Item 1. Business
Easton-Bell Sports, Inc. was incorporated in Delaware in April 2003. Our executive offices are located at 7855 Haskell Avenue, Suite 200, Van Nuys, California 91406, and our telephone number is 818-902-5800. 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-K 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.
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 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 and ice hockey equipment, apparel and cycling components), Bell® (cycling and action sports helmets and accessories), Giro® (cycling and snowsports helmets and accessories) and Riddell® (football equipment, apparel 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.
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.
In February 2014, we entered into an agreement with Bauer Performance Sports or BPS under which BPS will acquire the Easton Baseball/Softball business. The acquisition is subject to regulatory approvals and customary closing conditions and is expected to be completed in April 2014. We are also working towards an agreement with a third party for the sale of the Easton Hockey business.
Our Company follows a 52/53 week fiscal year, which ends on the Saturday closest to December 31. Fiscal years 2013, 2012 and 2011 were comprised of 52 weeks and ended on December 28, 2013, December 29, 2012 and December 31, 2011, respectively.
Industry Overview
Sporting Goods Industry
We compete in the sporting goods industry, which includes sports equipment, athletic footwear and apparel. According to the Sports & Fitness Industry Association, or SFIA, manufacturers’ sales of sporting goods in the United States, our largest market, has grown from $48.4 billion in 2000 to $79.2 billion in 2012. The SFIA also reported that sales of sporting goods in the United States increased by 2.4% in 2012. Although sales figures for 2013 are not yet available, we believe that sales in both sports equipment and the sporting goods market increased slightly in 2013. We believe that, in the long-term, avid participants will continue to be willing to pay premium prices for high performance and enhanced-protection equipment, which should contribute to future market growth.
The sporting goods equipment industry continues to undergo consolidation. Certain equipment manufacturers have chosen to assemble a multitude of brands offering a wide range of commodity-like products often competing primarily on price. Others, including us, primarily focus on creating a portfolio of sporting goods products that are differentiated by high performance and compete on product quality, enhanced features, technology, styling, price and customer service.
Baseball and Softball
According to the SFIA, baseball and softball (including fast-pitch and slow-pitch) attracted approximately 13.0 million participants and 10.0 million participants, respectively in the United States in 2012. The SFIA reports that baseball participation had decreased 4.3% in 2012, while participation rates for fast-pitch softball increased 9.4% and slow-pitch softball decreased 5.1%. Wholesale shipments of baseball and softball equipment were approximately $491.0 million in 2012, as compared to $489.0 million in 2011. We believe the enthusiast base in these sports will experience continued growth, driven by increasing popularity of travel ball, club baseball and more frequent play.
Ice Hockey
According to the SFIA, ice hockey attracted 2.4 million participants in the United States in 2012 and United States wholesale shipments of ice hockey equipment was approximately $244.0 million in 2012, as compared to the $243.0 million sold in 2011. We estimate that the Canadian ice hockey market is at least as large as the United States market in terms of participants and dollars spent.
Football Helmets
According to the SFIA, tackle football attracted approximately 6.2 million United States participants and total United States manufacturers’ sales of football equipment were estimated at $516.0 million in 2012, representing a slight decrease compared to the $521.0 million sold in 2011. As the largest and most popular sport for high school and college males, the football market is expected to continue to grow. Competitive tackle football leagues, such as the NCAA, high school leagues and Pop Warner, have increasingly emphasized the safety of participants by enforcing exacting equipment standards with an increased focus on the protective characteristics of helmets. As a result, football helmets have typically commanded higher price points, as well as faster equipment replacement and reconditioning rates. Due to the prevalence of dedicated organizations and players that demand a high level of safety without sacrificing performance, we believe that growth in sales of high performance, technologically advanced football equipment, including helmets and shoulder pads, as well as reconditioning services resulting from this trend will continue to provide a growth opportunity.
Cycling Helmets and Related Accessories
According to the SFIA, cycling (including bicycle motocross, or BMX, road and mountain biking) attracted approximately 48.9 million participants in 2012, as compared to approximately 48.8 million in 2011. Cycling has become one of the most popular physical activities in the United States and many states have laws mandating the use of helmets while riding a bicycle for those under the age of 18. Cycling continues to be influenced by increased television coverage of major events such as the Tour de France. In addition, many observers believe that cycling sales and participation rates will continue to benefit from higher costs of gasoline and an increasing presence of the green movement and urban cycling programs.
The accessory segment of the United States bicycle industry is larger than the helmet segment and is driven by highly technical products that command premium prices. As the mix of riders has shifted towards high-end road cyclists, the demand for such accessories has increased significantly.
Helmets for Action Sports, including Snowsports and Powersports
According to SnowSports Industries America, or SIA, snowsports attracted approximately 31.1 million participants in the 2012/2013 season, as compared to approximately 31.9 million in the 2011/2012 season. The SFIA estimates that United States manufacturers’ sales of ski and snowboard equipment were estimated at $498.0 million in 2012, representing a 6.2% decrease compared to $531.0 million in 2011, due to lack of snow in 2012 which decreased sales and participation. Events such as the ESPN X Games, the inclusion of snowboarding as a medal event in the Winter Olympics and the national recognition of leading board sport athletes have broadened general awareness of the action sports lifestyle. In addition, we believe that use of motor and other electric scooters is increasing. Growth in these sports should drive overall helmet sales as participants become more aware of the risk of head injuries.
Sports Apparel
According to the SFIA, wholesale spending for consumer sports apparel in the United States increased 1.5% in 2012, to approximately $31.8 billion in annual sales. The sports apparel segment is benefiting from consumers’ preference toward casual, comfortable clothing. Recent performance driven innovations, such as advanced features and highly technical fabrics, have fueled demand and increased price points for performance athletic apparel in recent years.
Our Brands
We currently sell a broad range of products, primarily under four well-known brands-Easton, Bell, Giro and Riddell-which represent the vast majority of our sales. We believe that our brands are among the most recognized and respected in the sporting goods industry, as demonstrated by our leading market share in many of our core categories. As a result of the high-performance nature of our products, we have been able to build and maintain relationships with professional and college sports teams, leagues and organizations and high-profile athletes. The visibility provided by these relationships reinforces the authenticity of our brands and drives demand for our products among retailers and consumers.
Our four primary brands include:
Easton. Under the Easton brand, founded in 1922, we offer baseball, softball and ice hockey equipment and cycling components. We believe Easton is recognized as one of the most innovative brands in the baseball, softball and ice hockey equipment industry. In Major League Baseball, or MLB, star players Andre Ethier and Jed Lowrie wear and use the Easton brand. We believe our hockey sticks are among the top brands used by National Hockey League, or NHL, players and that consumers choose Easton branded products due to their combination of performance, quality and value. As a result, we have been able to build and maintain relationships with some of the most visible professional athletes in the NHL, which includes Mike Cammalleri, Zach Parise and Brad Richards who wear and use Easton hockey equipment.
Bell. Under the Bell brand, founded in 1954, we offer helmets for cycling, motorcycles (street and motorcross), skateboarding and other action sports, as well as various cycling and fitness accessories. We believe Bell is the number one brand in the United States by sales in cycling helmets and accessories. Bell branded products are used by cycling enthusiasts ranging from competitive athletes to recreational users. Consumers choose Bell branded cycling helmets due to design, fit, quality, durability and value. The Bell brand image of toughness, dependability and performance is supported through the use of Bell products by, and sponsorship of, such high-profile athletes and professional cycling teams as U.S. National Road Champion George Hincapie, Tour de France winner Cadel Evans and Motocross Champion James Stewart.
Giro. Under the Giro brand, founded in 1986, we offer premium products for cycling (including helmets, footwear, gloves and apparel) and snowsports (including helmets and goggles). We believe the Giro brand is the global market leader by total sales volume in premium cycling and snowsports helmets. We believe that consumers are willing to pay premium prices for Giro products due to Giro’s reputation for innovation, performance and market-leading design. The Giro brand image is reinforced through the use of Giro products by, and sponsorship of, leading professional athletes and ambassadors including American Olympic cyclist, Taylor Phinney, and Four Cross World Champion, Jared Graves.
Riddell. The Riddell brand, founded in 1929, is one of the most recognized brands in tackle football. The Riddell branded helmet is used by numerous Division I NCAA football teams and National Football League, or NFL players, resulting in significant awareness of the Riddell brand with the general public, as well as with youth leagues and high schools. Under the Riddell brand, we sell football helmets, shoulder pads and related equipment, uniforms and reconditioning services for our football and other team sports products. We also sell branded collectible products, such as replica football helmets which reflect NFL and popular collegiate team logos.
In addition to the above products, we also sell a variety of accessories, including bicycle pumps, headlights, safety lights and reflectors under the Blackburn® brand (founded in 1975) and bicycle trailers and child carrier seats under the CoPilot® brand (founded in 2000). Additionally, we own the rights to use the widely recognized MacGregor® brand (exclusive of golf products), which we license to select third parties to manufacture and market footwear and other sports equipment.
Products and Services
For the period ended December 28, 2013, we had two reportable segments: Team Sports and Action Sports. Our Team Sports segment primarily consists of football, baseball, softball, ice hockey and other team sports products and reconditioning services related to certain subcategories of these products. Our Action Sports segment primarily consists of helmets, equipment, components and accessories for cycling, snowsports and powersports. For financial information on each segment, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and Note 6 to our Consolidated Financial Statements contained herein.
Team Sports
Our Team Sports segment produces technologically advanced equipment and apparel for baseball, softball, ice hockey and football and also provides reconditioning services for various sporting goods.
Baseball and Softball
We offer a broad line of baseball and softball (both slow-pitch and fast pitch) equipment and accessories (bats, gloves, protective equipment and apparel) for athletes and enthusiasts at all levels of competition. Substantially all of our baseball and softball products are currently sold under the Easton brand name. Since our first aluminum bat was produced in 1969, our bats have featured advanced designs and materials to optimize hitting performance, feel and durability. Baseball and softball products accounted for approximately 22.3%, 19.6%, and 21.1% of our net sales in 2013, 2012 and 2011, respectively.
Ice Hockey
We offer a broad line of ice hockey equipment and accessories (sticks, blades, skates, protective equipment and apparel) for athletes and enthusiasts at all levels of competition. All of our ice hockey products are sold under the Easton brand name. We believe our sticks are among the top brands used by NHL players. Ice hockey products accounted for approximately 9.4%, 13.3%, and 13.4% of our net sales in 2013, 2012 and 2011, respectively.
Football
Football Helmets - Substantially all of our football products and services are currently sold under the Riddell brand name. We believe we are the world’s leading designer, developer and marketer of football helmets. Our football helmets are designed to provide excellent on-field performance while meeting or exceeding all relevant safety standards.
Reconditioning Services - We believe we are the leading reconditioner of football equipment in the United States. We recondition football helmets and shoulder pads, baseball, softball and lacrosse helmets, catcher’s equipment, baseball and softball gloves and hockey helmets and shoulder pads. Most of our reconditioning volume is comprised of football helmets and shoulder pads as reconditioning typically includes the cleaning, sanitizing, buffing and/or painting of helmets. Face guards, interior pads, chin straps and other helmet components are inspected and replaced as necessary. Helmets are recertified to conform to the standards set by the National Operating Committee on Standards for Athletic Equipment, or NOCSAE, which is the leading standard-setting organization for athletic equipment.
Football equipment and reconditioning services accounted for approximately 16.2%, 16.5%, and 14.5% of our net sales in 2013, 2012 and 2011, respectively.
Other Products and Licensing
We sell collectible football helmets that primarily reflect licensed NFL and major collegiate trademarks. Our collectible helmets are available in a variety of sizes and forms, including authentic helmets that are identical to competitive helmets used on-field by professional players, replica helmets that have a similar appearance to the authentic helmet but are constructed with less advanced materials, mini helmets that are half-scale versions of full-size helmets and pocket size helmets that appeal to both collectors and the mass market.
In addition to the team sports products described above, we offer a range of practice wear, apparel, footwear and game uniforms under the Riddell and Easton brand names that are used on and off the field by football, baseball, softball and ice hockey athletes. These functional products incorporate advanced technical materials and innovative designs, such as our Bio-Dri® fabrics, which effectively wick moisture away from the body, keeping athletes cooler, drier and lighter.
We also have entered into selective licensing agreements that allow third parties to manufacture and market products under the Riddell, Easton and MacGregor brand names. Products currently licensed include Easton footwear, Easton hockey apparel and MacGregor footwear and team sports equipment. We receive royalty income from sales of these products.
Other team sports products and licensing accounted for approximately 10.2%, 8.7%, and 7.6% of our net sales in 2013, 2012 and 2011, respectively.
Action Sports
Our Action Sports segment encompasses a number of individual sports, such as cycling, extreme sports, snowsports and powersports. Within many of these sports, we are primarily focused on the helmet market. Within cycling, we are also focused on the accessories, footwear and premium components markets.
Cycling and Extreme Sports
Substantially all of our recreational cycling and extreme sports helmets are sold under the Bell brand name and our premium cycling helmets are sold under the Bell and Giro brand names. We sell premium cycling components under the Easton brand name and high-performance accessories under the Blackburn brand name. We also sell other accessories under the Bell and CoPilot brand names and certain recreational youth cycling helmets and accessories under various licensed brands, including Barbie, Hot Wheels, Hello Kitty, Disney and X Games.
Helmets - We offer helmets designed for cycling and action sports, including skateboarding and BMX biking. These helmets incorporate many proprietary technologies and feature styling designed to appeal to sports enthusiasts. Cycling and action sports helmets accounted for approximately 16.9%, 16.2%, and 16.4% of our net sales in 2013, 2012, and 2011 respectively.
