      $ 203,398   

Cost of sales

     143,106        139,441   
  

 

 

   

 

 

 

Gross profit

     73,175        63,957   

Selling, general and administrative expenses

     57,140        50,367   

Amortization of intangibles

     2,597        2,553   
  

 

 

   

 

 

 

Income from operations

     13,438        11,037   

Interest expense, net

     10,623        10,993   
  

 

 

   

 

 

 

Income before income taxes

     2,815        44   

Income tax expense

     1,465        106   
  

 

 

   

 

 

 

Net income (loss)

     1,350        (62

Other comprehensive income:

    

Foreign currency translation adjustment

     (205     954   
  

 

 

   

 

 

 

Comprehensive income

   $ 1,145      $ 892   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and amounts in thousands)

 

     Fiscal Quarter Ended  
     March 31,
2012
    April 2,
2011
 

Cash flows from operating activities:

    

Net income (loss)

   $ 1,350      $ (62

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Depreciation and amortization

     7,911        7,009   

Amortization of deferred financing fees and debt discount

     798        873   

Equity compensation expense

     604        657   

Deferred income taxes

     662        (852

Changes in operating assets and liabilities, net of effects from purchase of business:

    

Accounts receivable, net

     (12,267     (24,859

Inventories, net

     1,302        (6,478

Other current and noncurrent assets

     (889     (3,545

Accounts payable

     (17,565     6,750   

Accrued expenses

     1,833        4,739   

Other current and noncurrent liabilities

     244        (1,396
  

 

 

   

 

 

 

Net cash used in operating activities

     (16,017     (17,164
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (5,593     (4,916

Purchase of business, net of cash acquired

     (1,150     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,743     (4,916
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from revolving credit facility

     28,000        30,500   

Payments on revolving credit facility

     (4,000     (7,000

Payments on capital lease obligations

     (7     (6
  

 

 

   

 

 

 

Net cash provided by financing activities

     23,993        23,494   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (185     (173

Net change in cash and cash equivalents

     1,048        1,241   
  

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

     29,505        24,024   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 30,553      $ 25,265   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and amounts in thousands, except as specified)

1. Basis of Presentation

Easton-Bell Sports, Inc. is a wholly-owned subsidiary of RBG Holdings Corp., or RBG, which, in turn, is a wholly-owned subsidiary of EB Sports Corp., or EB Sports, of which 100% of the issued and outstanding voting common stock is owned by Easton-Bell Sports, LLC, the ultimate parent company, or our Parent. Unless otherwise indicated, all references in this Form 10-Q to Easton-Bell, we, us, our, and the Company refer to Easton-Bell Sports, Inc. and its consolidated subsidiaries. References to Easton, Bell and Riddell refer to Easton Sports, Inc. and its consolidated subsidiaries, Bell Sports Corp. and its consolidated subsidiaries and Riddell Sports Group, Inc. and its consolidated subsidiaries, respectively.

The accompanying unaudited consolidated financial statements included herein have been prepared by our Company in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and the rules and regulations of the Securities and Exchange Commission or the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, normal recurring adjustments considered necessary for a fair presentation have been reflected in these consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with our Company’s audited financial statements and notes thereto included in our Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 27, 2012. Results for interim periods are not necessarily indicative of the results for the year.

Our Company’s fiscal quarters are 13-week periods ending on Saturdays. As a result, our Company’s first quarter of fiscal year 2012 ended on March 31, and the first quarter of fiscal year 2011 ended on April 2.

2. Goodwill and Other Intangible Assets

Goodwill and other indefinite-lived intangible assets are tested for impairment at each of our Company’s segments on an annual basis in December, and more often if indications of impairment exist as required under the Financial Accounting Standards Board, or the FASB’s, Accounting Standards Codification 350-20 Goodwill. The results of our Company’s analyses conducted in 2011 indicated that no impairment in the carrying amount of goodwill and other indefinite-lived intangible assets had occurred. During the first fiscal quarter of 2012, there were no indicators of impairment to goodwill and intangible assets. There were no material changes to goodwill during the first fiscal quarter of 2012.

Goodwill by segment is as follows:

 

     Team
Sports
     Action
Sports
     Consolidated  

Balance as of March 31, 2012

   $ 146,326       $ 62,371       $ 208,697   

During the first fiscal quarter of 2012, Riddell acquired certain assets and assumed certain liabilities of an athletic equipment reconditioning and uniform supply company for a purchase price of approximately $5,150 consisting of cash and contingent consideration. As a result, the carrying amount of customer relationships related to our Team Sports segment increased by $3,334.

Acquired intangible assets are as follows:

 

     March 31, 2012     December 31, 2011  
     Gross
Carrying
Amounts
     Accumulated
Amortization
    Gross
Carrying
Amounts
     Accumulated
Amortization
 

Amortized intangible assets:

          

Trademarks and tradenames

   $ 1,702       $ (1,702   $ 1,702       $ (1,702

Customer relationships

     62,514         (39,068     59,180         (38,126

Patents

     60,345         (44,318     60,345         (42,714

Licensing and other

     6,923         (5,985     6,923         (5,934
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 131,484       $ (91,073   $ 128,150       $ (88,476
  

 

 

    

 

 

   

 

 

    

 

 

 

Indefinite-lived intangible assets:

          

Trademarks and tradenames

   $ 230,784         $ 230,784      
  

 

 

      

 

 

    

 

7


Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

3. Long-Term Debt

Long-term debt consisted of the following:

 

     March 31,
2012
    December 31,
2011
 

9.750% Senior Secured Notes

   $ 350,000      $ 350,000   

Senior Secured Credit ABL Facility

     66,000        42,000   

Capital lease obligations

     71        78   
  

 

 

   

 

 

 

Total long-term debt

     416,071        392,078   

Less unamortized debt discount on senior secured notes

     (3,196     (3,330

Less current maturities of long-term debt

     (66,026     (42,026
  

 

 

   

 

 

 

Long-term debt, less current portion(1)

   $ 346,849      $ 346,722   
  

 

 

   

 

 

 

 

(1) Includes long-term portion of capital lease obligations.

9.750% Senior Secured Notes

In December 2009, in connection with the refinancing of our Company’s then-existing indebtedness, or the Refinancing, we issued $350,000 of 9.750% Senior Secured Notes, due December 2016, or the Notes. Interest is payable on the Notes semi-annually on June 1 and December 1 of each year. We may redeem some or all of the Notes prior to December 1, 2012 at a price equal to 100.00% of the principal amount, plus accrued and unpaid interest and a make-whole premium. We may redeem all or any of the Notes on or after December 1, 2012 and prior to December 1, 2013 at 107.313% of the principal amount of the Notes, plus accrued and unpaid interest. Then we may redeem all or any of the Notes on or after December 1, 2013 and prior to December 1, 2014 at 104.875% of the principal amount of the Notes, plus accrued and unpaid interest. Then we may redeem all or any of the Notes on or after December 1, 2014 and prior to December 1, 2015 at 102.438% of the principal amount of the Notes, plus accrued and unpaid interest. At any time on or after December 1, 2015, our Company may redeem all or any of the Notes at 100.00% of the principal amount of the Notes, plus accrued and unpaid interest. In addition, during any twelve month period commencing on the issue date prior to December 1, 2012, we may redeem up to 10.00% of aggregate principal amount of the Notes at a price equal to 103.00% of their principal amount, plus accrued and unpaid interest. At any time prior to December 1, 2012, we may also redeem up to 35.00% of the aggregate principal amount of the Notes at a price equal to 109.750% of the principal amount of the Notes, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of our Company. We are not required to make mandatory redemption or sinking fund payments with respect to the Notes. However, the Notes will become due and payable on October 1, 2015 unless on or prior to August 28, 2015, the indebtedness of EB Sports under its senior secured credit agreement with Wachovia Bank, N.A. and the lenders party thereto, or the New Holdco Facility, has been either repaid or refinanced with indebtedness with a stated maturity that is at least 91 days after the maturity date of the Notes.

Among other provisions, the indenture governing the Notes contains certain restrictions that limit our Company’s ability to (1) incur, assume or guarantee additional debt, (2) pay dividends and make other restricted payments, (3) create liens, (4) sell assets and subsidiary stock, (5) enter into sale and leaseback transactions, (6) enter into agreements that restrict dividends from subsidiaries, (7) change our business, (8) enter into transactions with affiliates and (9) transfer all or substantially all of our assets or enter into merger or consolidation transactions. The indenture governing the Notes also requires us to make an offer to repurchase the Notes at 101.00% of the principal amount following a change of control of our Company, and subject to customary reinvestment rights, at 100.00% of the principal amount with the proceeds of certain sales of assets and subsidiary stock.

Subject to certain exceptions, the indenture governing the Notes permits our Company and our restricted subsidiaries to incur additional indebtedness, including senior indebtedness and secured indebtedness. In addition, the indenture does not limit the amount of indebtedness that our direct or indirect parent entities, including EB Sports and RBG, may incur.

 

8


Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

The ABL Facility

Concurrently with the issuance of the Notes on December 3, 2009, our Company, together with certain of our subsidiaries as Canadian Borrowers (as defined therein) or Guarantors (as defined therein), entered into a senior secured asset based revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, the other agents party thereto and the lenders party thereto, or the ABL Facility, under which our Company and the Canadian Borrowers may borrow, subject to availability under each of a United States and Canadian borrowing base, up to $250,000 (of which up to $30,000 may be borrowed by the Canadian Borrowers) which amount, subject to certain conditions, may be increased to allow borrowings of up to $300,000. The unused portion of the ABL Facility (subject to borrowing base availability) is to be drawn from time to time for general corporate purposes (including permitted acquisitions) and working capital needs. At March 31, 2012, we had $66,000 outstanding under the ABL facility and $177,956 of additional availability.

Certain of our Company’s wholly-owned domestic subsidiaries, and all subsidiaries that guarantee the Notes (currently only our wholly-owned domestic subsidiaries) guarantee all of our obligations (both United States and Canadian) under the ABL Facility. In addition, our wholly-owned Canadian subsidiaries guarantee the obligations of the Canadian borrowings under the Canadian sub-facility of the ABL Facility. Furthermore, we and our wholly-owned domestic subsidiaries, subject to certain exceptions, grant security with respect to substantially all of our personal property as collateral for our obligations (and related guarantees) under the ABL Facility, including a first-priority security interest in cash and cash equivalents, lockbox and deposit accounts, accounts receivable, inventory, other personal property relating to such inventory and accounts receivable and all proceeds therefrom and a second-priority security interest in substantially all of our equipment and all other assets that secure the Notes on a first-priority basis. The obligations of our Canadian subsidiaries that are borrowers under the Canadian sub-facility of the ABL Facility are secured, subject to certain exceptions and permitted liens, on a first-priority lien basis, by substantially all of the assets of our wholly-owned Canadian subsidiaries and by our and our domestic subsidiaries’ assets on the same basis as borrowings under the ABL Facility. At March 31, 2012, we had a zero balance outstanding under the Canadian sub-facility of the ABL Facility.