Premium Cycling Components and Accessories - We offer premium cycling components under the Easton brand, including handlebars, tubing and wheels that are sold through specialty retailers and directly to original equipment manufacturers, or OEM. Our cycling components incorporate advanced designs and materials for optimal weight, strength and shock-absorbing characteristics and are frequently used by professional racing teams. Under the Blackburn brand name, we offer a broad range of high-performance accessories, including air pumps and CO2 inflators, aluminum racks, lights, cyclometers and tools. In 2010, we introduced a line of performance cycling footwear. Premium cycling components and accessories accounted for approximately 7.5%, 8.7%, and 7.7% of our net sales in 2013, 2012 and 2011, respectively.
Cycling Accessories - We offer a wide selection of cycling accessories, including lights, mirrors, reflectors, locks, pumps, pedals, tires, protective pads, gloves and bags under our Bell and CoPilot brands that are sold primarily through mass retailers. Cycling accessories accounted for approximately 10.2%, 9.8%, and 9.9% of our net sales in 2013, 2012 and 2011, respectively.
Snowsports
We offer helmets for various snowsports, including snowboarding and skiing, as well as various snowsports accessories. Our snowsports helmets and accessories are sold under the Giro brand name. We have consistently been a leader in comfort and fit, as well as performance, from our first snow helmet with adjustable vents to wireless audio helmets, which feature specially designed headphones that are built seamlessly into the helmet ear pads and can be used with MP3 players or other portable audio devices. Snowsports helmets accounted for approximately 4.3%, 3.8%, and 5.8% of our net sales in 2013, 2012 and 2011, respectively.
Powersports
We offer helmets for various powersports, including motocross, as well as various powersports accessories under the Bell brand name. Our powersports helmets are designed for motorcycles, both street and motocross, all-terrain vehicles (ATVs) and snowmobiles. Powersports helmets and accessories accounted for approximately 2.9%, 1.9%, and 1.3% of our net sales in 2013, 2012 and 2011, respectively.
Other Products and Accessories
Due to their non-core status, during 2013, we ceased selling our Bell and Savasa fitness product lines which offered fitness accessories, including mats, resistance bands, weights and other fitness products designed primarily for strength training, yoga and pilates. Fitness accessories accounted for approximately 0.1%, 1.5%, and 2.3% of our net sales in 2013, 2012 and 2011, respectively.
Competition
Although we have no competitors which challenge us across all of our product lines, the markets for our products are highly competitive and we face competition from a number of sources in many of our individual product lines.
Team Sports
In baseball and softball, we compete with numerous national and international competitors including Rawlings Sporting Goods, Worth Sports, Wilson Sporting Goods, Hillerich & Bradsby and Mizuno Corp. In ice hockey, we primarily compete with Bauer Hockey and Reebok-CCM Hockey. In football, we compete with several companies, such as Schutt Sports, Douglas Protective Equipment and Rawlings Sporting Goods and our reconditioning business competes with many regional companies. Our uniform and practice wear business also competes with national businesses such as Adidas, Nike, Russell Athletic and Under Armour. We believe that we compete in each of these team sports markets on the basis of brand name recognition, product features, quality and customer service.
Action Sports
In cycling helmets and components, we compete with several national and regional competitors. Within the mass retail channel, our main competitor is Dorel Industries, Inc., which markets its products under such well-known brand names as Schwinn, Mongoose and GT. Dorel competes with us primarily on brand name recognition and price. In the specialty retail channel, our primary competitors are Specialized Bicycle Components and Trek Bicycle Corporation, both of whom compete with us mostly on a combination of performance, price, style, quality, design and focus on cycling enthusiasts.
We primarily compete in the snowsports and powersports markets with a number of smaller companies and a few multinationals, which compete mostly on a combination of performance, price and design. In the snowsports helmet market, we compete with several domestic and international brands, including Smith, Bern, K2, POC, as well as R.E.D., which is owned by The Burton Corporation and Salomon, which is owned by Amer Sports. In the powersports helmet market, we compete against such well-known brands as Arai, Shoei, HJC and KBC.
Sales
We utilize separate sales forces and a variety of distribution channels for the various products in our segments, enabling us to design specific marketing strategies for each brand and product.
Sales of Team Sports Products
Retail Sales
We sell a broad selection of our team sports products, including those for baseball, softball, ice hockey and to a lesser extent football, to both national and regional full-line sporting goods retailers in North America. We believe that our leading brands and the breadth and depth of our product portfolio match well with sporting goods chains’ marketing strategies, product selections and service capabilities, which generally fall between those of mass merchants and specialty retail accounts. Our extensive product selection allows sporting goods retailers to tailor their mix of our products to their individual selling strategies. In addition, we believe that sporting goods retailers benefit from consumer recognition and demand for our brands through increased foot traffic in their stores. We also sell team sports products to approximately 3,350 independent specialty retail accounts in North America. These retailers cater their marketing and product selections to sports enthusiasts who often seek premium products having the highest level of performance. We work with specialty customers to improve sales and profits by providing highly visible product displays and point-of-purchase signage.
Our team sports products that are sold to retail customers are sold through our network of approximately 40 in-house and independent sales representatives in the United States and Canada and through various third party distributors in other regions of the world. Our in-house sales team provides sales and support services to key retail accounts. Sales efforts to these customers are led by a national account manager, supported by other members of the sales team. These sales teams visit frequently with our larger customers to assist them with in-store merchandising, signage and market guidance, as well as to receive feedback and to anticipate future needs.
Institutional Sales
We primarily sell football helmets, shoulder pads, certain other team sports equipment, uniforms, accessories and reconditioning services to educational institutions and athletic leagues. We have a direct sales force and marketing team of approximately 235 individuals, which focus on sales to the NFL and approximately 18,000 high schools, 1,200 colleges and numerous youth leagues across the United States. We believe our institutional sales force, made up primarily of former players, former coaches and experienced industry sales professionals, is the largest national direct sales force for football products and services in the institutional sporting goods industry and provides us with a significant competitive advantage. Their experience helps us understand the needs, budgetary and timing constraints and other concerns of our customers and also facilitates education on new product offerings. Additionally, this approach allows us to sell equipment and reconditioning services directly to our customers, which enables us to more readily explore add-on sales opportunities. Our ability to actively manage the requirements of thousands of schools, leagues and professional teams with timely and expert service has aided us in establishing a reputation as a leader in customer service with a loyal customer base.
Sales of Action Sports Products
We primarily sell our broad selection of action sports products, including cycling, snowsports, powersports and skateboarding helmets and accessories through independent specialty retail accounts, sporting goods stores and mass retailers. We also sell premium aftermarket cycling components and accessories to distributors who supply the specialty retail channel and directly to bicycle manufacturers.
We utilize approximately 118 in-house and independent sales professionals across North America and a network of approximately 190 third-party distributors in other regions of the world to distribute our action sports products. Similar to our in-house sales team for team sports products, our in-house sales team for action sports products provides sales and support services to key retail accounts, including category management services for certain of our mass retail customers. These efforts are led by a national account manager, who is supported by other members of the sales team. These sales teams work with large sporting goods and mass retail customers to assist them with in-store merchandising, signage and market guidance, as well as to receive feedback and to anticipate future needs.
Marketing
Relationships with Athletes, Teams and Organizations
Our Easton, Bell, Giro and Riddell brands have enjoyed high visibility around the world due to use of our products by leading athletes. Many high-profile athletes choose to use our products even though they are not sponsored by us, which gives our products increased exposure to consumer audiences, strengthens the perceived authenticity of our brands and drives demand for our products among retailers and consumers. Our brands have a strong presence in professional (NHL and the NFL), collegiate and youth leagues, the Summer and Winter Olympics, the Tour de France and X Games.
We sponsor several hundred individuals, including teams across baseball, softball, ice hockey, cycling, snowboarding, skiing, motocross, and other sports around the world. We believe that Riddell helmets are used by approximately 60% of the players in the NFL. At the youth level, Riddell is the Official Football Helmet & Protective Equipment Partner of USA Football and the Official Hardgoods Supplier of American Youth Football. Within hockey, we believe that approximately 30% of NHL players use Easton hockey sticks and in baseball, Easton is the official equipment supplier of the Little League World Series.
Advertising and Promotional Events
As a result of the foregoing relationships, we receive a significant amount of media exposure. We augment this exposure with advertisements highlighting the distinctive design, quality and features of our products in various media outlets, including industry periodicals, magazines, newspapers, television and internet media. To further reinforce and build our brand recognition, we conduct a variety of marketing and promotional events in support of our products. For example, we participate in coaches clinics and equipment shows throughout the year where our product lines are displayed and promoted along with our reconditioning services. In addition, we dedicate resources to educate customers on the importance of helmet safety and proper fit and invest in initiatives designed to increase awareness of the importance of head protection in preventing brain injury.
Design and Product Development
Investment in research and development has been and continues to be a critical component of our business strategy. We are committed to the design and development of new products utilizing new technologies that provide athletes and other sports enthusiasts with performance or protective advantage over existing products. We believe that innovation drives consumer demand and often leads to higher selling prices. We have a track record for innovation in each of the markets in which we compete.
We also actively work with several organizations that set safety or performance standards for the sporting goods we sell. Our products meet or exceed the standards established by the most important regulatory and testing bodies, including the Department of Transportation, the Consumer Product Safety Commission, or CPSC, the Hockey Equipment Certification Council, or HECC, and Canadian Standards Association, or CSA, and various private organizations, including NOCSAE, which is the leading standard-setting organization for athletic equipment (including football, baseball and softball helmets, as well as other equipment) and the Snell Memorial Foundation, which is a leading organization that tests and certifies helmets for cycling, snowsports, powersports and other action sports. We also work with various athletic leagues, including the NFL, the NHL, MLB, the NCAA and Little League Baseball and Softball, that set standards for equipment used in competition and various conferences within these athletic organizations that have their own standards. We believe that we have regularly been among the first to adopt new safety or performance standards.
We invest in engineering and applied research to improve both the quality and performance of our current products and to develop new products. Our in-house product design, engineering, research and development and testing group includes approximately 188 employees. Our product development personnel work with top athletes to understand the latest industry trends and to develop new products or features that respond to their needs as well as set new industry standards. This team is augmented by additional product development, engineering and quality control personnel in the United States and Hong Kong who assist with the engineering and design of our products. We regularly test products throughout the development and manufacturing processes and all of our products are subjected throughout the manufacturing process to various quality control procedures that often exceed those mandated by law.
Production, Sourcing and Distribution
We currently maintain manufacturing, assembly and distribution facilities in the United States, Canada, Mexico, Sweden, China and Taiwan. We also generally employ a dual strategy for sourcing goods from third parties. For certain of our products that involve our proprietary design and materials technologies, we negotiate exclusive agreements with a limited number of manufacturing partners. For our products that are less complex to produce, we maintain relationships with a broader base of suppliers to purchase goods as needed without contractual obligation.
Our aluminum and composite baseball and softball bats are manufactured in Asia. We manufacture a portion of our composite ice hockey sticks and blades at our facility in Tijuana, Mexico and the balance of these products are sourced from various international suppliers. Custom ice hockey pants, gloves and skates were manufactured at our facility in Quebec, Canada during 2012, but manufacturing was transferred to Asia for 2013. We assemble and package a portion of our cycling and football helmets at our Elyria, Ohio and Rantoul, Illinois facilities, while the balance of our helmets are sourced from outside of the United States. Reconditioning services are performed at facilities strategically located throughout the United States and Mexico. In addition, we maintain a silk screening operation at our Elk Grove Village, Illinois facility to customize our football practice wear and uniform products with almost any logo, team name or other design that our customer requests.
We complement our manufacturing infrastructure with overseas sourcing and leverage our purchasing volumes to receive lower prices. We have exclusive agreements with various third-party vendors in Asia to produce a portion of our aluminum and composite products. These agreements provide us with additional flexibility and manufacturing capacity. To protect the integrity of our brands, we actively inspect products purchased from third-party vendors to confirm that they meet our high-quality standards. We have a product development team in Hong Kong that supports our Asian sourcing efforts. In addition to handling product design, this team visits and works with many of our suppliers to verify product specifications, logistics and quality control. We require our suppliers to perform factory tests periodically to confirm the material and functional integrity of our products.
We operate distribution facilities in Illinois, Pennsylvania, Utah, Canada, Sweden and Taiwan, which allow us to maintain high service levels for our customers across all distribution channels. We also use a third party distributor in Tennessee for apparel, in the United Kingdom for Bell mass products and in France for Bell and Giro products.
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 and softball 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.
Intellectual Property
We have a portfolio of approximately 215 patents along with approximately 165 pending patent applications. While we believe certain of these patents are material to the success of our products based on currently competing technology, we also believe that experience, reputation, brand recognition and our distribution network provide significant benefits to our business.
We believe our well-known brands-Easton, Bell, Giro and Riddell-are a core asset of our business and are of great value to us. We maintain a portfolio of active registered trademarks in support of our brands, including registration of certain trademarks in the United States and in certain other countries. We have also obtained licenses to use certain popular brands on select youth cycling helmets and accessories from several companies including Mattel Inc., to use the Barbie and Hot Wheels brands, ESPN, Inc., to use the X Games brand, Sanrio Co. to use the Hello Kitty brand and the Walt Disney Co., to use the Disney brand.
In connection with our purchase of Easton Sports, Inc., or Easton, in March 2006, we licensed the Easton trademark to certain affiliates of James L. Easton solely in connection with specific products or services, none of which currently compete with us. For a discussion of this license and other related technology licenses to such James L. Easton affiliates, see “Item 13 - Certain Relationships and Related Transactions, and Director Independence.” We also license the Easton trademark to third parties with respect to the production and marketing of footwear and hockey apparel and the MacGregor trademark primarily for athletic footwear and sports equipment. In addition, the Bell trademark is currently licensed to a third party for the production of auto racing helmets sold worldwide.
Employees
We believe that our relationships with our employees are good. As of December 28, 2013, we had approximately 2,397 employees, including 188 in product design, research and development and testing, 1,567 in operations, including manufacturing and distribution, 382 in sales and marketing and 260 in administration. Approximately 53 of our employees are represented by unions. Our collective bargaining agreement with a union in York, Pennsylvania, expires in December 2015, and an agreement with a union in Mount Vernon, New York, expires in January 2015.
Insurance and Risk Management
Our business exposes us to claims for product liability and warranty claims in the event our products actually or allegedly fail to perform as expected, or the use of our products results, or is alleged to result, in personal injury or death. We have various pending product liability cases against us. We vigorously defend product liability cases brought against us and actively manage our product liability exposure through research and testing, active case management and insurance. We maintain levels of insurance which we believe to be adequate. Our primary product liability insurance policies expire in January 2015.
Governmental Regulation
Our products and accessories are subject to the Federal Consumer Product Safety Act, which authorizes the CPSC to protect consumers from hazardous sporting goods and other products. The CPSC has the authority to exclude from the market certain articles which are found to be hazardous and can require a manufacturer to repurchase such goods. We maintain a quality control program for our protective equipment operations and retail products that is designed to comply with applicable laws. To date, none of our products have been deemed to be hazardous by any governmental agency. Operations at all of our facilities are subject to regulation by the Occupational Safety and Health Administration, and various other regulatory agencies. Our operations are also subject to environmental regulations and controls. While some of the raw materials used in our operations may be potentially hazardous, we have not received any material environmental citations or violations and we have not been required to spend significant amounts to comply with applicable law or to remediate conditions created by releases or disposal of hazardous materials.
Financial Information on Geographical Areas
For financial information on geographic areas, see Note 6 to our “Notes to Consolidated Financial Statements” contained herein.
Available Information
Our Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, the Exchange Act, are filed with the U.S. Securities and Exchange Commission, the SEC. Such reports and other information filed by our Company with the SEC are available free of charge on the SEC website. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, our Company’s references to the URLs for these websites are intended to be inactive textual references only.
Item 1A.
Item 1A. Risk Factors
Economic conditions could adversely affect the profitability of some or all of our businesses.
Turmoil in the financial markets could adversely affect economic activity in the United States and other regions of the world in which we do business. Our operations and performance depend significantly on worldwide economic conditions. Many of our products are discretionary items and the purchase of these items may be easily deferrable by consumers should the financial wherewithal of consumers not justify such purchases. Uncertainty about global economic conditions could pose a risk as some consumers and businesses could postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products and services. A decrease in the budgets of our institutional customers, such as schools could also lead to decreased spending by such customers on our products which could have a material adverse impact on our operations.
Collectability of receivables from our customers may also be adversely affected, causing an increase in aged receivables and/or a reduced collection rate. If we are forced to write off uncollectible accounts as a result, our profitability would be adversely affected. These conditions could also impair the ability of those with whom we do business to satisfy their obligations to us. A sustained decline in economic conditions could further reduce demand for our products, driving down their prices. In addition, an economic downturn could adversely affect the fiscal health of key customers or impair their ability to continue to operate during a recessionary period, which would decrease our revenues unless we are able to replace any lost business. Other factors that could influence demand include increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior.
An 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 economic environment could affect our business in a number of direct and indirect ways including: tighter inventory management by retailers; the potential for 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; tightening of credit markets; and business disruptions due to difficulties experienced by suppliers and customers. In addition, slowing consumer demand for our products has caused lower net sales in the past, and this could potentially recur in the future.
Our products face intense competition, and if we cannot compete successfully in our industry, and within our product lines, we could lose market share and our business could be adversely affected.
Although we believe that we have no competitors that challenge us across all of our product lines, the markets for our products are highly competitive and we face competition from a number of sources in many of our individual product lines. Competition is primarily based on brand name recognition, product features, style, quality, price and customer service. Our baseball and softball equipment business has numerous national and international competitors, including Rawlings Sporting Goods, Worth Sports, Wilson Sporting Goods, Hillerich & Bradsby and Mizuno Corp. Our ice hockey equipment business principally competes with Bauer Hockey and Reebok-CCM Hockey. Our football equipment business competes with several companies, including Schutt Sports, Douglas Protective Equipment and Rawlings Sporting Goods and our reconditioning business competes with many regional companies. Our uniform and practice wear business also competes with national businesses such as Adidas, Nike, Russell Athletic and Under Armour. Our cycling helmet, accessories and component business competes with several national and regional competitors, including Dorel Industries, Trek Bicycle Corporation and Specialized Bicycle Components, as well as with several other international companies. In the snowsports helmet market, we compete with several domestic and international brands, including, Smith, Bern, K2, POC, as well as R.E.D., which is owned by The Burton Corporation and Salomon, which is owned by Amer Sports. In the powersports helmet market, we compete against such well-known brands as Arai, Shoei, HJC and KBC. Many of these competitors are significantly larger and have greater financial resources than we do.
To compete effectively, we must (1) maintain the image of our brands and our reputation for quality and performance in our core markets; (2) be flexible and innovative in responding to changing market demands on the basis of brand image, style, performance and quality; (3) keep pace with rapid changes in marketing strategies; and (4) offer consumers a wide variety of high quality products at competitive prices. The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design. Several of our competitors enjoy substantial competitive advantages, including greater financial resources for competitive activities, such as sales and marketing and strategic acquisitions. The number of our direct competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into our product lines. Our ability to expand into other product lines may be inhibited by the risk of infringing intellectual property held by our competitors and, if we hold intellectual property rights in an area that competitors are expanding into, we cannot assure that we will successfully challenge such expansion. Furthermore, our inability to maintain or expand our intellectual property assets may inhibit our ability to comply with license terms concerning intellectual property assets. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences. Our results of operations and market position may be adversely impacted by our competitors and the competitive pressures in the apparel, sporting goods and footwear industries.
Increased competition in the markets for our products may cause us to reduce our prices to retailers and customers, which would cause our gross margin to decline if we are unable to offset price reductions with comparable reductions in our product costs. If our gross margin declines, our profitability could decline and we could incur operating losses that we may be unable to fund or sustain for extended periods of time, if at all. We cannot assure you that additional competitors will not enter our existing markets or that we will be able to compete successfully against existing or new competition.
Sales of our products may be adversely affected if we cannot effectively introduce new and innovative products.
The sporting goods industry is subject to constantly and rapidly changing consumer demands based on performance features. Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and quality of our brands. We believe the historical success of our business has been attributable, in part, to the introduction of products, which represent an improvement in performance over products then available in the market. Our future success will depend, in part, upon our continued ability to adapt to new materials, and to develop and introduce innovative products in the sports equipment and accessories markets in which we compete. Our success is also dependent on our ability to prevent competitors from copying our innovative products. We may not be able to obtain intellectual property protection for an innovative product and, even if we do, we cannot assure that we would be successful in challenging a competitor’s attempt to copy that product. Furthermore, successful product designs can be displaced by other product designs introduced by competitors which shift market preferences in their favor. Our competitors may obtain intellectual property protection for superior products that would preclude us from offering the same or similar features. Our competitive position could be particularly harmed if a competitor’s proprietary product feature became the industry standard. If we do not introduce successful new products or our competitors introduce products that are superior to ours, our customers may purchase products from our competitors, which will result in a decrease in our net sales and excess inventory levels, and will adversely affect our business.
As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs significantly in advance of the time when consumer acceptance can be measured. If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of finished goods inventory or other conditions which could have a material adverse effect on our results of operations.
The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer demand. These requirements could strain our management, financial and operational resources. If we do not continue to develop innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our revenues and market share.
The success of our business is dependent on our affiliation with athletes, athletic associations and leagues.
We sponsor numerous professional athletes in baseball, cycling, ice hockey, action sports, snowsports and powersports who endorse and use our products, including our Easton branded baseball and ice hockey equipment and our Bell and Giro branded helmets. We believe these sponsorships contribute to the authenticity and image of our brands. Also, our equipment is used by numerous professional players and Division I NCAA sports teams. We believe that these relationships increase sales of our products by enhancing the visibility of our brands and related trademarks and exposure of our branded products to other customers and, in certain instances, provide us with a significant competitive advantage. If we were to lose the benefits of these relationships, or if they were to deteriorate in a material way, our business and results of operations, financial condition and cash flow could be adversely affected.
We cannot assure you that we will be able to maintain our existing relationships with these professional athletes or leagues in the future or that we will be able to attract new athletes or leagues to endorse our products. Larger companies with greater access to capital for athlete or league sponsorship may in the future increase the cost of sponsorship to levels we may choose not to match. If this were to occur, our sponsored athletes or leagues may terminate their relationships with us and endorse the products of our competitors and we may be unable to obtain endorsements from other, comparable athletes or leagues.
Sales of our products will be adversely affected if we cannot satisfy the standards established by testing and athletic governing bodies.
Our products are designed to satisfy the standards established by a number of regulatory and testing bodies, including the Department of Transportation, the CPSC, HECC, CSA, NOCSAE and the Snell Memorial Foundation, as well as by athletic organizations and governing bodies, including the NFL, NHL, MLB, NCAA and Little League Baseball and Softball. In addition, conferences within these athletic organizations have their own standards that can be stricter than the standards promulgated by the organizations themselves. For certain products, we rely on our in-house testing equipment to ensure that such products comply with these standards. We cannot assure you that our future products will satisfy these standards, that our in-house testing equipment will produce the same results as the equipment used by the applicable testing bodies, athletic organizations and governing bodies or that existing standards will not be altered in ways that adversely affect our brands and the sales of our products, which has occurred in the past. Any failure to comply with applicable standards could have a material adverse effect on our business.
The loss of one or more key customers could result in a material loss of revenues.
Our customers do not have any contractual obligations to purchase our products in the future. For the fiscal year ended December 28, 2013, our top 10 customers collectively accounted for approximately 32.2% of our net sales, and Wal-Mart, our largest customer, accounted for approximately 12.6% of our net sales. We face the risk that one or more of these key customers may not increase their business with us as we expect, may significantly decrease their business with us, may negotiate lower prices or may terminate their relationship with us altogether. The failure to increase our sales to these customers would have a negative impact on our growth prospects and any decrease or loss of these key customers’ business could result in a material decrease in our net sales and net income. In addition, some of our customers in the retail industry are experiencing consolidation, contractions and financial difficulties. A large portion of our sales are to sporting goods retailers. Of these, many of our smaller retailers and some larger retailers are not strongly capitalized. Adverse conditions in the sporting goods retail industry can adversely impact the ability of retailers to purchase our products, or could lead retailers to request credit terms that would adversely affect our cash flow and involve significant risks of nonpayment. As a result, we may experience a loss of customers or the uncollectability of accounts receivable in excess of amounts against which we have reserved.
The cost of raw materials could affect our operating results.
The materials used by us, our suppliers and our manufacturers involve raw materials, including carbon-fiber, aluminum and petroleum-based products. Significant price fluctuations or shortages in petroleum or other raw materials, or the introduction of new and expensive raw materials, could have a material adverse effect on our cost of goods sold, operations and financial condition.
The seasonality of our sales may have an adverse effect on our operations and our ability to service our debt.
Our business is subject to seasonal fluctuations. This seasonality requires that we effectively manage our cash flows over the course of the year. If our sales were to fall substantially below what we would normally expect during particular periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected. In addition, quarterly results may vary from year to year due to the timing of new product introductions, major customer shipments, inventory holdings of significant customers, adverse weather conditions and the sales mix of products sold. Accordingly, comparisons of quarterly information from our results of operations may not be indicative of our ongoing performance.
Our success is dependent on our ability to protect our worldwide intellectual property rights and if we are unable to enforce and protect our intellectual property rights, our competitive position may be harmed.
We rely on a combination of patent, trademark, and trade secret laws in the United States and other jurisdictions and contractual restrictions, such as confidentiality agreements, to protect certain aspects of our business. We also enter into invention assignment agreements with our employees and consultants. However, while we have selectively pursued patent and trademark protection in the United States, Europe, and Canada; in some countries we have not perfected important patent and trademark rights. Our success depends in part on our ability to protect our trademarks and patents from unauthorized use by others. If substantial unauthorized use of our intellectual property rights occurs, we may incur significant financial costs in prosecuting actions for infringement of our rights, as well as the loss of efforts by engineers and managers who must devote attention to these matters. We cannot be sure that our patents and trademarks, or other protections such as confidentiality, will be adequate to prevent imitation of our products and technology by others. We may be unable to prevent third parties from using our intellectual property without our authorization, particularly in countries where we have not perfected our proprietary rights, where the laws or law enforcement practices do not protect our proprietary rights as fully as in the United States, or where intellectual property protection is otherwise limited or unavailable. In some foreign countries where intellectual property laws or law enforcement practices do not protect our proprietary rights as fully as in the United States, third-party manufacturers may be able to manufacture and sell imitation products and diminish the value of our brands. If we fail to obtain patent and trademark protection, maintain our existing patent and trademark rights, or prevent substantial unauthorized use of our technology and brands, we risk the loss of our intellectual property rights and competitive advantages we have developed, causing us to lose net sales and harm our business. Accordingly, we devote substantial resources to the establishment and protection of our trademarks, and patents and continue to evaluate the registration of additional trademarks, patents and service marks, as appropriate. We cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. Moreover, even if the applications will be approved, third parties may seek to oppose or otherwise challenge these registrations.
We cannot assure that any third party patents and trademarks for which we have obtained licenses are adequately protected to prevent imitation by others. If those third party owners fail to obtain or maintain adequate patent and trademark protection or prevent substantial unauthorized use of the licensed intellectual property, we risk the loss of our rights under the third party intellectual property and competitive advantages we have developed based on those rights.
We cannot assure that our actions taken to establish and protect our technology and brands will be adequate to prevent others from seeking to block sales of our products or to obtain monetary damages, based on alleged violation of their patents, trademarks or other proprietary rights. In addition, our competitors have obtained and may continue to obtain patents on certain features of their products, which may prevent us from offering such features on our products, may subject us to patent litigation, and in turn, could result in a competitive disadvantage to us. Moreover, third parties may independently develop technology or other intellectual property that is comparable with or similar to our own, and we may not be able to prevent their use of it.