On May 13, 2011, our Company entered into an Amendment and Restatement Agreement, or the Amendment, among our Company, the Canadian Borrowers, the subsidiary guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as collateral agent and administrative agent and the other agents party thereto, which amended the ABL Facility. The Amendment, among other things, reduced the interest rate applicable to loans made under the ABL Facility and amended certain covenants thereunder applicable to our Company and our subsidiaries. In addition, the Amendment extended the maturity date of loans under the ABL Facility from December 3, 2013 to May 13, 2016; provided that if the Credit and Guaranty Agreement, dated as of December 3, 2009 among EB Sports Corp., as borrower, RBG Holdings Corp., as guarantor, Wachovia Bank, N.A., as administrative agent and collateral agent and the lenders from time to time party thereto has not been repaid or refinanced prior to July 1, 2015 with a new credit agreement that meets certain criteria set forth in the ABL Facility, the loans under the ABL Facility will mature on July 1, 2015.

The interest rates per annum applicable to the loans under the ABL Facility, other than swingline loans and protective advances, equal an applicable margin percentage plus, at our option, (1) in the case of U.S. dollar denominated loans, a U.S. base rate or LIBOR, and (2) in the case of Canadian dollar denominated loans, a Canadian base rate or CDOR. Swingline loans and protective advances bear interest at the U.S. base rate for U.S. dollar denominated loans and the Canadian base rate for Canadian dollar denominated loans, in each case, plus an applicable margin (and plus an additional 2.0% in the case of protective advances). The applicable margin percentage for the ABL Facility, as amended by the Amendment, ranges between 1.5% and 2.5% for LIBOR or CDOR and 0.5% and 1.5% for the base rate, based upon our total leverage ratio as calculated under the ABL Facility. In addition to paying interest on outstanding principal under the ABL Facility, we are required to pay a commitment fee, in relation to the unutilized commitments, which ranges from 0.375% to 0.5% based upon our utilization of the ABL Facility (increasing when utilization is lower and decreasing when utilization is higher). We are also required to pay customary letter of credit fees.

 

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Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

The ABL Facility requires that if excess gross availability is less than the greater of a specified percentage of the gross borrowing base and a specified dollar amount, we must comply with a minimum fixed charge coverage ratio test. In addition, the ABL Facility includes negative covenants that, subject to significant exceptions, limit our ability and the ability of our subsidiaries, to, among other things (1) incur additional debt, (2) create liens, (3) transfer all or substantially all of our assets or enter into merger or consolidation transactions, (4) change our business, (5) make investments, loans, advances, guarantees and acquisitions, (6) transfer or sell assets, (7) enter into sale and leaseback transactions, (8) enter into swap agreements, (9) make restricted payments, (10) enter into transactions with affiliates and (11) enter into agreements that restrict dividends from subsidiaries.

Holdco Facility Obligations

On December 3, 2009, EB Sports refinanced its previous senior unsecured credit agreement with Wachovia Investment Holdings, LLC and the lenders named therein pursuant to which EB Sports had borrowed $175,000, or the Previous Holdco Facility, through (1) a new senior secured credit agreement, or the New Holdco Facility, with Wachovia Investment Holdings, LLC and the existing lenders under the Previous Holdco Facility, (2) an equity investment from Fenway Easton-Bell Sports Holding, LLC and Fenway Partners Capital Fund III, L.P., or together the Fenway Investors, each an affiliate of Fenway Partners, LLC and certain existing investors of Parent and EB Sports and their respective affiliates of $1,725 in cash in exchange for Class C Common Units of our Parent (of which, $1,466 was contributed by Parent to EB Sports) and (3) an equity investment from the Fenway Investors and certain existing investors of EB Sports and their respective affiliates of $113,275 in cash in exchange for new non-voting (other than rights to designate one director of EB Sports), non-redeemable Series A Preferred Stock of EB Sports, or the Series A Preferred Stock. The Series A Preferred Stock accrues dividends quarterly at a rate of 17.5% per annum. In addition to the $13,200 invested by existing investors of Parent, their respective affiliates and Paul Harrington in August 2009, the issuance of new shares of Series A Preferred Stock on December 3, 2009 resulted in an aggregate of $126,475 invested in Series A Preferred Stock immediately after giving effect to the financing.

Under the terms of the refinancing transaction, the net proceeds from the equity issuance were used to repurchase loans under the Previous Holdco Facility at a price of 90% of the principal amount thereof, and the consenting lenders whose loans were repurchased exchanged their remaining principal and accrued interest into a new facility with a maturity date of December 31, 2015. The Previous Holdco Facility has been terminated. At closing, EB Sports had borrowed $108,268 under the New Holdco Facility. Borrowings under the New Holdco Facility through May 1, 2012 will bear interest at 11.5% per annum and EB Sports may elect to pay interest in cash or defer interest by adding it to the aggregate amount of principal due under the loan. Interest after May 1, 2012 will be paid in cash; provided, that prior to maturity if EB Sports does not have sufficient cash on hand and Easton-Bell is either prohibited from distributing sufficient cash to EB Sports to make such interest payments or does not have sufficient liquidity (in the reasonable determination of Easton-Bell management) to permit Easton-Bell to distribute cash in an amount sufficient to allow such payment, EB Sports will pay cash to the extent it is able to do so using cash on hand after giving effect to permitted and available distributions, and the remainder of the interest due shall be added to the principal amount of the loan at a rate of 13.5% per annum for the then ending interest period.

Borrowings under the New Holdco Facility are not guaranteed by us or any of our subsidiaries and are senior unsecured obligations of EB Sports. However, given that EB Sports controls our Company’s direct parent, EB Sports has the ability, subject to the terms of the ABL Facility, the Notes and any other agreements which limit our ability to declare and pay dividends, to obtain money from us and our subsidiaries in order to fund its obligations under such loan.

At March 31, 2012, the amount of loans issued under the New Holdco Facility was $140,973 including accrued interest.

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

Other

Our Company has arrangements with various banks to issue standby letters of credit or similar instruments, which guarantee our obligations for the purchase of certain inventories and for potential claims exposure for insurance coverage. At March 31, 2012 and December 31, 2011, outstanding letters of credit issued under the revolving credit facilities both totaled $3,256. The amount of unused lines of credit at March 31, 2012 and December 31, 2011, were $177,956 and $190,923, respectively.

Cash payments for interest were $1,176 and $2,162 for the fiscal quarters ended March 31, 2012 and April 2, 2011, respectively. We amortized $664 and $751 of debt issuance costs during the first fiscal quarter of 2012 and 2011, respectively.

4. Accrued Expenses

Accrued expenses consist of the following:

 

     March 31, 2012      December 31, 2011  

Salaries, wages, commissions and bonuses

   $ 12,426       $ 17,032   

Advertising

     5,777         5,919   

Rebates

     5,498         6,111   

Warranty

     2,396         2,240   

Product liability - current portion

     5,700         5,521   

Royalties

     250         1,703   

Interest

     11,743         3,092   

Income taxes

     2,173         1,504   

Other

     19,105         20,169   
  

 

 

    

 

 

 

Total accrued expenses

   $ 65,068       $ 63,291   
  

 

 

    

 

 

 

5. Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and factory overhead.

Inventories consisted of the following:

 

     March 31, 2012      December 31, 2011  

Raw materials

   $ 23,502       $ 20,990   

Work-in-process

     3,524         2,647   

Finished goods

     117,919         122,178   
  

 

 

    

 

 

 

Inventories, net

   $ 144,945       $ 145,815   
  

 

 

    

 

 

 

6. Recent Accounting Pronouncements

In June 2011, the FASB, issued a new standard which revises the manner in which entities present comprehensive income in their financial statements. The new standard removes the presentation options and requires entities to report components of other comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The new standard does not change the items that must be reported in other comprehensive income and the standard is effective for annual and interim periods beginning after December 15, 2011. The adoption of the new standard did not have a material impact on our Company’s consolidated financial statements as we currently show comprehensive income as a continuous statement with our Consolidated Statements of Comprehensive Income.

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

In September 2011, the FASB issued an amendment to simplify how an entity is required to test goodwill for impairment. Under this amendment, an entity has the option to first assess qualitative factors to determine whether it is more likely than not, that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not, that the fair value of a reporting unit is less than its carrying amount, then performing the two-step quantitative impairment test is necessary; otherwise no further testing is necessary. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this amendment did not have a material impact on our Company’s consolidated financial statements.

7. Segment Reporting

Our Company has two reportable segments: Team Sports and Action Sports. Our Team Sports segment primarily consists of football, baseball, softball, ice hockey, lacrosse and other team sports products and reconditioning services related to certain of these products. Our Action Sports segment consists primarily of helmets, equipment, components and accessories for cycling, snowsports and powersports and fitness related products. Our Company evaluates segment performance primarily based on income from operations excluding equity compensation expenses, management expenses, restructuring and other infrequent expenses, amortization of intangibles and corporate expenses. Our selling, general and administrative expenses, excluding corporate expenses, are charged to each segment based on where the expenses are incurred. Segment income from operations as presented by our Company may not be comparable to similarly titled measures used by other companies. As a result, the components of income from operations for one segment may not be comparable to another segment.

Segment results for the fiscal quarters ended March 31, 2012 and April 2, 2011, respectively, are as follows:

 

Fiscal Quarter Ended

   Team
Sports
     Action
Sports
     Consolidated  

March 31, 2012

        

Net sales

   $ 124,412       $ 91,869       $ 216,281   

Income from operations

     11,896         14,690         26,586   

Depreciation

     3,217         2,097         5,314   

Capital expenditures

     3,020         2,573         5,593   

April 2, 2011

        

Net sales

   $ 116,268       $ 87,130       $ 203,398   

Income from operations

     9,566         11,784         21,350   

Depreciation

     2,676         1,780         4,456   

Capital expenditures

     2,951         1,965         4,916   

 

     Team
Sports
     Action
Sports
     Consolidated  

Assets

        

As of March 31, 2012

   $ 646,052       $ 375,821       $ 1,021,873   

As of December 31, 2011

     640,109         367,502         1,007,611   

A reconciliation from the segment information to the Consolidated Statements of Comprehensive Income is set forth below:

 

     Fiscal Quarter Ended  
     March 31,
2012
    April 2,
2011
 

Segment income from operations

   $ 26,586      $ 21,350   

Equity compensation expense

     (604     (657

Corporate expenses

     (9,947     (7,103

Amortization of intangibles

     (2,597     (2,553
  

 

 

   

 

 

 

Consolidated income from operations

   $ 13,438      $ 11,037   
  

 

 

   

 

 

 

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

8. Product Liability, Litigation and Other Contingencies

Product Liability

Our Company is subject to various product liability claims and/or suits brought against us for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by our Company and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot be determined. Our management obtains an actuarial analysis and has established an accrual for probable losses based on this analysis, which considers, among other factors, our previous claims history and available information on alleged claims. However, due to the uncertainty involved with estimates, actual results could vary substantially from those estimates.

In the opinion of management, amounts accrued for exposures relating to product liability claims and other legal proceedings are adequate and, accordingly, the ultimate resolution of these matters is not expected to have a material adverse effect on our Company’s consolidated financial statements. As of March 31, 2012, our Company had no known probable but inestimable exposures relating to product liability or other legal proceedings that are expected to have a material adverse effect on our Company.

There can be no assurance, however, that unanticipated events will not require our Company to increase the amount it has accrued for any matter or accrue for a matter that has not been previously accrued because it was not considered probable.

Certain of our entities are named in fourteen suits by groups of retired NFL players. We believe these complaints are without merit and we are vigorously defending against them. These cases are at preliminary stages, and we are unable to predict outcomes, or reasonably estimate a range of possible losses, if any. In the event that we are determined to have any liability in these matters, we believe that the insurance policies that we had in place during the time periods covered by the allegations will adequately cover any liability. The claims are complex and span several years. During the time period of the factual allegations, we had product liability insurance from numerous carriers. Through insurance coverage counsel, we are aggressively identifying policies, putting carriers on notice and pursuing claims coverage with many insurance carriers. We expect that we will be afforded adequate coverage for defense costs and liability, if any.

Our Company maintains product liability insurance coverage under various policies. These policies provide coverage against claims resulting from alleged injuries sustained during the respective policy periods, subject to policy terms and conditions. The primary portion of our Company’s product liability coverage is written under a policy expiring in January 2013 with a $2,000 limit per occurrence excess of a $1,000, $50 and $500 self-insured retention for helmets, soft goods and all other products, respectively. Our Company’s first layer excess policy is written under a liability policy with a limit of $25,000 excess of $3,000 expiring in January 2013. We also carry a second layer excess liability policy providing an additional limit of $15,000 excess of $28,000 expiring January 2013, and a third layer excess liability policy providing an additional limit of $10,000 excess of $43,000 expiring January 2013, for a total limit of $53,000.

Litigation and Other Contingencies

Our Company is also involved in various non-product liability claims and actions, including employment related matters as well as claims relating to potential infringement of intellectual property rights of others. In 2002, one of our competitors sued us in Canadian Federal Court alleging infringement of a hockey skate patent. In 2010, we received an unfavorable judgment on the issue of liability in this suit. Liability and damages are bifurcated proceedings in Canada, and we are now in the damages phase of this proceeding. We do not believe that any resulting infringement damages award will have a material adverse effect on our financial results. We anticipate this matter will be resolved within approximately two years.

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

9. Income Taxes

Our Company recorded income tax expense of $1,465 and $106 for the first fiscal quarters ended March 31, 2012, and April 2, 2011, respectively. Our Company’s effective tax rate was 52.0% for the first fiscal quarter of 2012, as compared to 240.9% for the first fiscal quarter of 2011. For the fiscal quarters ended March 31, 2012 and April 2, 2011, the difference between the effective rate and the statutory rate is primarily attributable to the permanent difference for equity compensation expense, state income taxes, meals and entertainment expenses and unrecognized tax benefits.

10. Derivative Instruments and Hedging Activity

Our Company accounts for all derivatives on the balance sheet as an asset or liability measured at fair value and changes in fair values are recognized in earnings unless specific hedge accounting criteria are met for cash flow or net investment hedges. If such hedge accounting criteria are met, the change is deferred in stockholder’s equity as a component of accumulated other comprehensive income. The deferred items are recognized in the period the derivative contract is settled. As of March 31, 2012, we had not designated any of our derivative instruments as hedges, and therefore, have recorded the changes in fair value in the Consolidated Statements of Comprehensive Income.

Our Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, our Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considers counterparty credit risk in its assessment of fair value.

In 2008, our Company entered an interest rate swap agreement with Wachovia Bank, N.A. The interest rate swap had an initial fixed USD LIBOR of 2.921%, and was subsequently revised to a fixed USD LIBOR of 2.811% for the period commencing October 15, 2008, through April 14, 2010 and thereafter a fixed USD LIBOR of 2.921% until the expiration of the agreement on April 15, 2011. The swap agreement was not designated as a hedge, and therefore, was recorded at fair value at each balance sheet date, with the resulting changes in fair value charged or credited to interest expense in the accompanying Consolidated Statements of Comprehensive Income each period.

The swap fair value was determined through the use of a model that considers various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 from a third party bank. As the interest rate swap expired on April 15, 2011, the fair value of the swap was zero at March 31, 2012 and a liability of $48 at April 2, 2011, and was recorded in the current portion of other liabilities in the accompanying Consolidated Balance Sheets with the corresponding charge to interest expense. During the first fiscal quarter of 2011, interest expense reflected $380 related to the swap and a credit of $405 related to the change in the fair value of the swap.

Our Company has foreign currency exchange forward contracts in place to reduce our risk related to inventory purchases and foreign currency based accounts receivable. These contracts are not designated as hedges, and therefore, under current accounting standards are recorded at fair value at each balance sheet date, with the resulting change charged or credited to selling, general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income.

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

No foreign currency exchange forward contracts were in place as of December 31, 2011. The foreign currency exchange forward contracts in aggregated notional amounts in place to exchange United States Dollars at March 31, 2012 were as follows:

 

     March 31, 2012      December 31, 2011  
     U.S. Dollars      Foreign
Currency
     U.S. Dollars      Foreign
Currency
 

Foreign Currency Exchange Forward Contracts:

           

U.S. Dollars / Mexican Pesos

   $ 3,840       MXN$  49,346       $ —         $ —     

As of March 31, 2012, the fair value of the foreign currency exchange forward contracts, using Level 2 inputs from a third party bank, represented a liability of approximately $73. Changes in the fair value of the foreign currency exchange contracts are reflected in selling, general and administrative expenses each period.

The assets and liabilities measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820 at March 31, 2012, were as follows:

 

     Fair Value Measurements at Reporting
Date Using
 
     Quoted
Prices in
Active
Markets
for

Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

        

None

   $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Foreign currency exchange forward contracts

   $ —         $ 73       $ —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 73       $ —     
  

 

 

    

 

 

    

 

 

 

Fair Value of Financial Instruments

The carrying amounts reported in our Company’s Consolidated Balance Sheets for “Cash and cash equivalents,” “Accounts receivable, net” and “Accounts payable” approximates fair value because of the immediate or short-term maturity of these financial instruments. The fair value amount of long-term debt under our Company’s 9.75% Notes are based on quoted market prices for the same or similar issues on borrowing rates available to our Company for loans with similar terms and average maturities.

The estimated fair values of the Company’s long-term debt including accrued interest were as follows:

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial liability:

           

9.75% Senior Secured Notes

   $ 358,369       $ 398,752       $ 349,609       $ 384,439   

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

11. Equity-Based Employee Compensation

On March 16, 2006, our Parent adopted the 2006 Equity Incentive Plan, or the Incentive Plan. Our Parent amended the Incentive Plan in December 2009 to allow for certain new grants. The Incentive Plan provides for the issuance of Class B Common Units of our Parent, the Units, which are intended to be profits interests. Such Units qualify as equity instruments of our Parent. The holders of these Units are entitled to share in the distribution of profits above a certain threshold, or the distribution threshold. For any particular such Unit, the distribution threshold is the fair value of a Class A Common Unit of our Parent on the date of grant. Our Parent has made grants of these Units pursuant to the Incentive Plan since its adoption. Generally, so long as the Unit holder is employed or remains a member of the board of managers of our Parent, these Units vest over time (generally a four-year period) or upon achievement of certain company performance goals. Subject to certain conditions, Units are also eligible to vest in the event of an initial public offering or change of control. In December 2009, our Parent issued new Class B Common Units and amended certain existing Class B Common Units, which, in each case, are eligible, subject to certain conditions, for additional distributions from our Parent in the event that certain company performance goals are met through 2012. In addition, in December 2009, our Parent agreed to amend and restate certain existing Class B Common Units to revise the distribution threshold of such Units to an amount commensurate with the then fair market value of a Class A Common Unit. As of March 31, 2012, there were 110,152,750.854 Units authorized for grant pursuant to the Incentive Plan.

Our Company uses the Black-Scholes Option Pricing Model to determine the fair value of the Units granted. This model uses the simplified method and such factors as the market price of the underlying Units at date of issuance. No grants were issued during the first fiscal quarter of 2012.

Our Company records compensation expense using the fair value of the Units granted with time vesting over the vesting service period on a straight-line basis. Compensation expense for the performance based vesting Units is recognized when it becomes probable that the performance conditions will be met. As of March 31, 2012, we have not recognized any compensation expense for the performance based vesting Units as it is not probable that the performance conditions will be met.

Our Company recognized compensation expense, included in selling, general and administrative expenses for its Units during the first fiscal quarters of 2012 and 2011 as follows:

 

     Fiscal Quarter Ended  
     March 31,
2012
     April 2,
2011
 

Equity compensation expense

   $ 604       $ 657   
  

 

 

    

 

 

 

As of March 31, 2012, there was $16,840 of unrecognized compensation costs, net of actual and estimated forfeitures related to the Units. This was comprised of $2,514 related to time based vesting Units and $14,326 related to the performance based vesting Units. The unrecognized cost related to the time based vesting Units is expected to be amortized over a weighted average service period of approximately 1.5 years. The unrecognized cost related to the performance based vesting Units will be recognized when it becomes probable that the performance conditions will be met.