Our best known brands and branded products include Easton, Bell, Giro and Riddell. We believe that these trademarked brands are a core asset of our business and are of great value to us. If we lose the use of a product name, our efforts spent building that brand will be lost and we will have to rebuild a brand for that product, which we may or may not be able to do. We also note that in connection with our acquisition of Easton, we agreed that certain affiliates of one of Parent’s members, Jas. D. Easton, Inc., have the right to continue to use the Easton brand name in certain product areas, although we retain ownership of the Easton mark. While we do not intend to compete with these entities in such product areas, we also do not control such entities and therefore can make no assurances as to how they will conduct business under the Easton brand name.
Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
From time to time, third parties have challenged our patents, trademark rights and branding practices, or asserted intellectual property rights that relate to our products and product features. We may be required to defend such claims in the future, which, whether or not meritorious, could result in substantial costs and diversion of resources and could negatively affect our results of operations or competitive position. Should we be found liable for infringement of the intellectual property rights of others, we may be required to enter into licensing agreements (if available on acceptable terms or at all), pay damages, or cease making certain of our products. We may also need to redesign or rename some of our products to avoid future infringement liability. For example in 2002, one of our competitors sued us in Canadian Federal Court alleging infringement of a hockey skate patent. The details of such lawsuit have been previously disclosed in prior Company filings. In June 2013, we settled the lawsuit. Moreover, our involvement in litigation against third parties based on infringement of our intellectual property rights presents some risk that our intellectual property rights could be challenged and invalidated. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling certain of our products.
We are subject to product liability, warranty and recall claims and our insurance coverage may not cover such claims.
Our business exposes us to warranty claims and claims for product liability in the event products manufactured, designed or reconditioned by us actually or allegedly fail to perform as expected, or the use of these products results, or is alleged to result, in personal injury or death. We have various pending product liability cases against us. We vigorously defend or attempt to settle product liability cases brought against us. However, there is no assurance that we can successfully defend or settle all such cases. We believe that we are not currently subject to any material product liability claims not covered by insurance, although the ultimate outcome of these and future claims cannot presently be determined. Management obtains an actuarial analysis and has established an accrual for probable losses based on this analysis, which considers, among other factors, our Company’s 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. Because product liability claims are part of the ordinary course of our business, we maintain product liability insurance, which we believe is adequate. Our insurance policies provide coverage against claims resulting from alleged injuries arising from our products sustained during the respective policy periods, subject to policy terms and conditions. The primary and excess layers of our Company’s product liability coverage are written under policies expiring in January 2015. We cannot assure you that this coverage will remain available in the future, that our insurers will be financially viable when payment of a claim is required, that the cost of such insurance will not increase, or that this insurance will ultimately prove to be adequate under our various policies. Furthermore, future rate increases might make insurance cost-prohibitive for us to maintain. These potential insurance problems or any adverse outcome in any liability suit could create increased expenses which could harm our business. We are unable to predict the nature of product liability claims that may be made against us in the future with respect to injuries, diseases or other illnesses resulting from the use of our products or the materials incorporated in our products.
With regard to warranty claims, our actual product warranty obligation could materially differ from historical rates, which would oblige us to revise our estimated warranty liability accordingly. Adverse determinations of material product liability and warranty claims made against us could have a material adverse effect on our financial condition and could harm our reputation, reducing the success of our business.
In addition, if any of our products are, or are alleged to be defective, we may be required to or voluntarily participate in a recall of that product. For example, in 2010 we conducted a voluntary recall of a single bicycle stem product line as a preventative measure. Although we have never had a material recall, if we were to recall one or more of our material products, it would be a substantial cost to us and our relationships with our customers could be irreparably harmed and could materially and adversely affect our business.
In addition to the matters discussed in the preceding paragraphs, our Company is, from time to time, a party to various other legal claims and actions incidental to its business, including, without limitation, employment-related and intellectual property infringement claims. Management believes that none of these claims or actions, either individually or in the aggregate, is material to its business or financial condition.
Our international sourcing and sales network subjects us to additional risks and costs, which may differ in each country in which we do business and may cause our profitability to decline.
During the fiscal year ended December 28, 2013, we purchased approximately $288.6 million of finished goods and raw materials from international third-party suppliers. A significant amount of these purchases were from vendors in Asia, the majority of which were located in mainland China. Most of what we purchase in Asia is finished goods rather than raw materials. We expect to increase our international sourcing in the future. In addition, a significant percentage of our net sales are to customers outside the United States, including Canada and Europe. Consequently, our business is subject to the risks generally associated with doing business abroad. We cannot predict the effect of various factors in the countries in which we sell our products or where our suppliers are located, including, among others: (1) recessionary trends in international markets; (2) legal and regulatory changes and the burdens and costs of our compliance with a variety of laws, including trade restrictions and tariffs; (3) difficulties in enforcing intellectual property rights; (4) increases in transportation costs or delays; (5) work stoppages and labor strikes; (6) fluctuations in exchange rates; (7) political unrest, terrorism and economic instability, and (8) limitations on repatriation of earnings. If any of these or other factors were to render the conduct of our business in a particular country undesirable or impractical, our business and financial condition could be adversely affected.
Our business is also subject to the risks associated with the enactment of additional United States or foreign legislation and regulations relating to exports or imports, including quotas, duties, taxes or other charges or restrictions. If imposed, such legislation and regulations could have a material adverse effect on our net sales and profitability.
We also may be adversely affected by significant fluctuations in the value of the United States dollar relative to other currencies. We generally purchase goods made by foreign manufacturers in United States dollars, and therefore, changes in the value of the United States dollar can have an immediate effect on the cost of our purchases. If we experience increased costs as a result of exchange rate fluctuations and we are unable to increase our prices to a level sufficient to compensate for such increased costs, our gross margins would decline and we could become less price-competitive with companies who manufacture their products in the United States.
Changes in foreign currency exchange or interest rates could affect our revenues and costs.
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in United States dollars, and to fluctuations in interest rates related to our variable rate debt. In some cases, as part of our risk management strategies, we may choose not to hedge our exposure to foreign currency exchange rate changes, or we may choose to maintain variable interest rate debt. If we misjudge these risks, there could be a material adverse effect on our operating results and financial position. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the statements of income and balance sheets of our international subsidiaries into United States dollars. Approximately 9.4% of our net sales in the fiscal year ended December 28, 2013 were denominated in foreign currencies and subject to exchange rate fluctuation risk. The reported revenues and expenses of our international subsidiaries would decrease if the United States dollar increased in value in relation to other currencies, including, the Canadian dollar, British pound, Euro and Taiwan dollar. Finally, changes in exchange rates for foreign currencies may reduce international demand for our products, increase our labor or supply costs in non-United States markets, or reduce the United States dollar value of revenue we receive from other markets. These and other economic factors could have an adverse effect on demand for our products and services and on our financial condition and operating results.
Our results of operations may suffer if we are not able to adequately forecast demand for our products.
To reduce purchasing costs and ensure supply, we place orders with our suppliers far in advance of the time period we expect to deliver our products. However, a large portion of our products are sold into consumer markets that are difficult to accurately forecast. If we fail to accurately forecast demand for our products, we may experience excess inventory levels or inventory shortages. Factors that could affect our ability to accurately forecast demand for our products include:
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changes in consumer demand for our products or the products of our competitors;
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new product introductions by our competitors;
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failure to accurately forecast consumer acceptance of our products;
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adverse weather during key sporting seasons;
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unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders placed by retailers;
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weakening of economic conditions or consumer confidence in future economic conditions, which could reduce demand for discretionary items, such as our products;
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terrorism or acts of war, or the threat thereof, which could adversely affect consumer confidence and spending or interrupt production and distribution of products and raw materials; and
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general economic conditions.
Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could significantly harm our operating results and impair the value of our brands. Inventory shortages may result in unfulfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost net sales, any of which could harm our business.
Many of our products or components of our products are provided by a limited number of third-party suppliers and manufacturers and, because we have limited control over these parties, we may not be able to obtain quality products on a timely basis or in sufficient quantities.
We rely on a limited number of suppliers and manufacturers for many of our products and for many of the components in our products. During the fiscal year ended December 28, 2013, approximately 37.8% of our raw materials for the products we manufacture were sourced from international suppliers. In addition, a substantial portion of our products are manufactured by third-party manufacturers, and during the fiscal year ended December 28, 2013, approximately 150 international manufacturers produced approximately 85.0% of our purchased finished goods. We do not generally maintain long-term contracts with our third-party suppliers and manufacturers, and we compete with other businesses for raw materials, production capacity and capacity within applicable import quotas.
Should our current third-party manufacturers become incapable of meeting our manufacturing requirements in a timely manner or cease doing business with us for any reason, our business and financial condition could be adversely affected. If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional supplies of raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, should we decide to transition existing in-house manufacturing to third-party manufacturers, the risk of such a problem could increase. Even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. For example, we experienced quality issues when the manufacturing of composite baseball and softball bats was outsourced, which led to an increase in returns of defective bats in 2008. The issue was successfully addressed by working with the supplier in Asia to improve process controls to allow for the identification and resolution of quality issues prior to products being sold into the marketplace. Any material delays, interruption or increased costs in the supply of raw materials or manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and result in lower revenues and net income both in the short and long term.
In addition, there can be no assurance that our suppliers and manufacturers will continue to provide raw materials and to manufacture products that are consistent with our standards and that comply with all applicable laws and regulations. We have occasionally received, and may in the future receive shipments of products that fail to conform to our quality control standards. In that event, unless we are able to obtain replacement products in a timely manner, we risk the loss of net sales resulting from the inability to sell those products and could incur related increased administrative and shipping costs. If we are unable to sell products, we could lose trademark registrations applicable to those products for failure to make use of the mark. Any violation of our policies or any applicable laws and regulations by our suppliers or manufacturers could interrupt or otherwise disrupt our sourcing, adversely affect our reputation or damage our brand image. While we do not control these suppliers, manufacturers or licensees or their labor practices, negative publicity regarding the production methods of any of our suppliers, manufacturers or licensees could adversely affect our reputation and sales and force us to locate alternative suppliers, manufacturing sources or licensees.
The success of our business is dependent upon our information systems.
Our ability to effectively manage and maintain our inventory, process transactions, ship products to our customers on a timely basis and maintain cost-efficient operations is dependent on information technology and on our information systems. We continue to plan for our long-term growth by investing in operations management and infrastructure. We may experience difficulties in operating our business under our current ERP system, any of which could disrupt our operations, including our ability to timely ship and track product orders to customers, project inventory requirements, manage our supply chain and otherwise adequately service our customers.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement.
Any failure to implement and maintain the improvements in the controls over our financial reporting, or difficulties encountered in the implementation of these improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls to address an identified weakness could also cause investors to lose confidence in our reported financial information, which could have a negative impact on our Company. There can be no assurance that we will not discover weaknesses in our internal control over financial reporting in the future.
Our current executive officers, management and key employees are critical to our success, and the loss of any of these individuals could harm our business, brands and image.
In 2013, we announced several key changes among our executive officers and senior management team, including appointing Terry G. Lee as our Executive Chairman and Chief Executive Officer, and Timothy P. Mayhew as our President and Chief Operating Officer. Both Messrs. Lee and Mayhew have served on our board of directors since 2004. In addition, Mr. Lee previously served as Chairman and Chief Executive Officer of Bell Sports from 1989 to 1998. Our executives are experienced and highly qualified, and we believe our team enables us to pursue our long-term strategic goals. The success of our business is dependent upon the management and leadership skills of our senior management team and other key personnel, including certain members of our product development team. Competition for these individuals’ talents is intense, and we may not be able to attract and retain a sufficient number of qualified personnel in the future. Our Company does not currently maintain any key man insurance coverage, and the loss of any such personnel or the inability to attract and retain key personnel could delay the development and introduction of new products, harm our ability to sell our products, damage the image of our brands and prevent us from executing our business strategy.
We may not succeed in integrating an acquisition into our operations, which could have a material adverse effect on our operations, results of operations and financial condition.
We may continue to expand our business and operations through strategic acquisitions. The value of our Company will be affected by our ability to achieve the benefits expected from any strategic acquisitions we may undertake in the future. Achieving these benefits will depend in part upon meeting the challenges inherent in the successful combination of these enterprises. In particular, we may have difficulty and may incur unanticipated expenses related to integrating management, personnel and operations generally. Such an acquisition may also cause a substantial diversion of our management’s attention from day-to-day operations, and the assumption of liabilities of an acquired business, including unforeseen liabilities. Additionally, we may not be able to achieve any anticipated cost savings for many reasons, including an inability to take advantage of expected tax savings. Failure to integrate these acquisitions successfully may have a material adverse effect on our business, results of operations and financial condition.
Employment related matters, such as unionization, may affect our profitability.
As of December 28, 2013, approximately 53 of our 2,397 employees were unionized. Although we have good labor relations with these unionized employees, we have little control over union activities and could face difficulties in the future. Our collective bargaining agreement with a union in York, Pennsylvania covering approximately 43 employees expires in December 2015. Our collective bargaining agreement with a union in Mount Vernon, New York covering approximately 10 employees expires in January 2015. Labor organizing activities could result in additional employees becoming unionized. We cannot assure you that we will be able to negotiate new collective bargaining agreements on similar or more favorable terms or that we will not experience work stoppages or other labor problems in the future at our unionized and non-union facilities. We could experience a disruption of our operations or higher ongoing labor costs, which could have an adverse effect on our business and financial condition.
In addition, labor disputes at our suppliers or manufacturers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions during our peak importing or manufacturing seasons, and could have an adverse effect on our business, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation or shortages and reduced net revenues and net income.
Acts of war, terrorism or epidemics may have an adverse effect on our business.
Acts of war, terrorism or epidemics may have an adverse effect on the economy generally, and more specifically on our business. Among various other risks, such occurrences have the potential to significantly decrease consumer spending on leisure products and activities, adversely impact our ability to consummate future debt or equity financings and negatively affect our ability to manufacture, source and deliver our products in a timely manner.
We may be subject to potential environmental liability.