Our Company’s Unit activity under the Incentive Plan for the first fiscal quarter of 2012 is as follows:

 

     Number of
Units
    Weighted Average
Grant Date
Exercise Price
 

Outstanding at December 31, 2011

     105,303,237      $ 1.42   

Forfeited

     (537,943   $ 2.14   
  

 

 

   

Outstanding at March 31, 2012

     104,765,294      $ 1.42   
  

 

 

   

Vested Units at March 31, 2012

     49,401,613      $ 1.42   
  

 

 

   

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

12. Warranty Obligations

Our Company records a product warranty obligation at the time of sale based on our historical experience. We estimate our warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, revisions to the estimated warranty liability would be required.

The following is a reconciliation of the changes in our Company’s product warranty liability:

 

     Fiscal Quarter Ended  
     March 31,
2012
    April 2,
2011
 

Beginning of period

   $ 2,240      $ 2,434   

Warranty costs incurred during the period

     (2,284     (2,034

Warranty expense recorded during the period

     2,440        1,780   
  

 

 

   

 

 

 

End of period

   $ 2,396      $ 2,180   
  

 

 

   

 

 

 

13. Related Party Transactions

Our Company, certain of our subsidiaries, RBG and our Parent have management agreements with Fenway Partners, LLC and Fenway Partners Resources, Inc., each an affiliate of Fenway Partners Capital Fund II, L.P and Fenway Partners Capital Fund III, L.P., which are affiliates of our Parent, pursuant to which Fenway Partners, LLC and Fenway Partners Resources, Inc. agree to provide management and other advisory services to our Company, certain of our subsidiaries, RBG and our Parent. These management agreements provided for an annual management fee and a fee in connection with certain significant transactions. In connection with the acquisition of Easton in 2006, the management agreements were amended to remove any obligation to pay an annual management fee, except for advisory services in connection with certain types of transactions where a Fenway entity will be paid a fee equal to the greater of $1.0 million or 1.5% of the gross value of such transaction, plus reimbursement of fees and expenses incurred in connection with such transactions. No annual management fees have been paid under the management agreements since 2006.

In connection with the acquisition of Easton in 2006, Easton and various affiliates of James L. Easton (including Jas. D. Easton, Inc.) entered into various technology license and trademark license agreements with respect to certain intellectual property owned or licensed by Easton, including the Easton brand name. Pursuant to these agreements, Easton has granted each of Jas D. Easton, Inc., James L. Easton Foundation, Easton Development, Inc. and Easton Sports Development Foundation a name license for use of the Easton name solely as part of their respective company names. In addition, Easton has granted each of Easton Technical Products, Inc. and Hoyt Archery, Inc. a license to certain trademarks, including the Easton brand solely in connection with specific products or services, none of which are currently competitive with our Company’s products or services. Easton has also granted each of these entities a license to certain technology solely in connection with specific products and fields. Easton has also entered into a patent license agreement with Easton Technical Products, Inc., which grants it a license to exploit the inventions disclosed in the patent solely within specific fields. Lastly, Easton entered into a trademark license agreement with Easton Technical Products, Inc., which grants Easton a license to use certain trademarks solely in connection with specific products or services.

Our Company has entered into a right of first offer agreement with Jas. D. Easton, Inc. and Easton Technical Products, Inc. pursuant to which our Company is to receive the opportunity to purchase Easton Technical Products, Inc. prior to any third party buyer. The term of the right of first offer agreement extends until the earliest of (1) March 16, 2016, (2) the date Easton Technical Products, Inc. no longer uses the name “Easton,” (3) the effectiveness of any initial public offering by Easton Technical Products, Inc. or (4) the consummation of any sale of such company or a controlling interest therein effectuated in accordance with the terms of the right of first offer agreement.

Affiliates of Jas. D. Easton, Inc. and James L. Easton own certain of the properties currently leased by Easton. Rent payments pursuant to such affiliate leases were $297, for both the first fiscal quarters of 2012 and 2011.

In connection with the Refinancing on December 3, 2009, our Company distributed $2,594 to RBG, which has been recorded as a distribution to RBG in Stockholder’s Equity.

 

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Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

On October 1, 2004, Bell entered into a consulting agreement with Terry Lee, a member of the board of managers of our Parent and the board of directors of our Company. Pursuant to the terms of the consulting agreement, Mr. Lee agreed to provide us and our affiliates with certain consulting services relating to Bell. In exchange for his services, Mr. Lee is entitled to annual compensation of $100. The term of Mr. Lee’s consulting agreement is for one year and will automatically extend for additional one-year terms until our Company elects not to extend the agreement.

On November 28, 2011, our Company entered into a consulting agreement with Dimension Six Innovation, LLC or Dimension, an entity of which Michael Wilskey, a member of the board of managers of our Parent and the board of directors of our Company, is an owner. Pursuant to the terms of the consulting agreement, Dimension agreed to provide us with strategic and product innovation consulting services. In exchange for services, Dimension is entitled to a compensation of $265 for 2012 and $60 for the first three months of 2013, with the agreement expiring on March 31, 2013.

14. Supplemental Guarantor Condensed Financial Information

In December 2009, in connection with the Refinancing, we issued $350,000 of 9.750% Senior Secured Notes due 2016, or the Notes. The indenture governing the Notes contains certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, grant liens, sell assets and engage in certain other activities. The Notes are guaranteed by all of our domestic subsidiaries, or Guarantors. Each subsidiary guarantor is wholly owned and the guarantees are full and unconditional and joint and several. All other subsidiaries of our Company, or Non-Guarantors, do not guarantee the Notes.

The following condensed consolidating financial statements present the results of operations, financial position and cash flows of (1) Issuer, (2) Guarantors, (3) Non-Guarantors and (4) eliminations to arrive at the information for our Company on a consolidated basis for the first fiscal quarter of 2012 and the respective comparable periods for fiscal 2011. Separate financial statements and other disclosures concerning the Guarantors are not presented because our management does not believe such information is material to investors. Therefore, each of the Guarantors is combined in the presentation below.

 

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Table of Contents

EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

Condensed Consolidating Balance Sheet

March 31, 2012

 

     Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 1,956       $ 7,559       $ 21,038       $ —        $ 30,553   

Accounts receivable, net

     —           240,679         21,728         —          262,407   

Inventories, net

     —           126,775         18,170         —          144,945   

Prepaid expenses

     2,084         4,215         1,002         —          7,301   

Deferred taxes

     —           17,779         —           —          17,779   

Other current assets

     —           8,578         2,025         —          10,603   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     4,040         405,585         63,963         —          473,588   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property, plant and equipment, net

     24,423         29,690         1,133         —          55,246   

Deferred financing fees, net

     11,958         —           —           —          11,958   

Investments and intercompany receivables

     407,485         47,491         61,832         (516,808     —     

Intangible assets, net

     —           265,771         5,424         —          271,195   

Goodwill

     16,195         187,311         5,191         —          208,697   

Other assets

     —           1,052         137         —          1,189   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 464,101       $ 936,900       $ 137,680       $ (516,808   $ 1,021,873   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY              

Current liabilities:

             

Revolving credit facility

   $ 66,000       $ —         $ —         $ —        $ 66,000   

Current portion of capital lease obligations

     —           26         —           —          26   

Accounts payable

     —           66,679         4,541         —          71,220   

Accrued expenses

     17,132         44,222         3,714         —          65,068   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     83,132         110,927         8,255         —          202,314   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term debt, less current portion

     346,804         —           —           —          346,804   

Capital lease obligations, less current portion

     —           45         —           —          45   

Deferred taxes

     —           59,571         —           —          59,571   

Other noncurrent liabilities

     —           14,332         7,433         —          21,765   

Long-term intercompany payables

     —           428,884         48,752         (477,636     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     429,936         613,759         64,440         (477,636     630,499   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholder’s equity

     34,165         323,141         73,240         (39,172     391,374   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 464,101       $ 936,900       $ 137,680       $ (516,808   $ 1,021,873   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

Condensed Consolidating Balance Sheet

December 31, 2011

 

     Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  
ASSETS              

Current assets:

             

Cash and cash equivalents

   $ 2,697       $ 5,813       $ 20,995       $ —        $ 29,505   

Accounts receivable, net

     —           227,920         22,263         —          250,183   

Inventories, net

     —           130,161         15,654         —          145,815   

Prepaid expenses

     2,563         3,546         833         —          6,942   

Deferred taxes

     —           17,798         —           —          17,798   

Other current assets

     —           7,886         1,759         —          9,645   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     5,260         393,124         61,504         —          459,888   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Property, plant and equipment, net

     24,579         28,804         946         —          54,329   

Deferred financing fees, net

     12,622         —           —           —          12,622   

Investments and intercompany receivables

     374,661         81,052         59,014         (514,727     —     

Intangible assets, net

     —           265,049         5,409         —          270,458   

Goodwill

     16,195         187,311         5,191         —          208,697   

Other assets

     425         1,066         126         —          1,617   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 433,742       $ 956,406       $ 132,190       $ (514,727   $ 1,007,611   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDER’S EQUITY              

Current liabilities:

             

Revolving credit facility

   $ 42,000       $ —         $ —         $ —        $ 42,000   

Current portion of capital lease obligations

     —           26         —           —          26   

Accounts payable

     —           86,421         2,268         —          88,689   

Accrued expenses

     11,511         46,999         4,781         —          63,291   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     53,511         133,446         7,049         —          194,006   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term debt, less current portion

     346,670         —           —           —          346,670   

Capital lease obligations, less current portion

     —           52         —           —          52   

Deferred taxes

     —           58,928         —           —          58,928   

Other noncurrent liabilities

     —           10,897         7,433         —          18,330   

Long-term intercompany payables

     —           432,339         45,297         (477,636     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     400,181         635,662         59,779         (477,636     617,986   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholder’s equity

     33,561         320,744         72,411         (37,091     389,625   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 433,742       $ 956,406       $ 132,190       $ (514,727   $ 1,007,611   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

Condensed Consolidating Statement of Comprehensive Income

Fiscal Quarter Ended March 31, 2012

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 212,171      $ 12,308      $ (8,198   $ 216,281   

Cost of sales

     —          140,905        10,399        (8,198     143,106   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          71,266        1,909        —          73,175   

Selling, general and administrative expenses

     11,717        42,920        2,503        —          57,140   

Amortization of intangibles

     —          2,597        —          —          2,597   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (11,717     25,749        (594     —          13,438   