We are subject to many federal, state and local requirements relating to the protection of the environment, and we have made and will continue to make expenditures to comply with such requirements. Past and present manufacturing operations subject us to environmental laws that regulate the use, handling and contracting for disposal or recycling of hazardous or toxic substances, the discharge of particles into the air and the discharge of processed wastewaters into sewers. We believe that our operations are in substantial compliance with these laws and regulations and we do not believe that future compliance with such laws and regulations will have a material adverse effect on our results of operations, financial condition and cash flow. If environmental laws become more stringent, our capital expenditures and costs for environmental compliance could increase. Under applicable environmental laws we may also become liable for the remediation of contaminated properties, including properties currently or previously owned, operated or acquired by us and properties where wastes generated by our operations were disposed. Such liability can be imposed regardless of whether we were responsible for creating the contamination. We do not believe that any of our existing remediation obligations, including at third-party sites, will have a material adverse effect on our financial results. However, due to the possibility of unanticipated factual or regulatory developments, the amount and timing of future environmental expenditures could vary substantially from those currently anticipated and could have a material adverse effect on our financial results.
Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.
The labeling, distribution, importation and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, or FTC, CPSC, and state attorneys general in the United States, as well as by various other federal, state, provincial, local and international regulatory authorities in the countries in which our products are manufactured, distributed or sold. If we fail to comply with those regulations, we could become subject to significant penalties or claims, which could harm our results of operations or our ability to conduct our business. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and may impair the marketing of our products, resulting in significant loss of net sales. In 2011, a U.S. Senator requested that the FTC investigate football helmet manufacturers’ alleged misleading safety claims and deceptive practices in the selling of new football helmets and reconditioning of used ones. In 2013, the FTC closed the investigation without taking formal action.
The value of our brand and sales of our products could be diminished if we, the athletes who use our products, the sport categories in which we compete or the categories of products of which we sell, are associated with negative publicity.
We sponsor a variety of athletes and feature those athletes in our advertising and marketing materials, and many athletes and teams use our products, including those teams or leagues for which we are an official supplier. Actions taken by athletes, teams or leagues associated with our products that harm the reputations of those athletes, teams or leagues could also harm our brand image and result in a material decrease in our net sales, net income, and cash flows which could have a material adverse effect on our financial condition and liquidity. We may also select athletes who are unable to perform at expected levels or who are not sufficiently marketable, which could also have an adverse effect on our business. If we are unable in the future to secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove to be as effective or may result in additional costs. Also, union strikes or lock-outs affecting play could negatively impact the popularity of a sport, which could have a material adverse effect on our net sales of products used in that sport. Furthermore, negative publicity resulting from severe injuries or death occurring in the sports in which our products are used could negatively affect our reputation and result in restrictions or bans on the use of our products. For example, national media recently reported on the results of several scientific studies suggesting that concussive injuries associated with football may increase rates of various physical and mental disabilities among players. In response to these reports, the House Judiciary Committee held hearings to discuss the NFL’s efforts to protect players from head injury. If the popularity of football among players and fans were to decrease due to these risks or the associated negative publicity, sales of certain of our products could decrease and it could have a negative impact on our net sales, profitability and operating results. In addition, we could become exposed to additional claims and litigation relating to the use of our products and our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products.
In addition, in response to injuries or death caused by balls hit off different types of non-wood bats, some state legislatures and other national and local governing bodies have introduced bills and rules to ban certain types of non-wood bats from use in youth and adult sports. If we are unable to adapt our products to the standards that may or have already been developed, it could have a negative impact on our operating results.
Recent turmoil in the financial markets could increase our cost of borrowing and impede access to or increase the cost of financing our operations and investments.
United States and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms. In addition, equity markets are continuing to experience rapid and wide fluctuations in value. If these conditions continue or worsen, our cost of borrowing may increase and it may be more difficult to obtain financing for our operations or investments. In addition, our borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in significant part, on our performance as measured by credit metrics such as interest coverage and leverage ratios. A decrease in these ratings could increase our cost of borrowing and/or make it more difficult for us to obtain financing in the future. The disruption in the global financial markets has also impacted some of the financial institutions with which we do business and may impair the ability of banks to honor draws on the ABL Facility (as defined below). A sustained decline in the financial stability of financial institutions could affect our ability to secure credit-worthy counterparties for our interest rate and foreign currency hedging programs and could affect our ability to settle existing contracts.
There could be a number of other effects from the disruption of the credit markets on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products; potential insolvencies of such customers or channel partners; and failure of derivative counterparties and other financial institutions negatively impacting our treasury operations.
Our substantial indebtedness could adversely affect our financial health.
We have a significant amount of indebtedness. As of December 28, 2013, we had total indebtedness of approximately $373.0 million (including $350.0 million of our 9.750% senior secured notes due 2016, or the Notes and $23.0 million under our senior secured asset-based revolving credit facility, or ABL Facility). For more information on our indebtedness, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Subject to the limits that are contained in certain of the documents governing our indebtedness, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could intensify. Specifically, our high level of debt could have important consequences, including the following:
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making it more difficult for us to satisfy our obligations with respect to the Notes and our other debt;
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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
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requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
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increasing our vulnerability to general adverse economic and industry conditions;
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exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;
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limiting our flexibility in planning for and reacting to changes in the industry in which we compete;
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inhibiting our ability to pay fees and invest resources to maintain or expand our portfolio of intellectual property assets or to comply with license terms concerning intellectual property assets;
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placing us at a disadvantage compared to other less leveraged competitors; and
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increasing our cost of borrowing.
Certain of the documents governing our indebtedness contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt. In addition, our indirect parent company, EB Sports, has entered into the New Holdco Facility (as defined below) pursuant to which it has borrowed $108.3 million. Neither our Company nor any of our subsidiaries have guaranteed or are otherwise obligated to repay such indebtedness or any interest that accrues thereon. However, given that EB Sports controls RGB, our direct parent, EB Sports has the ability, subject to the terms of the ABL Facility and any other agreements which limit our ability to declare and pay dividends, to obtain money from us and our subsidiaries to fund its obligations under such loan. Borrowings under the New Holdco Facility are secured by a pledge of all capital stock of RBG and our Company. This credit agreement is more fully described in “Item 13 - Certain Relationships and Related Transactions, and Director Independence.”
Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.
We may be able to incur significant additional indebtedness in the future. Although certain of the documents governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and the additional indebtedness incurred in compliance with the documents governing our indebtedness could be substantial. These restrictions do not prevent us from incurring obligations that do not constitute indebtedness under the terms of the documents governing our indebtedness. In addition, the ABL Facility provided for unused commitments of approximately $161.7 million as of December 28, 2013. Furthermore, subject to availability under a borrowing base and certain other conditions, we may increase our borrowing availability under the ABL Facility by up to an additional $50.0 million. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” To the extent new debt is added to our and our subsidiaries’ current debt levels, the substantial leverage risks described above would increase.
The terms of certain of the documents governing our indebtedness, may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
Certain of the documents governing our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in activities that may be in our long-term best interests, including, among other things, restrictions in the ABL Facility and the other documents governing our indebtedness on our ability to:
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incur additional indebtedness and issue capital stock;
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pay dividends or make other distributions or repurchase or redeem our capital stock;
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make certain loans and investments;
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enter into sale and leaseback transactions;
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transfer or sell assets;
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incur certain liens;
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enter into transactions with affiliates;
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alter the businesses we conduct;
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enter into agreements restricting our subsidiaries’ ability to pay dividends; and
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consolidate, merge or sell all or substantially all of our assets.
Under the ABL Facility, there are limitations on our ability to incur the full $250.0 million of commitments. Our availability is limited to the lesser of a borrowing base and $250.0 million (and, in the case of the Canadian borrowers, the lesser of a Canadian based borrowing base and $30.0 million, the size of the Canadian sub-facility). The borrowing base for our and our Canadian borrowers is and will be calculated on a monthly (or more frequent under certain circumstances) valuation of our inventory, accounts receivable and certain cash balances. As a result, our access to credit under the ABL Facility will potentially be subject to significant fluctuation, depending on the value of the applicable borrowing base eligible assets as of any measurement date. In addition, if our excess gross availability falls below a specified percentage of our gross borrowing base, we will be required to satisfy and maintain on a monthly basis, a minimum fixed charge coverage ratio test. Our ability to meet the required minimum fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio. Moreover, the ABL Facility provides the administrative agent considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us and the Canadian borrowers. There can be no assurance that the administrative agent under the ABL Facility will not impose such actions during the term of the ABL Facility and further, was it to do so, the resulting impact of this action could materially and adversely impair our ability to make interest payments on the Notes. The inability to borrow under the ABL Facility may adversely affect our and our Canadian subsidiaries’ liquidity, financial position and results of operations. As of December 28, 2013, we estimated our borrowing capacity under the ABL Facility would have been approximately $161.7 million, after giving effect to outstanding borrowings of $23.0 million, other customary reserves and $3.3 million of outstanding letters of credit. Because the borrowing capacity under the ABL Facility depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time, such amount may not reflect actual borrowing capacity.
A breach of the covenants under certain of the documents governing our indebtedness could result in an event of default under the applicable documents governing our indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the ABL Facility would permit the lenders under the ABL Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under the ABL Facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we cannot assure that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:
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limited in how we conduct our business;
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unable to raise additional debt or equity financing to operate during general economic or business downturns; or
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unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our plans.
Our variable rate indebtedness will subject us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Borrowings under the ABL Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. Certain of the documents governing our indebtedness restrict our ability to dispose of assets and use the proceeds from any such dispositions and also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
In addition, we hold a substantial portion of our assets and conduct substantially all of our operations through our subsidiaries, certain of which are not guarantors of our indebtedness. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of our indebtedness, our subsidiaries do not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the agreements governing certain of our existing indebtedness limit the ability of certain of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our obligations under the Notes.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, holders of any of our debt could declare all outstanding principal and interest to be due and payable, the lenders under the ABL Facility could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing such borrowings and we could be forced into bankruptcy or liquidation, in each case, which could result in you losing your investment.
In addition to our obligations on our indebtedness discussed above, we may make distributions to EB Sports to fund cash payments under the New Holdco Facility. On December 3, 2009, EB Sports refinanced its senior unsecured credit agreement, or the Previous Holdco Facility, with Wachovia Investment Holdings, LLC and the lenders named therein, pursuant to which EB Sports had borrowed $175.0 million, through a new senior secured credit agreement with Wachovia Bank, N.A. and the existing lenders under the Previous Holdco Facility, the New Holdco Facility, with Wachovia Investment Holdings, LLC and the existing lenders under the Previous Holdco Facility and 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 and their affiliates. As of December 28, 2013, the amount of loans issued under the New Holdco Facility was approximately $144.9 million, including accrued interest. 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. The borrowings under the New Holdco Facility are scheduled to mature on December 31, 2015. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
The New Holdco Facility is secured by a pledge of all of the capital stock of RBG and Easton-Bell. The New Holdco Facility is guaranteed by RBG and any subsidiary of EB Sports that in the future guarantees other indebtedness of 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 if prior to maturity EB Sports does not have sufficient cash on hand and we are either prohibited from distributing sufficient cash to EB Sports to make such interest payments or we do not have sufficient liquidity (in the reasonable determination of our management) to permit us to distribute cash in an amount sufficient to allow such payment, then 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.
Certain of the documents governing our indebtedness restrict us and certain of our subsidiaries from, in each case, paying dividends or otherwise transferring assets to EB Sports. Such restrictions include, among others, prohibitions on payment of dividends in the event of default and limitations on the amount of dividends and other restricted payments to our parent entities, although certain of the documents, include exceptions to permit the payment of dividends and other distributions to service interest and refinance principal under the New Holdco Facility, provided that certain financial conditions have been satisfied. In addition, legal and contractual restrictions in agreements governing current and future indebtedness, as well as the financial condition and operating requirements of EB Sports’ subsidiaries, currently limit and may in the future limit EB Sports’ ability to obtain cash from us. Our earnings or available assets may not be sufficient to meet our payment obligations under the New Holdco Facility.
Our ability to make restricted payments (including payments to EB Sports to service its obligations) is limited by the terms of certain of the documents governing our indebtedness. Delaware law also requires that we be solvent both at the time, and immediately following, a restricted payment to EB Sports. Because EB Sports will rely on dividends from us to fund all cash payments under the New Holdco Facility, in the event that such restrictions prevent us from paying such a dividend, EB Sports would be unable to make payments which would result in an event of default under the New Holdco Facility.
If EB Sports is unable to pay borrowings under the New Holdco Facility, when due at maturity, an event of default will occur, which would permit the lenders to enforce their rights under the pledge agreement entered into in connection with the New Holdco Facility. If the lenders were to foreclose on collateral or exercise voting rights with respect to the pledged stock under the pledge agreement this would also result in a change of control under the terms of certain of the documents governing our indebtedness, which would require us to repay all loans outstanding under certain of the documents governing our indebtedness and/or to offer to repurchase all of the outstanding Notes.
The Notes are effectively subordinated to our and our subsidiary guarantors’ indebtedness under the ABL Facility and our other secured indebtedness to the extent of the value of the property securing such indebtedness on a basis senior to the Notes.
The Notes and the guarantees are effectively subordinated to our and our subsidiary guarantors’ indebtedness under the ABL Facility with respect to the assets that secure the indebtedness under the ABL Facility on a first-priority basis. The effect of this subordination is that upon a default in payment on, or the acceleration of, any indebtedness under the ABL Facility or other indebtedness secured by such assets on a first-priority basis, or in the event of bankruptcy, insolvency, liquidation, dissolution, reorganization or similar proceeding of us or any of the subsidiary guarantors of the ABL Facility or of such other secured debt, the proceeds from the sale of assets securing the ABL Facility and/or such other secured indebtedness on a first-priority basis will be available to pay obligations on the Notes only after all indebtedness under the ABL Facility and such other secured debt has been paid in full.
The Notes are structurally subordinated to all indebtedness of those of our existing or future subsidiaries that are not, or do not become, guarantors of the Notes.