Interest expense, net

     10,164        448        11        —          10,623   

Share of net income (loss) of subsidiaries under equity method

     23,231        (622     —          (22,609     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1,350        24,679        (605     (22,609     2,815   

Income tax expense

     —          1,448        17        —          1,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1,350        23,231        (622     (22,609     1,350   

Other comprehensive income:

          

Foreign currency translation adjustment

     —          —          (205     —          (205
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,350      $ 23,231      $ (827   $ (22,609   $ 1,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income

Fiscal Quarter Ended April 2, 2011

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 198,497      $ 16,257      $ (11,356   $ 203,398   

Cost of sales

     —          136,628        14,169        (11,356     139,441   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          61,869        2,088        —          63,957   

Selling, general and administrative expenses

     9,302        38,588        2,477        —          50,367   

Amortization of intangibles

     —          2,553        —          —          2,553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (9,302     20,728        (389     —          11,037   

Interest expense, net

     10,771        222        —          —          10,993   

Share of net income (loss) of subsidiaries under equity method

     20,011        (428     —          (19,583     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (62     20,078        (389     (19,583     44   

Income tax expense

     —          67        39        —          106   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (62     20,011        (428     (19,583     (62

Other comprehensive income:

          

Foreign currency translation adjustment

     —          —          954        —          954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ (62   $ 20,011      $ 526      $ (19,583   $ 892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

Condensed Consolidating Statement of Cash Flows

Fiscal Quarter Ended March 31, 2012

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 1,350      $ 23,231      $ (622   $ (22,609   $ 1,350   

Non-cash adjustments

     (30,187     15,166        2,387        22,609        9,975   

Changes in operating assets and liabilities

     6,525        (32,699     (1,168     —          (27,342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (22,312     5,698        597        —          (16,017

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     (2,429     (2,795     (369     —          (5,593

Purchase of business, net of cash acquired

     —          (1,150     —          —          (1,150
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (2,429     (3,945     (369     —          (6,743

Cash flows from financing activities:

          

Payments on capital lease obligations

     —          (7     —          —          (7

Proceeds from revolving credit facility, net

     24,000        —          —          —          24,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     24,000        (7     —          —          23,993   

Effect of exchange rate changes on cash and cash equivalents

     —          —          (185     —          (185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (741     1,746        43        —          1,048   

Cash and cash equivalents, beginning of period

     2,697        5,813        20,995        —          29,505   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,956      $ 7,559      $ 21,038      $ —        $ 30,553   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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EASTON-BELL SPORTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited and amounts in thousands, except as specified)

 

Condensed Consolidating Statement of Cash Flows

Fiscal Quarter Ended April 2, 2011

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net (loss) income

   $ (62   $ 20,011      $ (428   $ (19,583   $ (62

Non-cash adjustments

     (25,119     10,690        2,533        19,583        7,687   

Changes in operating assets and liabilities

     4,706        (30,510     1,015        —          (24,789
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (20,475     191        3,120        —          (17,164

Cash flows from investing activities:

          

Purchases of property, plant and equipment

     (2,929     (1,727     (260     —          (4,916
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (2,929     (1,727     (260     —          (4,916

Cash flows from financing activities:

          

Payments on capital lease obligations

     —          (6     —          —          (6

Proceeds from revolving credit facility, net

     23,500        —          —          —          23,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     23,500        (6     —          —          23,494   

Effect of exchange rate changes on cash and cash equivalents

     —          —          (173     —          (173
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     96        (1,542     2,687        —          1,241   

Cash and cash equivalents, beginning of period

     1,981        7,049        14,994        —          24,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 2,077      $ 5,507      $ 17,681      $ —        $ 25,265   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The following discussion should be read in conjunction with our consolidated financial statements and the related notes, included elsewhere in this Form 10-Q.

Unless otherwise indicated, all references in this Form 10-Q to Easton-Bell, we, us, our, and the Company refer to Easton-Bell Sports, Inc. and its consolidated subsidiaries. References to Easton, Bell and Riddell refer to Easton Sports, Inc. and its consolidated subsidiaries, Bell Sports Corp. and its consolidated subsidiaries and Riddell Sports Group, Inc. and its consolidated subsidiaries, respectively. Easton-Bell Sports, Inc. is a wholly-owned subsidiary of RBG Holdings Corp., or RBG, which, in turn, is a wholly-owned subsidiary of EB Sports Corp., or EB Sports, of which 100% of the issued and outstanding voting common stock is owned by Easton-Bell Sports, LLC, the ultimate parent company, or our Parent.

FORWARD-LOOKING STATEMENTS AND INFORMATION

This quarterly report includes forward-looking statements. All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. The factors mentioned in our discussion in this quarterly report, as well as the risks outlined under “Risk Factors” in our 2011 Annual Report on Form 10-K, will be important in determining future results.

These forward-looking statements are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that the events, results or trends identified in these forward-looking statements will occur or be achieved. Investors should not place undue reliance on any of our forward-looking statements because they are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Furthermore, any forward-looking statement speaks only as of the date on which it is made and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

OVERVIEW

We are a leading designer, developer and marketer of branded sports equipment, protective products and related accessories. We offer products that are used in baseball, softball, ice hockey, football, lacrosse and other team sports, and in various action sports, including cycling, snowsports, powersports and skateboarding. Sports enthusiasts at all levels, from recreational participants to professional athletes, choose our products for their innovative designs and advanced materials, which provide a performance or protective advantage. Throughout our history, our focus on research and development has enabled us to introduce attractive and innovative products, many of which have set new standards for performance in their respective sports. As a result, we are able to consistently enter new product categories and expand and improve our existing product lines.

We currently sell a broad range of products primarily under four well-known brands—Easton® (baseball, softball, ice hockey and lacrosse equipment, apparel and cycling components), Bell® (cycling, action sports and powersports helmets and accessories), Giro® (cycling and snowsports helmets and accessories) and Riddell® (football equipment and reconditioning services). Together, these brands represent the vast majority of our revenues. We believe that our brands are among the most recognized in the sporting goods industry as demonstrated by our leading market share in many of our core categories.

 

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Table of Contents

We sell our products through diverse channels of distribution including: (1) specialty retailers that cater to sports enthusiasts who typically seek premium products at the highest performance levels, (2) national and regional full-line sporting goods retailers and distributors, (3) institutional buyers such as educational institutions and athletic leagues and (4) mass retailers that offer a focused selection of products at entry-level and mid-level price points. As a function of our flexible, low fixed-cost production model, we are able to leverage the expertise of our vendor partners to reduce the overhead and capital intensity generally associated with manufacturing.

We have two reportable segments: Team Sports and Action Sports. Our Team Sports segment primarily consists of football, baseball, softball, ice hockey, lacrosse and other team sports products and reconditioning services related to certain of these products. Our Action Sports segment primarily consists of helmets, equipment, components and accessories for cycling, snowsports and powersports and fitness related products.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are net sales growth by segment, gross profit margin and selling, general and administrative expenses.

Net Sales

Net sales reflect our revenues from the sale of our products and services less returns, discounts and allowances. It also includes licensing income that we collect. Substantially all of Easton’s activity and all of Riddell’s activity is reflected in our Team Sports segment, which primarily consists of football, baseball, softball, ice hockey, lacrosse and other team sports products and reconditioning services related to certain of these products. All of Bell’s activity, including the Bell and Giro brands and the Easton branded cycling products, are reflected in our Action Sports segment, which primarily consists of helmets, equipment, components and accessories for cycling, snowsports and powersports and fitness related products.

Cost of Sales

Cost of sales includes the direct cost of purchased merchandise, inbound freight, factory operating costs (including depreciation), warranty costs, distribution and shipping expenses, including outbound freight. Cost of sales generally changes as we incur higher or lower costs from our vendors, experience better or worse productivity in our factories and increase or decrease inventory levels as certain fixed overhead is included in inventory. A shift in the composition of our net sales can also result in higher or lower cost of sales as our gross profit margins differ by product. We review our inventory levels on an ongoing basis to identify slow-moving materials and products and generally reserve for excess and obsolete inventory. If we misjudge the market for our products, we may be faced with significant excess inventory and need to allow for higher charges for excess and obsolete inventory. Such charges have reduced our gross profit in some prior periods and may have a material adverse impact depending on the amount of the charge.

Gross Profit

Gross profit is equal to our net sales minus our cost of sales. Gross profit margin measures gross profit as a percentage of our net sales. We state inventories at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and factory overhead costs. Our gross profit may not be fully comparable to other sporting goods companies, as we include costs related to distribution and freight in cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses include all operating expenses not included in cost of sales, primarily, selling, marketing, administrative payroll, research and development, product liability, insurance and non-manufacturing lease expense, as well as certain depreciation and amortization. Other than selling expenses, these expenses generally do not vary proportionally with net sales. As a result, SG&A expenses as a percentage of net sales are usually higher in the winter season than the summer season due to the seasonality of net sales.

 

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Table of Contents

Factors Affecting our Business

Outlook

Although other factors will likely impact us, including some we do not foresee, we believe our performance for 2012 may be affected by the following:

 

   

Economic Climate. The uncertain worldwide economic environment could cause the reported financial information not to be necessarily indicative of future operating results or of future financial condition. The current economic environment continues to affect our business in a number of direct and indirect ways including: reduced consumer demand for our products; tighter inventory management by retailers; reduced profit margins due to pricing pressures and an unfavorable sales mix due to a higher concentration of sales of mid to lower price point products; changes in currency exchange rates; lack of credit availability, particularly for specialty retailers; inflation; and business disruptions due to difficulties experienced by suppliers and customers.

 

   

Retail Market Conditions. The retail market for sports equipment is extremely competitive, with strong pressure from retailers for lower prices. Also, we have experienced the effect of consumers trading down price points and delaying certain discretionary purchases, which has resulted in retailers reluctance to place orders for inventory in advance of selling seasons. Further, institutional customers have reduced or deferred purchases due to budget constraints. These trends may continue to have a negative impact on our businesses. We continue to address the retail environment through our focus on innovation and product development and emphasis on multiple price points.

 

   

Operations and Manufacturing. We intend to continue to streamline distribution, logistics and manufacturing operations, bring uniform methodologies to inventory management, optimize transportation, improve manufacturing efficiencies and provide a high level of service to our customers. Over a several year period we have transitioned production of certain products from our facilities to third party suppliers in Asia and other cost efficient sources of labor. However, as a result of our transition of the production of products from our own facilities to third party suppliers, we may become more vulnerable to higher levels of product defects, as well as increased sourced product costs, and our ability to mitigate such cost increases may be reduced.

 

   

Interest Expense and Debt Repayment. In connection with the Refinancing, we entered into a $250.0 million ABL Facility. As of March 31, 2012, the outstanding principal balance under the ABL Facility was $66.0 million. In addition, we have $350.0 million of outstanding principal amount of our Notes due in December 2016. Because our existing indebtedness requires that we use a substantial portion of our cash flows to service interest payments, the amount of available cash flows we will have for working capital, capital expenditures, acquisitions and other general corporate purposes could be limited.

 

   

Seasonality. Our business is subject to seasonal fluctuation. Sales of cycling products and accessories occur primarily during the warm weather months. Sales of baseball and softball products occur primarily in the late fall and winter months in preparation for the spring baseball season. Sales of football equipment and reconditioning services are driven primarily by football buying patterns, where orders begin at the end of the school football season (December) and run through to the start of the next season (August). Shipments of football products and performance of reconditioning services reach a low point during the football season. Sales of ice hockey equipment are driven by ice hockey buying patterns with orders shipping in late spring for fall play. Seasonal impacts are increasingly mitigated by the increase in snowsports and powersports sales which, to a certain extent, counter the cycling, baseball, softball and football seasons.

 

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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates estimates, including those related to reserves, intangible assets, income taxes and contingencies. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition. Sales of products are recognized when title passes and risks of ownership have been transferred to our customer, which usually is upon shipment. Title generally passes to the dealer or distributor upon shipment from our facilities and the risk of loss upon damage, theft or destruction of the product in transit is the responsibility of the dealer, distributor or third party carrier. Reconditioning revenue is recognized upon the completion of services. Allowances for sales returns, discounts and allowances, including volume-based customer incentives, are estimated and recorded concurrent with the recognition of the sale. Royalty income, which is not material, is recorded when earned based upon contract terms with licensees which provide for royalties.

Accounts Receivable and Allowances. We review the financial condition and creditworthiness of potential customers prior to contracting for sales and record accounts receivable at their face value upon completion of the sale to our customers. We record an allowance for doubtful accounts based upon management’s estimate of the amount of uncollectible receivables. This estimate is based upon prior experience including historic losses as well as current economic conditions. The estimates can be affected by changes in the retail industry, customer credit issues and customer bankruptcies. Since we cannot predict future changes in the retail industry and financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger allowance might be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which such a determination is made. Uncollectible receivables are written-off once management has determined that further collection efforts will not be successful. We generally do not require collateral from our customers.

Inventories. Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and include material, labor and factory overhead. Provisions for excess and obsolete inventories are based on management’s assessment of slow-moving and obsolete inventory on a product-by-product basis. We record adjustments to our inventory for estimated obsolescence or a decrease in market value equal to the difference between the cost of the inventory and the estimated market value, based on market conditions. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual experience if future economic conditions, levels of consumer demand, customer inventory levels or competitive conditions differ from our expectations.

Long-lived and intangible assets. We follow the current accounting guidance relating to goodwill and trademarks, which have indefinite lives and are not amortized. The carrying values of all long-lived assets, excluding goodwill and indefinite lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable (such as a significant decline in sales, earnings or cash flows or material adverse changes in the business climate) in accordance with current accounting guidelines. An impairment loss is recognized when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. The impairment review includes a comparison of future cash flows expected to be generated by the asset or group of assets with their associated carrying value. If the carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss would be recognized to the extent that the carrying value exceeds the fair value. The estimate of future cash flows is based upon, among other things, certain assumptions about expected future operating performance. These estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in general economic conditions, customer requirements and our business model.

 

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For goodwill, on an annual basis or more frequently if certain conditions exist, the fair values of our reporting units are compared with their carrying values and an impairment loss is recognized if the carrying value exceeds fair value to the extent that the carrying value of goodwill exceeds its fair value. We generally base our measurement of the fair value of a reporting unit on the present value of future discounted cash flows. The discounted cash flows model indicates the fair value of each reporting unit based on the present value of the cash flows that we expect each reporting unit to generate in the future. Our significant estimates in the discounted cash flows model include our discount rate, long-term rate of growth and profitability of each reporting unit and working capital effects. The growth and profitability rates are based on our expectations for the markets in which we operate and cost increases that are reflective of anticipated inflation (deflation) adjusted for any anticipated future cost savings and our discount rate is based on our weighted average cost of capital. In our most recent impairment analysis, we used a weighted average long-term cash flow growth rate of 5.1%, and a discount rate of 9.7%. Our weighted average long-term growth rate reflects our expectation that our future cash flows will increase. The fair value of the reporting units could change significantly due to changes in estimates of future cash flows as a result of changing economic conditions, our business environment and as a result of changes in the discount rate used.

The Company’s goodwill impairment analysis performed as of December 31, 2011 indicated that none of the reporting units were at risk of failing the goodwill impairment test, and the fair values of each of the reporting units would have to decline at a minimum in excess of 20% depending on the specific reporting unit in order for the carrying value of a particular reporting unit to exceed the fair value. If reductions in estimated undiscounted or discounted cash flows occur in the future, and such reductions indicate that an impairment loss has occurred, an impairment loss will be recorded in the period that such a determination is made.

We amortize certain definite-lived acquired intangible assets on a straight-line basis over estimated useful lives of seven to nineteen years for patents, seven to twenty years for customer relationships, four to five years for licensing and other agreements and seven years for finite-lived trademarks and tradenames. Deferred financing costs are being amortized by the straight-line method over the term of the related debt, which does not vary significantly from an effective interest method.

Income Taxes. We follow the provisions of Accounting Standards Codification (ASC) Topic 740, “Income Taxes”. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities (excluding non-deductible goodwill) using enacted tax rates in effect for the years in which the differences are expected to become recoverable or payable. A portion of our deferred tax assets relate to net operating loss carryforwards. The realization of these assets is based upon estimates of future taxable income. Changes in economic conditions and the business environment and our assumptions regarding realization of deferred tax assets can have a significant effect on income tax expense.

Product Liability Litigation Matters and Contingencies. We are subject to various product liability claims and/or suits brought against us for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured or reconditioned by us or our subsidiaries and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot currently be determined. We estimate the uninsured portion of probable future costs and expenses related to claims, as well as incurred but not reported claims and record an accrual in this amount on our consolidated balance sheets. These accruals are based on managements’ best estimate of probable losses and defense costs anticipated to result from such claims, from within a range of potential outcomes, based on available information, including an analysis provided by an independent actuarial services firm, previous claims history and available information on alleged claims. However, due to the uncertainty involved with estimates, actual results could vary substantially from these estimates.

Derivative Instruments and Hedging Activity. We enter into foreign currency exchange forward contracts to reduce our risk related to inventory purchases. These contracts are not designated as hedges, and therefore, they are recorded at fair value at each balance sheet date, with the resulting change charged or credited to SG&A in the Consolidated Statements of Comprehensive Income.

 

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Warranty Liability. We record a warranty obligation at the time of sale based on our historical experience. We estimate our warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, revisions to the estimated warranty liability would be required.

Equity-Based Compensation. Effective January 1, 2006, we adopted accounting standards which requires us to expense Class B Common Units of our Parent, or Units, granted under our Parent’s Incentive Plan based upon the fair market value of the Units on the date of grant. We are amortizing the fair market value of Units granted over the vesting period of the Units and we are using the prospective method of adoption. For Units issued prior to January 1, 2006, we accounted for these Units using the intrinsic value method in accordance with previous accounting standards.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our Consolidated Statements of Comprehensive Income:

 

     Fiscal Quarter Ended  
     March 31,
2012
     % of
Net Sales
    April 2,
2011
     % of
Net Sales
 
     (Dollars in millions)  

Net sales

   $ 216.3         100.0   $ 203.4         100.0

Cost of sales

     143.1         66.2     139.4         68.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     73.2         33.8     64.0         31.5

Selling, general and administrative expenses

     57.2         26.4     50.4         24.8

Amortization of intangibles

     2.6         1.2     2.6         1.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from operations

   $ 13.4         6.2   $ 11.0         5.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Sales

The following table sets forth for the periods indicated, net sales for each of our segments:

 

     Fiscal Quarter Ended  
     March 31,      April 2,    Change  
     2012      2011    $      %  
     (Dollars in millions)  

Team Sports

   $ 124.4       $116.3    $ 8.1         7.0

Action Sports

     91.9       87.1      4.8         5.5
  

 

 

    

 

  

 

 

    
   $ 216.3       $203.4    $ 12.9         6.3
  

 

 

    

 

  

 

 

    

Net sales in Team Sports during the first quarter of 2012 were negatively impacted by unfavorable foreign currency exchange rate movements of $0.1 million. Net sales in Action Sports during the first quarter of 2012 were positively impacted by favorable foreign currency exchange rate movements of $0.1 million. On a constant currency basis, net sales in Team Sports increased by $8.2 million, or 7.1%, and net sales in Action Sports increased by $4.7 million, or 5.4%.

The Team Sports net sales increase was due primarily to higher sales of baseball and softball bats resulting from new products and rule changes by governing bodies of certain baseball leagues, growth in sales of football helmets due to continued market share gains, higher sales of reconditioning services resulting from market share gains and higher sales of collectible helmets, all of which were partially offset by close out sales of hockey skates.

The Action Sports net sales increase was due primarily to growth in sales of Giro branded cycling footwear which was introduced in 2011, higher sales of cycling helmets to the specialty and mass channels and increased sales of powersports helmets to specialty dealers due to enhanced product offerings, all of which were partially offset by reduced demand for snow helmets and goggles in the global market due to high retail inventory levels.

 

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Cost of Sales

The following table sets forth for the periods indicated, cost of sales for each of our segments:

 

     Fiscal Quarter Ended  
     March 31,
2012
     % of
Net
Sales
    April 2,
2011
     % of
Net
Sales
 
     (Dollars in millions)  

Team Sports

   $ 81.6         65.6   $ 78.4         67.4

Action Sports

     61.5         66.9     61.0         70.0
  

 

 

      

 

 

    
   $ 143.1         66.2   $ 139.4         68.5
  

 

 

      

 

 

    

The decrease in Team Sports cost of sales as a percentage of net sales primarily relates to improved sales mix and higher sales volumes of baseball and softball bats, the continued shift towards sales of higher margin football helmets and increased sales of higher margin collectible helmets, all of which were partially offset by a sales mix shift to lower margin hockey sticks, close-out sales of hockey skates, and a sales mix shift to lower margin baseball, softball and hockey protective equipment.