The Notes are guaranteed by each of our existing and subsequently acquired or organized domestic subsidiaries that guarantee the ABL Facility or that, in the future, guarantee other debt issued by our Company or the subsidiary guarantors of the Notes. Except for such subsidiary guarantors of the Notes, our subsidiaries, including all of our non-domestic subsidiaries, will have no obligation, contingent or otherwise, to pay amounts due under the Notes or to make any funds available to pay those amounts, whether by dividend, distribution, loan or other payment. The Notes are structurally subordinated to all indebtedness and other obligations of any non-guarantor subsidiary such that, in the event of insolvency, liquidation, reorganization, dissolution or other winding up of any subsidiary that is not a guarantor, all of such subsidiary’s creditors (including trade creditors and preferred stockholders, if any) would be entitled to payment in full out of such subsidiary’s assets before we would be entitled to any payment.
In addition, the indenture governing the Notes, subject to some limitations, permit these subsidiaries to incur additional indebtedness and does not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.
For the twelve months ended December 28, 2013, our non-guarantor subsidiaries represented approximately 6.5% of our net sales, but had negative operating income and EBITDA. As of December 28, 2013, our non-guarantor subsidiaries represented 7.6% of our assets and 2.2% of total liabilities, including debt and trade payables.
In addition, our subsidiaries that provide guarantees of the Notes will be automatically released from such guarantees upon the occurrence of certain events, including the following:
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the designation of such subsidiary guarantor as an unrestricted subsidiary;
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the release or discharge of all guarantees or indebtedness that resulted in the creation of the guarantee of the Notes by such subsidiary guarantor; or
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the sale or other disposition, including the sale of substantially all the assets, of such subsidiary guarantor.
If any such subsidiary guarantee is released, no holder of the Notes will have a claim as a creditor against any such subsidiary and the indebtedness and other liabilities, including trade payables and preferred stock, if any, whether secured or unsecured, of such subsidiary will be effectively senior to the claim of any holders of the Notes.
Because each guarantor’s liability under its guarantees may be reduced to zero, avoided or released under certain circumstances, you may not receive any payments from some or all of the guarantors.
The Notes have the benefit of the guarantees of the guarantors. However, the guarantees by the guarantors are limited to the maximum amount that the guarantors are permitted to guarantee under applicable law. As a result, a guarantor’s liability under its guarantee could be reduced to zero, depending upon the amount of other obligations of such guarantor. Further, under certain circumstances, a court under federal and state fraudulent conveyance and transfer statutes could void the obligations under a guarantee or further subordinate it to all other obligations of the guarantor. In addition, you will lose the benefit of a particular guarantee if it is released under certain circumstances.
The value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. Consequently, liquidating the collateral securing the Notes may not produce proceeds in an amount sufficient to pay any amounts due on the Notes.
A portion of the collateral securing the Notes is subject to first-priority liens in favor of the lenders under the ABL Facility. As a result, upon any distribution to our creditors, liquidation, reorganization or similar proceedings, or following acceleration of our indebtedness or an event of default under our indebtedness, the lenders under the ABL Facility will be entitled to be repaid in full from the proceeds of the assets securing the ABL Facility on a first-priority basis before any payment is made to you from the proceeds of that collateral. In addition, the terms of the indenture relating to the Notes will permit the incurrence of additional debt that may be secured by these or other assets on a first-priority basis. The incurrence of such debt would dilute the value of the liens on such collateral securing the Notes.
As of December 28, 2013, the book values of the real estate, intellectual property, customer relationships and plant and equipment assets included in the first-priority collateral were $0.1 million, $247.5 million, $16.5 million and $67.1 million, respectively. The fair market value of the collateral securing the Notes is subject to fluctuations based on factors that include, among others, the condition of the markets for various forms of collateral, the ability to sell the collateral in an orderly sale, general economic conditions, the availability of buyers and similar factors. The amount to be received upon a sale of the collateral would be dependent on numerous factors, including but not limited to the actual fair market value of the collateral at such time and the timing and the manner of the sale. By their nature, portions of the collateral may be illiquid and may have no readily ascertainable market value. Likewise, we cannot assure holders of the Notes that the collateral will be saleable or, if saleable, that there will not be substantial delays in their liquidation. To the extent that liens, rights and easements granted to third parties encumber assets located on property owned by us or constitute subordinate liens on the collateral, those third parties may have or may exercise rights and remedies with respect to the property subject to such encumbrances (including rights to require marshalling of assets) that could adversely affect the value of the collateral located at that site and the ability of the collateral agent to realize or foreclose on the collateral at that site. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, we cannot assure you that the proceeds from any sale or liquidation of the collateral will be sufficient to pay our obligations under the Notes. In addition, the asset sale covenant and the definition of asset sale in the indenture governing the Notes, have a number of significant exceptions pursuant to which we may be able to sell assets securing the Notes without being required to reinvest the proceeds of such sale into assets that will comprise collateral securing the Notes or to make an offer to the holders of the Notes to repurchase the Notes.
In the event of a bankruptcy of us or any of the guarantors, holders of the Notes may be deemed to have an unsecured claim to the extent that our obligations in respect of the Notes exceed the fair market value of the collateral securing the Notes.
In any bankruptcy proceeding with respect to us or any of the guarantors, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to the Notes on the date of the bankruptcy filing was less than the then-current principal amount of the Notes. Upon a finding by the bankruptcy court that the Notes are under-collateralized, the claims in the bankruptcy proceeding with respect to the Notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the Notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of the Notes to receive other “adequate protection” under federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to the Notes.
The collateral securing the Notes may be diluted under certain circumstances.
The collateral that secures the Notes also secures our obligations under the ABL Facility. This collateral may also secure additional senior indebtedness, including additional Notes, that we incur in the future, subject to restrictions on our ability to incur debt and liens under certain of the documents governing our indebtedness. Your rights to the collateral would be diluted by any increase in the indebtedness secured by this collateral.
The rights of holders of the Notes to the collateral securing the ABL Facility, in which such holders have a second-priority lien, are materially limited by the intercreditor agreement.
The rights of the holders of the Notes with respect to the collateral securing the ABL Facility, which secures the Notes on a second-priority basis, are limited pursuant to the terms of an intercreditor agreement with the lenders under the ABL Facility.
Under the intercreditor agreement, any actions that may be taken in respect of that collateral (including the ability to commence enforcement proceedings against that collateral and to control the conduct of such proceedings, and to approve amendments to, releases of that collateral from the lien of, and waivers of past defaults under, the collateral documents) will be at the direction of the lenders under the ABL Facility. Under those circumstances, the collateral agent on behalf of the holders of the Notes, with limited exceptions, will not have the ability to control or direct such actions, even if the rights of the holders of the Notes are adversely affected. Any release by the lenders under the ABL Facility of their collateral that secures the ABL Facility (other than a termination of the ABL Facility or a release of all the collateral securing the ABL Facility) on a first-priority basis will also release the second-priority lien securing the Notes on the same collateral (subject to the interest of the holders of the Notes in the proceeds of that collateral), and holders of the Notes will have no control over such release. In addition, because the holders of the indebtedness secured by first-priority liens control the disposition of such collateral, such holders could decide not to proceed against such collateral, regardless of whether there is a default under the documents governing such indebtedness or under the indenture governing the Notes. In such event, the only remedy available to the holders of the Notes would be recourse to collateral for the Notes which is secured on a first-priority basis and to sue for payment on the Notes and the related guarantees. In addition, the intercreditor agreement gives the holders of first-priority liens on the collateral securing the ABL Facility the right to access and use such collateral securing the Notes on a first lien basis to allow those holders to protect such collateral and to process, store and dispose of the collateral securing the ABL Facility.
The waiver in the intercreditor agreement of rights of marshaling may adversely affect the recovery rates of holders of the Notes in a bankruptcy or foreclosure scenario.
The Notes and the guarantees are secured on a second-priority lien basis by the collateral securing the ABL Facility. The intercreditor agreement provides that, at any time holders of the Notes hold a second-priority lien on the collateral where a first-priority lien on such collateral exists, the trustee under the indenture governing the Notes and the Notes collateral agent may not assert or enforce any right of marshaling accorded to a junior lienholder, as against the holders of such indebtedness secured by first-priority liens in the collateral securing the ABL Facility. Without this waiver of the right of marshaling, holders of such indebtedness secured by first-priority liens in the collateral securing the ABL Facility would likely be required to liquidate collateral on which the Notes did not have a lien, if any, prior to liquidating the collateral, thereby maximizing the proceeds of the collateral that would be available to repay our obligations under the Notes. As a result of this waiver, the proceeds of sales of the collateral securing the ABL Facility could be applied to repay any indebtedness secured by first-priority liens in the collateral securing the ABL Facility before applying proceeds of other collateral securing indebtedness, and the holders of Notes may recover less than they would have if such proceeds were applied in the order most favorable to the holders of the Notes.
Certain assets are excluded from the collateral securing the Notes.
Certain assets are excluded from the collateral securing the Notes including, among other things, any assets held by foreign subsidiaries, any assets in real property other than fee interests (including leaseholds), as well as other typical exclusions, such as capital stock of non-wholly owned subsidiaries if the pledge of such capital stock would violate a contractual obligation, letters of credit for identified purposes or a contract or license if the grant of a lien would violate a contract, license or agreement. In addition, the collateral does not include any capital stock of a subsidiary to the extent that the pledge of such capital stock results in our being required to file separate financial statements of such subsidiary with the SEC, and any such capital stock that triggers such a requirement to file financial statements of such subsidiary with the SEC would be automatically released from the collateral. However, the liens on such capital stock will continue to secure obligations under the ABL Facility. Further, the collateral does not include a pledge of our capital stock, which is pledged as collateral under the New Holdco Facility.
Your rights in the collateral may be adversely affected by the failure to perfect security interests in certain collateral acquired in the future.
Applicable law requires that certain property and rights acquired after the grant of a general security interest, such as rights in real property, can only be perfected at the time such property and rights are acquired and identified. Likewise, any rights acquired in a pending, unpublished intellectual property application may be unrecordable until after the application, or resulting registration, is published. There can be no assurance that the trustee or the collateral agent will monitor, or that we will inform the trustee or the collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. The collateral agent for the Notes has no obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest in favor of the Notes against third parties. Failure to perfect any such security interest could result in the loss of such security interest or the priority of the security interest in favor of the Notes against third parties.
Rights of holders of the Notes in the collateral may be adversely affected by the failure to create or perfect security interests in certain collateral on a timely basis, and a failure to create or perfect such security interests on a timely basis or at all may result in a default under the indenture and other agreements governing the Notes.
The Notes and the guarantees are secured by first-priority liens, subject to permitted liens, on certain of our and the subsidiary guarantors’ principal United States assets, other than assets pledged under the ABL Facility which secure the Notes and the subsidiary guarantees on a second-priority basis.
If we, or any subsidiary guarantor, were to become subject to a bankruptcy proceeding, any liens recorded or perfected after the issue date would face a greater risk of being invalidated than if they had been recorded or perfected on the issue date. Liens recorded or perfected after the issue date may be treated under bankruptcy law as if they were delivered to secure previously existing indebtedness. In bankruptcy proceedings commenced within 90 days of lien perfection, a lien given to secure previously existing debt is materially more likely to be avoided as a preference by the bankruptcy court than if delivered and promptly recorded on the issue date. Accordingly, if we or a subsidiary guarantor were to file for bankruptcy protection after the issue date of the outstanding Notes and the liens had been perfected less than 90 days before commencement of such bankruptcy proceeding, or not yet perfected at all, the liens securing the Notes may be especially subject to challenge as a result of having not been perfected before the issue date. To the extent that such challenge succeeded, you would lose the benefit of the security that the collateral was intended to provide.
Additionally, a failure, for any reason that is not permitted or contemplated under the security agreement and related documents, to perfect the security interest in the properties included in the collateral package may result in a default under the indenture and other agreements governing the Notes.
There are circumstances other than repayment or discharge of the Notes under which the collateral securing the Notes and guarantees will be released automatically, without your consent or the consent of the trustee.
Under various circumstances, collateral securing the Notes will be released automatically, including:
·
a sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture;
·
with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee;
·
with respect to collateral that is capital stock, upon the dissolution of the issuer of such capital stock in accordance with the indenture; and
·
with respect to collateral that secures the ABL Facility on a first-priority basis, upon any release, sale or disposition (other than in connection with a cancellation or termination of the ABL Facility) of such collateral pursuant to the terms of the ABL Facility resulting in the release of the lien on such collateral securing the ABL Facility.
In addition, the guarantee of a subsidiary guarantor will be automatically released in connection with a sale of such subsidiary guarantor in a transaction permitted under the indenture.
The indenture governing the Notes also permits us to designate one or more of our restricted subsidiaries that is a guarantor of the Notes as an unrestricted subsidiary. If we designate a subsidiary guarantor as an unrestricted subsidiary for purposes of the indenture governing the Notes, all of the liens on any collateral owned by such subsidiary or any of its subsidiaries and any guarantees of the Notes by such subsidiary or any of its subsidiaries will be released under the indenture but not necessarily under the ABL Facility. Designation of an unrestricted subsidiary will reduce the aggregate value of the collateral securing the Notes to the extent that liens on the assets of the unrestricted subsidiary and its subsidiaries are released. In addition, the creditors of the unrestricted subsidiary and its subsidiaries will have a senior claim on the assets of such unrestricted subsidiary and its subsidiaries.
The collateral securing the Notes is subject to casualty risks and potential environmental liabilities.
We intend to maintain insurance or otherwise insure against hazards in a manner appropriate and customary for our business. There are, however, certain losses that may be either uninsurable or not economically insurable, in whole or in part. For example, we cannot assure that we will obtain or maintain insurance against potential losses related to our intellectual property assets. Insurance proceeds may not compensate us fully for our losses. If there is a complete or partial loss of any of the pledged collateral, the insurance proceeds may not be sufficient to satisfy all of the secured obligations.