The decrease in Action Sports cost of sales as a percentage of net sales primarily relates to reduced close-out sales and increased sales of higher margin cycling helmets and accessories, all of which were partially offset by reduced sales of higher-margin snow helmets due to softness in the global market.

Gross Profit

The following table sets forth for the periods indicated, gross profit for each of our segments:

 

     Fiscal Quarter Ended  
     March 31,
2012
     % of
Net
Sales
    April 2,
2011
     % of
Net
Sales
 
     (Dollars in millions)  

Team Sports

   $ 42.8         34.4   $ 37.9         32.6

Action Sports

     30.4         33.1     26.1         30.0
  

 

 

      

 

 

    
   $ 73.2         33.8   $ 64.0         31.5
  

 

 

      

 

 

    

The increase in Team Sports gross margin primarily relates to improved sales mix and higher sales volumes of baseball and softball bats, the continued shift towards sales of higher margin football helmets and increased sales of higher margin collectible helmets, all of which were partially offset by a sales mix shift to lower margin hockey sticks, close-out sales of hockey skates, and a sales mix shift to lower margin baseball, softball and hockey protective equipment.

The increase in Action Sports gross margin primarily relates to reduced close-out sales and increased sales of higher margin cycling helmets and accessories, all of which were partially offset by reduced sales of higher-margin snow helmets due to softness in the global market.

Selling, General and Administrative Expenses

SG&A expenses increased $6.8 million or 13.5% for the first fiscal quarter of 2012, as compared to the first fiscal quarter of 2011. The increase primarily relates to increased variable costs to support the sales growth, higher spending on research and development to enhance our product portfolio and increased depreciation expense related to capital expenditures for information technology and facilities improvements.

Amortization of Intangibles

Amortization of intangibles expense of $2.6 million did not vary for the first fiscal quarters of 2012 and 2011.

 

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Interest Expense

Interest expense decreased $0.4 million or 3.4% during the first fiscal quarter of 2012, as compared to the first fiscal quarter of 2011. The decrease relates to a slight decrease in interest rates for the revolving credit facility during the first fiscal quarter of 2012.

Income Tax Expense

Income tax expense was $1.5 million and $0.1 million for the first fiscal quarters ended March 31, 2012, and April 2, 2011, respectively. The effective tax rate was 52.0% for the first fiscal quarter of 2012, as compared to 240.9% for the first fiscal quarter of 2011. For the fiscal quarters ended March 31, 2012 and April 2, 2011, the difference between the effective rate and the statutory rate is primarily attributable to the permanent difference for equity compensation expense, state income taxes, meals and entertainment expenses and unrecognized tax benefits.

LIQUIDITY AND CAPITAL RESOURCES

Our financing requirements are subject to variations due to seasonal changes in working capital levels. Internally generated funds are supplemented when necessary from external sources, primarily from the ABL Facility. The cash generated from operating activities, the issuance of the Notes offered on December 3, 2009, and the availability under the ABL Facility are our principal sources of liquidity. Each are described below. Based on our current level of operations and anticipated cost savings and operational improvements, we believe our cash flow from operations, available cash and available borrowings under the ABL Facility will be adequate to meet our liquidity needs for at least the next twelve months. We cannot guarantee that the business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us under the ABL Facility in an amount sufficient to enable us to repay our indebtedness, including our senior secured notes, or to fund our other liquidity needs. In addition, upon the occurrence of certain events, such as a change of control of our Company, we could be required to repay or refinance our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness, including the ABL Facility or our Notes, on commercially reasonable terms or at all.

Our ability to make payments to fund working capital, capital expenditures, debt service, strategic acquisitions, joint ventures and investments will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. Future indebtedness may impose various restrictions and covenants on us which could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

Our debt to capitalization ratio, which is total debt divided by the sum of total debt and stockholder’s equity, was 51.3% at March 31, 2012, as compared to 49.9% at December 31, 2011. The increase was primarily attributable to the increase in the revolving credit facility, partially offset by the increase in shareholder’s equity as a result of earnings for the fiscal quarter ended March 31, 2011.

From time to time, we review and will continue to review acquisition opportunities as well as changes in the capital markets. If we were to consummate a significant acquisition or elect to take advantage of favorable opportunities in the capital markets, we may supplement availability or revise the terms under the ABL Facility or complete public or private offerings of debt securities. If the capital markets present favorable opportunities to purchase our own debt, we may do so.

 

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9.750% Senior Secured Notes

In December 2009, in connection with the refinancing of our Company’s then-existing indebtedness, or the Refinancing, we issued $350.0 million of 9.750% Senior Secured Notes, due December 2016, or the Notes. Interest is payable on the Notes semi-annually on June 1 and December 1 of each year. We may redeem some or all of the Notes prior to December 1, 2012 at a price equal to 100.00% of the principal amount, plus accrued and unpaid interest and a make-whole premium. We may redeem all or any of the Notes on or after December 1, 2012 and prior to December 1, 2013 at 107.313% of the principal amount of the Notes, plus accrued and unpaid interest. Then we may redeem all or any of the Notes on or after December 1, 2013 and prior to December 1, 2014 at 104.875% of the principal amount of the Notes, plus accrued and unpaid interest. Then we may redeem all or any of the Notes on or after December 1, 2014 and prior to December 1, 2015 at 102.438% of the principal amount of the Notes, plus accrued and unpaid interest. At any time on or after December 1, 2015, our Company may redeem all or any of the Notes at 100.00% of the principal amount of the Notes, plus accrued and unpaid interest. In addition, during any twelve month period commencing on the issue date prior to December 1, 2012, we may redeem up to 10.00% of aggregate principal amount of the Notes at a price equal to 103.00% of their principal amount, plus accrued and unpaid interest. At any time prior to December 1, 2012, we may also redeem up to 35.00% of the aggregate principal amount of the Notes at a price equal to 109.750% of the principal amount of the Notes, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of our Company. We are not required to make mandatory redemption or sinking fund payments with respect to the Notes. However, the Notes will become due and payable on October 1, 2015 unless on or prior to August 28, 2015, the indebtedness of EB Sports under its senior secured credit agreement with Wachovia Bank, N.A. and the lenders party thereto, or the New Holdco Facility, has been either repaid or refinanced with indebtedness with a stated maturity that is at least 91 days after the maturity date of the Notes.

Among other provisions, the indenture governing the Notes contains certain restrictions that limit our Company’s ability to (1) incur, assume or guarantee additional debt, (2) pay dividends and make other restricted payments, (3) create liens, (4) sell assets and subsidiary stock, (5) enter into sale and leaseback transactions, (6) enter into agreements that restrict dividends from subsidiaries, (7) change our business, (8) enter into transactions with affiliates and (9) transfer all or substantially all of our assets or enter into merger or consolidation transactions. The indenture governing the Notes also requires us to make an offer to repurchase the Notes at 101.00% of the principal amount following a change of control of our Company, and subject to customary reinvestment rights, at 100.00% of the principal amount with the proceeds of certain sales of assets and subsidiary stock.

Subject to certain exceptions, the indenture governing the Notes permits our Company and our restricted subsidiaries to incur additional indebtedness, including senior indebtedness and secured indebtedness. In addition, the indenture does not limit the amount of indebtedness that our direct or indirect parent entities, including EB Sports and RBG, may incur.

ABL Credit Facility

Concurrently with the issuance of the Notes on December 3, 2009, our Company, together with certain of our subsidiaries as Canadian Borrowers (as defined therein) or Guarantors (as defined therein), entered into a senior secured asset based revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, the other agents party thereto and the lenders party thereto, or the ABL Facility, under which our Company and the Canadian Borrowers may borrow, subject to availability under each of a United States and Canadian borrowing base, up to $250.0 million (of which up to $30.0 million may be borrowed by the Canadian Borrowers) which amount, subject to certain conditions, may be increased to allow borrowings of up to $300.0 million. The unused portion of the ABL Facility (subject to borrowing base availability) is to be drawn from time to time for general corporate purposes (including permitted acquisitions) and working capital needs. At March 31, 2012, we had $66.0 million outstanding under the ABL facility and $178.0 million in availability.

 

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Certain of our Company’s wholly-owned domestic subsidiaries, and all subsidiaries that guarantee the Notes (currently only our wholly-owned domestic subsidiaries) guarantee all of our obligations (both United States and Canadian) under the ABL Facility. In addition, our wholly-owned Canadian subsidiaries guarantee the obligations of the Canadian borrowings under the Canadian sub-facility of the ABL Facility. Furthermore, we and our wholly-owned domestic subsidiaries, subject to certain exceptions, grant security with respect to substantially all of our personal property as collateral for our obligations (and related guarantees) under the ABL Facility, including a first-priority security interest in cash and cash equivalents, lockbox and deposit accounts, accounts receivable, inventory, other personal property relating to such inventory and accounts receivable and all proceeds therefrom and a second-priority security interest in substantially all of our equipment and all other assets that secure the Notes on a first-priority basis. The obligations of our Canadian subsidiaries that are borrowers under the Canadian sub-facility of the ABL Facility are secured, subject to certain exceptions and permitted liens, on a first-priority lien basis, by substantially all of the assets of our wholly-owned Canadian subsidiaries and by our and our domestic subsidiaries’ assets on the same basis as borrowings under the ABL Facility. At March 31, 2012, we had a zero balance outstanding under the Canadian sub-facility of the ABL Facility.

On May 13, 2011, our Company entered into an Amendment and Restatement Agreement, or the Amendment, among our Company, the Canadian Borrowers, the subsidiary guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as collateral agent and administrative agent and the other agents party thereto, which amended the ABL Facility. The Amendment, among other things, reduced the interest rate applicable to loans made under the ABL Facility and amended certain covenants thereunder applicable to our Company and our subsidiaries. In addition, the Amendment extended the maturity date of loans under the ABL Facility from December 3, 2013 to May 13, 2016; provided that if the Credit and Guaranty Agreement, dated as of December 3, 2009 among EB Sports Corp., as borrower, RBG Holdings Corp., as guarantor, Wachovia Bank, N.A., as administrative agent and collateral agent and the lenders from time to time party thereto has not been repaid or refinanced prior to July 1, 2015 with a new credit agreement that meets certain criteria set forth in the ABL Facility, the loans under the ABL Facility will mature on July 1, 2015.

The interest rates per annum applicable to the loans under the ABL Facility, other than swingline loans and protective advances, equal an applicable margin percentage plus, at our option, (1) in the case of U.S. dollar denominated loans, a U.S. base rate or LIBOR, and (2) in the case of Canadian dollar denominated loans, a Canadian base rate or CDOR. Swingline loans and protective advances bear interest at the U.S. base rate for U.S. dollar denominated loans and the Canadian base rate for Canadian dollar denominated loans, in each case, plus an applicable margin (and plus an additional 2.0% in the case of protective advances). The applicable margin percentage for the ABL Facility, as amended by the Amendment, ranges between 1.5% and 2.5% for LIBOR or CDOR and 0.5% and 1.5% for the base rate, based upon our total leverage ratio as calculated under the ABL Facility. In addition to paying interest on outstanding principal under the ABL Facility, we are required to pay a commitment fee, in relation to the unutilized commitments, which ranges from 0.375% to 0.5% based upon our utilization of the ABL Facility (increasing when utilization is lower and decreasing when utilization is higher). We are also required to pay customary letter of credit fees.

The ABL Facility requires that if excess gross availability is less than the greater of a specified percentage of the gross borrowing base and a specified dollar amount, we must comply with a minimum fixed charge coverage ratio test. In addition, the ABL Facility includes negative covenants that, subject to significant exceptions, limit our ability and the ability of our subsidiaries, to, among other things (1) incur additional debt, (2) create liens, (3) transfer all or substantially all of our assets or enter into merger or consolidation transactions, (4) change our business, (5) make investments, loans, advances, guarantees and acquisitions, (6) transfer or sell assets, (7) enter into sale and leaseback transactions, (8) enter into swap agreements, (9) make restricted payments, (10) enter into transactions with affiliates and (11) enter into agreements that restrict dividends from subsidiaries.

 

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Holdco Facility Obligations

On December 3, 2009, EB Sports refinanced its previous senior unsecured credit agreement with Wachovia Investment Holdings, LLC and the lenders named therein pursuant to which EB Sports had borrowed $175.0 million, or the Previous Holdco Facility, through a new senior secured credit agreement, or the New Holdco Facility, with Wachovia Investment Holdings, LLC and the existing lenders under the Previous Holdco Facility. Pursuant to the refinancing transaction, EB Sports borrowed $108.3 million under the New Holdco Facility. Borrowings under the New Holdco Facility are secured by a pledge of all capital stock of RBG and our Company. The New Holdco Facility is guaranteed by RBG and will, in the future, be guaranteed by any other subsidiary of EB Sports if such other subsidiary of EB Sports guarantees other indebtedness of either EB Sports or RBG.

Borrowings under the New Holdco Facility through May 1, 2012 will bear interest at 11.5% per annum and EB Sports may elect to pay interest in cash or defer interest by adding it to the aggregate amount of principal due under the loan. Interest after May 1, 2012 will be paid in cash; provided, that prior to maturity if EB Sports does not have sufficient cash on hand and Easton-Bell is either prohibited from distributing sufficient cash to EB Sports to make such interest payments or does not have sufficient liquidity (in the reasonable determination of Easton-Bell management) to permit Easton-Bell to distribute cash in an amount sufficient to allow such payment, EB Sports will pay cash to the extent it is able to do so using cash on hand after giving effect to permitted and available distributions, and the remainder of the interest due shall be added to the principal amount of the loan at a rate of 13.5% per annum for the then ending interest period.

Borrowings under the New Holdco Facility are not guaranteed by our Company or any of our subsidiaries and are senior unsecured obligations of EB Sports. However, EB Sports depends on us and our subsidiaries, who conduct the operations of the business, for dividends and other payments to generate the funds necessary to meet its financial obligations, including payments of principal and interest on the New Holdco Facility. Given that EB Sports controls our Company’s direct parent, EB Sports has the ability, subject to the terms of the ABL Facility, the Notes and any other agreements which limit our ability to declare and pay dividends, to obtain money from our Company and our subsidiaries in order to fund its obligations under such loan.

As of March 31, 2012, the amount of loans issued under the New Holdco Facility was approximately $141.0 million, including accrued interest.

Sources and Uses of Our Cash

Cash used in operating activities was $16.0 million for the first fiscal quarter of 2012, as compared to $17.2 million of cash used in the first fiscal quarter of 2011. The net decrease in cash used in operating activities between the periods primarily reflects a smaller increase in accounts receivable and lower inventory, partially offset by lower accounts payable.

We had $271.3 million in working capital as of March 31, 2012, as compared to $265.9 million at December 31, 2011. The $5.4 million increase in working capital primarily results from the increase in accounts receivable and the decrease in accounts payable, partially offset by the increase in revolver borrowings.

Cash used in investing activities was $6.7 million for the first fiscal quarter of 2012, as compared to $4.9 million used in the first fiscal quarter of 2011. The primary reason for the difference is that the first fiscal quarter of 2012 includes $1.1 million in cash payments for the purchase of business, while no business was purchased in 2011. In addition, the first fiscal quarter of 2012 reflects $5.6 million related to the purchase of property, plant and equipment for information technology and enhancing new and existing products, whereas the first fiscal quarter of 2011 reflects $4.9 million related to the purchase of property, plant and equipment for information technology and enhancing new and existing products.

Cash provided by financing activities was $24.0 million for the first fiscal quarter of 2012, as compared to $23.5 million of cash provided by financing activities in the first fiscal quarter of 2011. The primary reason for the difference is that the first fiscal quarter of 2012 reflects $28.0 million of proceeds from borrowings and $4.0 million of payments on the revolving credit facility, whereas the first fiscal quarter of 2011 reflects $30.5 million from borrowings and $7.0 million of payments on the revolving credit facility.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

Our net sales and expenses are predominantly denominated in United States dollars. In fiscal year 2011, approximately 87.7% of our net sales were in United States dollars, with substantially all of the remaining sales in Canadian dollars, British pounds, Euros and Taiwan dollars. In addition, we purchase a number of materials abroad, including finished goods and raw materials from third parties. A significant amount of these purchases were from vendors in Asia, the majority of which were located in mainland China. We may decide to increase our international sourcing in the future. As a result, we have exposure to currency exchange risks.

Most of what we purchase in Asia are finished goods rather than raw materials. Because we generally purchase these goods in United States dollars, changes in the value of the United States dollar can have a more immediate effect on the cost of our purchases. If we are unable to increase our prices to a level sufficient to cover any increased costs, it could adversely affect our margins.

We enter into foreign currency exchange forward contracts to reduce the risks related to inventory purchases and foreign currency based accounts receivable denominated in foreign currencies. At March 31, 2012, there were foreign currency exchange forward contracts in effect for the purchase of United States $3.8 million aggregated notional amounts, or approximately Mexican Pesos $49.3 million. In the future, if we feel our foreign currency exposure has increased, we may consider entering into additional hedging transactions to help mitigate that risk.

Considering both the anticipated cash flows from firm purchase commitments and anticipated purchases for the next quarter and the foreign currency derivative instruments in place at March 31, 2012, a hypothetical 10% weakening of the United States dollar relative to other currencies would not have a material adverse effect on our expected second quarter 2012 earnings or cash flows. This analysis is dependent on actual purchases during the next quarter occurring within 90% of budgeted forecasts. In addition, the effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables, including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects analysis described. In addition, it is unlikely currencies would uniformly strengthen or weaken relative to the United States dollar. In reality, some currencies may weaken while others may strengthen. Moreover, any movement of the United States dollar relative to other currencies and its impact on materials costs would likely be partially offset by the impact on net sales due to our sales internationally and the conversion of those international sales into United States dollars.

Interest Rate Risk

We are exposed to market risk from changes in interest rates that can affect our operating results and overall financial condition. In connection with our refinancing in December 2009, we entered into a new $250.0 million ABL Facility. As of March 31, 2012, the outstanding principal balance under this facility was $66.0 million. The interest rates on the ABL Facility are based on (1) the prime rate or LIBOR in the case of U.S. dollar denominated loans and (2) the prime rate or CDOR in the case of Canadian dollar denominated loans, in each case plus an applicable margin percentage. A hypothetical 10% increase from the average interest rate of 2.5% for the first fiscal quarter of 2012, based on the average ABL Facility balance of $63.3 million would result in an increase in interest expense of less than $0.1 million for the fiscal quarter ended March 31, 2012.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2012, the end of the fiscal period covered by this quarterly report, we performed an evaluation, under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer each concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed 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 Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the period covered by this report that materially affected, or is reasonably likely to affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are subject to various product liability claims and/or suits brought against us for claims involving damages for personal injuries or deaths. Allegedly, these injuries or deaths relate to the use by claimants of products manufactured by us and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot be determined. Our management obtains an actuarial analysis and has established an accrual for probable losses based on this analysis, which considers, among other factors, our previous claims history and available information on alleged claims. However, due to the uncertainty involved with estimates, actual results could vary substantially from those estimates. We maintain primary and excess product liability insurance coverage for such claims under various policies.

We are also involved in various non-product liability claims and actions, including employment related matters as well as claims relating to potential infringement of intellectual property rights of others. In 2002, one of our competitors sued us in Canadian Federal Court alleging infringement of a hockey skate patent. In 2010, we received an unfavorable judgment on the issue of liability in this suit. Liability and damages are bifurcated proceedings in Canada, and we are now in the damages phase of this proceeding. We do not believe that any resulting infringement damages award will have a material adverse effect on our financial results. We anticipate this matter will be resolved within approximately two years.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. The materialization of any risks and uncertainties identified in Forward-Looking Statements contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements and Information” in this report.

 

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Item 6. Exhibits

 

  (a) The following exhibits are filed or incorporated by reference as part of this Form 10-Q. Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*):

 

Exhibit

Number

  

Description of Exhibit

  

The filings referenced for

incorporation by reference are:

31.1    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed herewith
31.2    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002    Filed herewith
32.1    Certification of the Principal Executive Officer and Principal Financial Officer pursuant to the 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Filed herewith

 

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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.

 

     EASTON-BELL SPORTS, INC.
  Registrant
Dated: May 11, 2012  

/s/ PAUL E. HARRINGTON

  Paul E. Harrington
  President and Chief Executive Officer
  (Principal Executive Officer)
Dated: May 11, 2012  

/s/ MARK A. TRIPP

  Mark A. Tripp
  Chief Financial Officer
  (Principal Financial Officer)

 

 

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