Moreover, the collateral agent for the Notes may need to evaluate the impact of potential liabilities before determining to foreclose on collateral consisting of real property because secured creditors that hold a security interest in real property may be held liable under environmental laws for the costs of remediating or preventing the release or threatened release of hazardous substances at such real property. Consequently, the collateral agent may decline to foreclose on such collateral or exercise remedies available in respect thereof if it does not receive indemnification to its satisfaction from the holders of the Notes.
We may not be able to repurchase the Notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all of the outstanding Notes at 101% of their principal amount, plus accrued and unpaid interest to the purchase date. Additionally, under the ABL Facility, a change of control (as defined therein) constitutes an event of default that permits the lenders to accelerate the maturity of borrowings under that agreement and the commitments to lend will terminate. The source of funds for any purchase of the Notes and repayment of our other credit facilities will be our available cash or cash generated from our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the Notes upon a change of control because we may not have sufficient financial resources to purchase all of the debt securities that are tendered upon a change of control and to repay our other indebtedness that will become due. We may require additional financing from third parties to fund any such purchases, and we cannot assure you that we would be able to obtain financing on satisfactory terms or at all. Further, our ability to repurchase the Notes may be limited by law. In order to avoid the obligations to repurchase the Notes and events of default and potential breaches of the credit agreement governing the ABL Facility, we may have to avoid certain change of control transactions that would otherwise be beneficial to our Company.
In addition, certain important corporate events, such as leveraged recapitalizations, may not, under the indenture governing the Notes, constitute a “change of control” that would require us to repurchase the Notes, notwithstanding the fact that such corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the Notes.
In addition, in a recent decision, the Chancery Court of Delaware raised the possibility that a change of control put right occurring as a result of a failure to have “continuing directors” comprising a majority of a board of directors might be unenforceable on public policy grounds.
Holders of the Notes may not be able to determine when a change of control giving rise to their right to have the Notes repurchased has occurred following a sale of “substantially all” of our assets.
The definition of change of control in the indenture governing the Notes includes a phrase relating to the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of Notes to require us to repurchase its Notes as a result of a sale of less than all our assets to another person may be uncertain.
In the event of our bankruptcy, the ability of the holders of the Notes to realize upon the collateral will be subject to certain bankruptcy law limitations.
The ability of holders of the Notes to realize upon the collateral are subject to certain bankruptcy law limitations in the event of our bankruptcy. Under applicable federal bankruptcy laws, upon the commencement of a bankruptcy case, an automatic stay goes into effect which, among other things, stays:
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the commencement or continuation of any action or proceeding against the debtor that was or could have been commenced before the commencement of the bankruptcy case to recover a claim against the debtor that arose before the commencement of the bankruptcy case;
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any act to obtain possession of, or control over, property of the bankruptcy estate or the debtor;
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any act to create, perfect or enforce any lien against property of the bankruptcy estate; and
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any act to collect or recover a claim against the debtor that arose before the commencement of the bankruptcy case.
Thus, upon the commencement of a bankruptcy case, secured creditors are prohibited from, among other things, repossessing their collateral from a debtor, or from disposing of such collateral repossessed from such a debtor, without bankruptcy court approval. Moreover, applicable federal bankruptcy laws generally permit the debtor to continue to use, sell or lease collateral in the ordinary course of its business even though the debtor is in default under the applicable debt instruments. Upon request from a secured creditor, the bankruptcy court will prohibit or condition such use, sale or lease of collateral as is necessary to provide “adequate protection” of the secured creditor’s interest in the collateral. The meaning of the term “adequate protection” may vary according to the circumstances, but is intended generally to protect the value of the secured creditor’s interest in the collateral at the commencement of the bankruptcy case and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines any diminution in the value of the collateral occurs as a result of the debtor’s use, sale or lease of the collateral during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term “adequate protection” and the broad discretionary powers of a United States bankruptcy court, we cannot predict whether payments under the Notes would be made following commencement of and during a bankruptcy case, whether or when the trustee or collateral agent under the indenture for the Notes could foreclose upon or sell the collateral or whether or to what extent holders of Notes would be compensated for any delay in payment or loss of value as a result of the use, sale or lease of their collateral through the requirement of “adequate protection.” A creditor may seek relief from the stay from the bankruptcy court to take any of the acts described above that would otherwise be prohibited by the automatic stay. The United States bankruptcy court has broad discretionary powers in determining whether to grant a creditor relief from the stay.
The value of the collateral securing the Notes may not be sufficient to secure post-petition interest.
In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, holders of the Notes will only be entitled to post-petition interest under the bankruptcy code to the extent that the value of their security interest in the collateral is greater than their pre-bankruptcy claim. Holders of the Notes that have a security interest in the collateral with a value equal to or less than their pre-bankruptcy claim will not be entitled to post-petition interest under the bankruptcy code. No appraisal of the fair market value of the collateral has been prepared in connection with this offering and we therefore cannot assure you that the value of the holders’ interest in the collateral equals or exceeds the principal amount of the Notes.
The interests of our sponsors may conflict with yours.
An investor group led by Fenway Partners Capital Fund II, L.P. (investing through Fenway Easton-Bell Sports Holding, LLC) and Fenway Partners Capital Fund III, L.P., each an affiliate of Fenway Partners, LLC, owns a majority of our Parent’s outstanding equity interests. As a result, these investors are in a position to control all matters affecting us, including decisions made by our board of directors, such as the appointment of members of our management and the approval of mergers or sales of substantially all of our assets. The Fenway Investors’ interests in exercising control over our business may conflict with your interests as a holder of the Notes.
Federal and state fraudulent transfer laws may permit a court to void the Notes, the guarantees and/or the grant of collateral and, if that occurs, you may not receive any payments on the Notes.
Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the Notes and the incurrence of the guarantees of such Notes. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the Notes or the guarantees thereof (or the grant of collateral securing any such obligations) could be voided as a fraudulent transfer or conveyance if we or any of the guarantors, as applicable, (a) issued the Notes or incurred the guarantees with the intent of hindering, delaying or defrauding creditors, or (b) received less than reasonably equivalent value or fair consideration in return for either issuing the Notes or incurring the guarantees and, in the case of (b) only, one of the following is also true at the time thereof:
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we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the Notes or the incurrence of the guarantees;
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the issuance of the Notes or the incurrence of the guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital or assets to carry on the business;
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we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay as they mature; or
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we or any of the guarantors were a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.
As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is secured or satisfied. A court would likely find that a subsidiary guarantor did not receive reasonably equivalent value or fair consideration for its guarantee, to the extent such guarantor did not obtain a reasonably equivalent benefit directly or indirectly from the issuance of the Notes.
We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were insolvent at the relevant time or, regardless of the standard that a court uses, whether the Notes or the guarantees would be subordinated to our or any of our guarantors’ other debt. In general, however, a court would deem an entity insolvent if:
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the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;
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the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
·
it could not pay its debts as they became due.
If a court were to find that the issuance of the Notes, the incurrence of a guarantee or the grant of security was a fraudulent transfer or conveyance, the court could void the payment obligations under the Notes or such guarantee or void the grant of collateral or subordinate the Notes or such guarantee to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the Notes to repay any amounts received with respect to such guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the Notes. Further, the avoidance of the Notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in acceleration of such debt.
Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the Notes to other claims against us under the principle of equitable subordination, if the court determines that: (1) the holder of Notes engaged in some type of inequitable conduct; (2) such inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holder of Notes; and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.
Your ability to transfer the Notes is limited by the absence of an active trading market and an active trading market may not develop for the Notes.
The Notes were new issues of securities for which there is no established trading market. We do not intend to list the Notes on any national securities exchange or include the Notes in any automated quotation system. The initial purchasers of the Notes advised us that they may make a market in the Notes, as permitted by applicable laws and regulations; however, the initial purchasers are not obligated to make a market in the Notes (and have not yet made such as market) and, if commenced, they may discontinue their market-making activities at any time without notice.
Therefore, an active market for the Notes may not develop or be maintained, which would adversely affect the market price and liquidity of the Notes. In such case, the holders of the Notes may not be able to sell their Notes at a particular time or at a favorable price.
Even if an active trading market for the Notes does develop, there is no guarantee that it will continue. Historically, the market for non-investment grade debt has been subject to severe disruptions that have caused substantial volatility in the prices of securities similar to the Notes. The market, if any, for the Notes may experience similar disruptions and any such disruptions may adversely affect the liquidity in such market and/or the prices at which you may sell your Notes. In addition, subsequent to their initial issuance, the Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar notes, our performance and other factors.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating, and there can be no assurances that any rating assigned will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Credit ratings are not recommendations to purchase, hold or sell the Notes, and may be revised or withdrawn at any time. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the Notes. If any credit rating initially assigned to the Notes is subsequently lowered or withdrawn for any reason, you may not be able to resell your Notes without a substantial discount.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
As of December 28, 2013 we operated 21 facilities in the United States, two in Canada, two in Mexico, three in Europe and six in Asia. Our corporate headquarters is located in Van Nuys, California. Set forth below is information regarding our principal properties:
In addition to the primary facilities listed above, we operate other offices and facilities around the world totaling approximately 274,000 square feet. We consider each of our facilities to be in good condition and adequate for its present use. We believe that we have sufficient capacity to meet our current and anticipated manufacturing and distribution requirements.
Item 3.
Item 3. Legal Proceedings
We are subject to various product liability claims and lawsuits 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, designed or reconditioned by us and, in certain cases, products manufactured by others. The ultimate outcome of these claims, or potential future claims, cannot presently 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 Company’s previous claims history and available information on alleged claims.
Certain of our entities are named in lawsuits by groups of former collegiate players (1 lawsuit) and retired NFL players (74 lawsuits consolidated into one multidistrict litigation). These cases are at preliminary stages and we are unable to predict outcomes or reasonably estimate a range of possible losses, if any. While the claims are complex and the alleged injury occurrences span many years, we believe these complaints are without merit and are vigorously defending against them. Further, during the time period of the factual allegations, the entity had product liability insurance from numerous carriers. Through insurance coverage counsel, we have been able to identify policies, put carriers on notice and pursue coverage claims. We anticipate that the insurance policies that were in place during the time periods covered by the allegations will afford considerable coverage for defense costs during the course of the litigation. In the event that we are determined to have liability in these matters, there can be no assurance that our insurance coverage will adequately cover such liability.
We maintain primary and excess product liability insurance coverage under various policies. Our primary and excess product liability insurance policies expire in January 2015. We are also party to various non-product liability claims and actions, including without limitation, claims relating to infringement of intellectual property rights of others. We do not believe that any of these claims or actions, either individually or in the aggregate, is material to our business or financial condition. In 2002, one of our competitors sued us in Canadian Federal Court alleging infringement of a hockey skate patent. The details of such lawsuit have been previously disclosed in prior Company filings. In June 2013, we settled the lawsuit.
Item 4.
Item 4. [Reserved]
PART II
Item 5.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for our equity securities.
Item 6.
Item 6. Selected Financial Data
Set forth below is our selected historical consolidated financial and other operating data. We follow a 52/53 week fiscal year, which ends on the Saturday closest to December 31. Our selected historical consolidated financial data and other data set forth below as of December 28, 2013, December 29, 2012, December 31, 2011, January 1, 2011 and January 2, 2010 and for the fiscal years ended December 28, 2013, December 29, 2012, December 31, 2011, January 1, 2011 and January 2, 2010, have been derived from our audited consolidated financial statements. The selected historical consolidated financial and other data presented below should be read in conjunction with “Item 7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data,” as well as the consolidated financial statements and notes included elsewhere in this annual report.
Uncertainty of Forward-Looking Statements and Information
This annual 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 the financial condition, results of operations, plans, objectives, future performance and business of our Company. You can identify these statements 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. Many factors mentioned in our discussion in this annual report, including the risks outlined under “Item 1A - Risk Factors,” 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 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 and ice hockey equipment, apparel and cycling components), Bell® (cycling and action sports helmets and accessories), Giro® (cycling and snowsports helmets and accessories) and Riddell® (football equipment, apparel 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.
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 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.
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 and other team sports products and reconditioning services related to certain of these products. All of Bell’s activity, including the Bell brand and the Giro brand 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.
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 Margin
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.
Results of Operations
Our Company follows a 52/53 week fiscal year, which ends on the Saturday closest to December 31. Fiscal years 2013, 2012 and 2011 were comprised of 52 weeks and ended on December 28, 2013, December 29, 2012 and December 31, 2011, respectively. Also set forth below are the percentage relationships to net sales of certain items included in our consolidated statements of comprehensive (loss) income.
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.
2013 compared to 2012
Our results for 2013 and 2012 include the following items:
Net Sales
The following table sets forth net sales for each of our segments for the years indicated:
Net sales in both Team Sports and Action Sports were negatively impacted by unfavorable foreign currency exchange rate movements in 2013 of $0.9 million and $0.3 million, respectively. On a constant currency basis, net sales in Team Sports were down $25.7 million or 5.4%, and net sales in Action Sports were down $19.9 million or 5.7%.
Team Sports net sales decreased due to lower sales of:
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Easton hockey products from loss of market share and inflated retail inventories, particularly within the stick category from multiple manufacturer product launches,
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Riddell football helmets due to the prior year benefitting from the implementation of the industry’s new ten-year helmet life policy, and
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Riddell football products sold in the mass channel, due to our exit from the channel,
partially offset by sales growth in:
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Easton baseball and softball products driven by market share gains and the introduction of the Mako bat,
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Riddell non-helmet football products and the performance of reconditioning services.
Action Sports net sales decreased due to lower sales of:
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cycling helmets and accessories in the specialty and mass channels resulting from inclement weather earlier in the year, leading to excess retail inventories and competitive pressure in the market,
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Easton cycling products due to quality issues, and
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the exit of the low-margin, non-core fitness products category,
partially offset by sales growth in:
·
Bell powersports helmets from market share gains, driven by product innovation and expanded geographic distribution,
·
Giro snowsports products as the market rebounds from the two recent dismal weather related seasons,
·
juvenile licensed cycling products in the mass channel under the recently acquired Disney license,
·
Giro cycling apparel, due to entrance into this category, and
·
Giro footwear from continued market share gains.
Cost of Sales
The following table sets forth cost of sales for each of our segments for the years indicated:
The decrease in Team Sports cost of sales as a percentage of net sales is due to:
·
the continued transition of Riddell football equipment reconditioning operations to Mexico,
·
increased sales of higher-margin Easton bats,
·
the introduction of the Easton Mako hockey skate and reduced skate close-out sales,
·
non-recurring Easton hockey inventory reserve expense recorded in the prior year,
partially offset by:
·
declines in sales of high-margin Easton hockey sticks and closeout sales, and
·
sales declines in high-margin Riddell football helmets due to the aforementioned prior year benefit of the industry’s new ten-year helmet life policy.
The decrease in Action Sports cost of sales as a percentage of net sales is due to:
·
increased sales of higher-margin Bell powersports helmets,
·
increased sales of Giro snowsports products, and
·
non-recurring Easton cycling inventory reserve expense recorded in the prior year,
partially offset by:
·
lower sales and closeout sales of Easton cycling wheels and components.
Gross Profit
The following table sets forth gross profit for each of our segments for the years indicated:
The increase in Team Sports gross margin as a percentage of net sales is due to:
·
the continued transition of Riddell football equipment reconditioning operations to Mexico,
·
increased sales of higher-margin Easton bats,
·
the introduction of the Easton Mako hockey skate and reduced skate close-out sales,
·
non-recurring Easton hockey inventory reserve expense recorded in the prior year,
partially offset by:
·
declines in sales of high-margin Easton hockey sticks and closeout sales, and
·
sales declines in high-margin Riddell football helmets due to the aforementioned prior year benefit of the industry’s new ten-year helmet life policy.
The increase in Action Sports gross margin as a percentage of net sales is due to:
·
increased sales of higher-margin Bell powersports helmets,
·
increased sales of Giro snow sports products, and
·
non-recurring Easton cycling inventory reserve expense recorded in the prior year,
partially offset by:
·
lower sales and closeout sales of Easton cycling wheels and components.
Selling, General and Administrative Expenses
During 2013, SG&A expenses increased $5.9 million or 2.6% as compared to 2012. The increase primarily relates to:
·
severance expenses related to management changes,
·
increased non-cash equity compensation expense related to new grants,
·
the write-off of goodwill and certain other assets and the recording of certain liabilities directly associated with lacrosse, and
·
investments in Action Sports sales infrastructure,
partially offset by
·
reduced litigation expenses resulting from the non-recurring IP litigation reserve recorded in the prior year,
·
lower variable selling expenses due to the sales decline, and
·
personnel reductions and other spending reductions.
Amortization of Intangibles
Amortization of intangibles decreased $2.5 million or 24.0% as compared to 2012 due to certain intangible assets in the Team Sports segment becoming fully amortized in 2013.
Interest Expense, Net
Interest expense, net for 2013 was comparable to 2012.
Income Taxes
Income tax benefit was $1.8 million in 2013, an effective tax rate of 10.6%, as compared to income tax expense of $3.1 million in 2012, with an effective tax rate in excess of 100%. The difference between the effective rate and the statutory rate for 2013 is primarily attributable to the rate difference on foreign earnings, the permanent difference for equity compensation expense, changes in the valuation allowance, and state income taxes; the difference between the effective rate and the statutory rate for 2012 is primarily attributable to the rate difference on foreign earnings, the permanent difference for equity compensation expense and state income taxes.
2012 compared to 2011
Our results for 2012 and 2011 include the following items:
Net Sales
The following table sets forth net sales for each of our segments for the years indicated:
Net sales in both Team Sports and Action Sports were negatively impacted by unfavorable foreign currency exchange rate movements in 2012 of $0.5 million and $0.6 million, respectively. On a constant currency basis, net sales in Team Sports were up $8.5 million or 1.8%, and net sales in Action Sports were down $15.0 million or 4.2%.
Team Sports net sales increased from sales growth in:
·
Riddell football attributable to continued market share gains, the positive impact on helmet sales from the industry’s new ten-year helmet life policy, lapping the negative impact that the NFL lockout had on sales of collectible helmets last year and the acquisition of a uniform supply and equipment reconditioning company early in the year, partially offset by
·
reduced sales of Easton baseball bats as last year benefitted from the non-recurring BBCOR transition and the decline in sales of Easton hockey skates offsetting the sales growth in Easton hockey sticks.
Action Sports net sales decreased due to:
·
the weather related decline in sales of Giro snow products in both the U.S. and Europe and
·
exiting the non-core fitness product categories, partially offset by
·
growth in sales of Bell powersports helmets from enhanced product offerings and expanded distribution and
·
increased sales of Giro cycling products and Blackburn cycling accessories.
Cost of Sales
The following table sets forth cost of sales for each of our segments for the years indicated:
The decrease in Team Sports cost of sales as a percentage of sales is primarily due to:
·
increased sales of higher margin Riddell on-field and collectible football helmets and
·
increased sales of and reduced product manufacturing costs for Easton hockey sticks, partially offset by
·
lower sales of higher margin Easton baseball bats as last year benefitted from the non-recurring BBCOR transition,
·
increased warranty costs for bat returns and
·
close-out sales and write-offs of aged hockey products.
Action Sports cost of sales as a percentage of sales was unchanged due to:
·
the reduction in product costs and returns for Bell cycling helmets sold in the mass channel and
·
improved margins for Blackburn accessories, was offset by
·
reduced sales and closeout sales of higher margin Giro snow helmets and
·
write-off of obsolete Easton cycling wheel inventory due to product design changes.
Gross Profit
The following table sets forth gross profit for each of our segments for the years indicated:
The increase in Team Sports gross margin is primarily due to:
·
increased sales of higher margin Riddell on-field and collectible football helmets and
·
increased sales of and reduced product manufacturing costs for Easton hockey sticks, partially offset by
·
lower sales of higher margin Easton baseball bats as last year benefitted from the non-recurring BBCOR transition;
·
increased warranty costs for bat returns and
·
close-out sales and write-offs of aged hockey products.
Action Sports gross margin was unchanged due to:
·
the reduction in product costs and returns for Bell cycling helmets sold in the mass channel and
·
improved margins for Blackburn accessories, was offset by
·
reduced sales and closeout sales of higher margin Giro snow helmets and
·
write-off of obsolete Easton cycling wheel inventory due to product design changes.
Selling, General and Administrative Expenses
During 2012, SG&A expenses increased $18.5 million or 8.7% as compared to 2011. The increase primarily relates to:
·
increased litigation and product liability reserves and expenses of $5.5 million;
·
investments in sales infrastructure of $2.7 million to support international expansion and future growth;
·
increased sales, marketing, promotion and sponsorship program spending of $3.6 million;
·
increased research and development expense of $5.8 million due to the investment in new products and
·
increased equity compensation expense of $1.5 million related to employee grants, partially offset by
·
reduced incentive compensation of $4.2 million due to the decline in earnings.
Amortization of Intangibles
Amortization of intangibles increased $0.8 million or 8.1% as compared to 2011 due to an acquisition in the Team Sports segment during the first quarter of 2012 which increased intangibles, partially offset by certain intangible assets in the Team Sports segment becoming fully amortized in 2012.
Interest Expense, Net
Net interest expense decreased $0.3 million to $42.6 million for 2012 from $42.9 million in 2011. The decrease relates to fees incurred in 2011 related to the amendment of the ABL facility, which did not recur in 2012.
Income Tax Expense
Income tax expense was $3.1 million in 2012, an effective rate in excess of 100%, as compared to income tax expense of $9.7 million in 2011, and effective rate of 49.2%. The difference between the effective rate and the statutory rate for 2012 is primarily attributable to the rate difference on foreign earnings, the permanent difference for equity compensation expense and state income taxes; the difference between the effective rate and the statutory rate for 2011 is primarily attributable to the permanent difference for equity compensation expense and state income taxes.
Quarterly Results
The following table presents unaudited interim operating results. We believe that the following information includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our results of operations for the periods presented. Each quarter is comprised of 13 weeks and in 2013, the quarters ended on March 30, June 29, September 28 and December 28, 2013. The operating results for any period are not necessarily indicative of results for any future period.
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 be certain 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 be certain 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 51.1% at December 28, 2013, as compared to 49.9% at December 29, 2012. The increase was primarily attributable to the decrease in stockholder’s equity as a result of the distribution to RBG and the net loss in 2013, partially offset by the decrease in the balance outstanding on the revolving credit facility.
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.
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 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. 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) use the proceeds from sales of 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 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 will not limit the amount of indebtedness that our direct or indirect parent entities, including EB Sports and RBG, may incur.
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 $250.0 million 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 December 28, 2013, we had $23.0 million outstanding under the ABL facility and $161.7 million in 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 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 December 28, 2013, 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 (as defined therein), 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) enter into transactions with affiliates and (10) 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 $175.0 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 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 our Company’s existing senior secured credit facility 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. In 2013, our Company distributed $16.4 million to RBG, to enable EB Sports to pay interest on the New Holdco Facility.
As of December 28, 2013, the amount of loans issued under the New Holdco Facility was approximately $144.9 million, including accrued interest.
Sources and Uses of our Cash
Cash provided by operating activities was $79.2 million for 2013, as compared to $51.9 million of cash provided in 2012. The net increase in cash provided by operating activities between the periods primarily reflects the changes in inventories, other current and noncurrent assets and accounts payable, the timing of sales and collection of corresponding accounts receivable and proceeds from landlord advance and tax increment financing of $9.0 million related to our new distribution center in Rantoul, Illinois, partially offset by the increase in net loss in 2013.
Cash provided by operating activities was $51.9 million for 2012, as compared to $29.8 million of cash provided in 2011. The net increase in cash provided by operating activities between the periods primarily reflects the timing of sales and collection of corresponding accounts receivable, partially offset by the decrease in accounts payable and accrued expenses, the decrease in net income in 2012 and the change in deferred income taxes.
Cash provided by operating activities was $29.8 million for 2011, as compared to $47.6 million of cash provided in 2010. The net decrease in cash provided by operating activities as compared to 2010 primarily reflects higher accounts receivable due to the increase in net sales in 2011 and a smaller increase in accrued expenses as compared to 2010, partially offset by a smaller increase in inventory in 2011 versus 2010 and a larger increase in accounts payable as compared to 2010.
The Team Sports business is seasonal and driven primarily by baseball and softball, football and ice hockey buying patterns. 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 primarily by hockey buying patterns with orders shipping in late spring for fall play.
Working capital typically experiences a buildup in the first half of the year as Team Sports seeks to balance its manufacturing and reconditioning facilities, and therefore, increases inventory. This pattern is magnified by the preference of many school districts to pay for items in the budget year in which they will be used. As July 1st often marks the start of the budget year for these customers, receivable balances generated during the first half of the year are historically reduced as collections are made in the second half of the year.
The Action Sports business is also seasonal and driven primarily by the warm weather months conducive to cycling. As such, Action Sports sales are lowest during the fourth calendar quarter. The seasonal impacts have been partially mitigated by the rise in snowsports sales which are sold primarily during the last two quarters of the year.
Action Sports typically experiences an increase in working capital in the first two fiscal quarters of the year as it builds inventory for the late spring and summer selling seasons for cycling products and ships preseason cycling helmet and accessory orders. Inventories of snowsports products increase in the second and third fiscal quarters in preparation for the upcoming fall-winter selling season. Working capital decreases in the third and fourth fiscal quarters as cycling and snowsports product inventories are reduced through the summer and fall-winter selling seasons, respectively and accounts receivable are collected.
We had $234.6 million in working capital as of December 28, 2013, as compared to $273.7 million at December 29, 2012. The $39.1 million decrease in working capital primarily results from the decrease in accounts receivable related to the sales decline and timing of payments and decrease in inventory, partially offset by lower borrowings under the ABL Facility. We had $273.7 million in working capital as of December 29, 2012, as compared to $265.9 million at December 31, 2011. The $7.8 million increase in working capital primarily resulted from the increase in cash, the reduction in accounts payable and lower borrowings under the ABL Facility, partially offset by the decrease in accounts receivable related to the sales decline and timing of payments.
Cash used in investing activities was $42.9 million in 2013, as compared to $25.8 million used in 2012. For both 2013 and 2012, the amount was primarily related to capital expenditures for the purchase of property, plant and equipment and the purchase of businesses. Capital expenditures for 2013 were $34.2 million, as compared to $22.2 million in 2012, the increase being primarily due to increased purchases of property, plant and equipment related to the new distribution center in Rantoul, Illinois. Capital expenditures made in both 2013 and 2012 also related to the enhancement of our ERP system, investments in facilities, and molds and tooling. In addition, our Company purchased $8.7 million and $2.5 million of intellectual property in 2013 and 2012, respectively.
Cash used in financing activities was $29.3 million in 2013, as compared to $15.4 million in 2012. In 2013, the net cash used related primarily to net payments made on the ABL Facility and a $17.3 million distribution to RBG, primarily to pay interest on the New Holdco Facility, while in 2012 the net cash used related primarily to net payments made on the ABL Facility and an $8.4 million distribution to RBG, primarily to pay interest on the New Holdco Facility.
Outlook
Although other factors will likely impact us, including some we do not foresee, we believe our performance for 2014 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 December 28, 2013, the outstanding principal balance under the ABL Facility was $23.0 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 and softball 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.
Contractual Requirements
Future payments required under our significant contractual obligations as of December 28, 2013 are as follows:
(1)
Amounts include obligations pursuant to the ABL Facility and Notes that were outstanding on December 28, 2013. See “Liquidity and Capital Resources.”
(2)
Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in long-term debt agreements, not including the ABL Facility. Debt may be repaid sooner or later than such minimum maturity periods.
(3)
Amounts include interest on capital lease obligations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. In the preparation of these financial statements, we make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 in the Notes to Consolidated Financial Statements. We believe that our application of the policies discussed below involve significant levels of judgments, estimates and complexity. These estimates are reviewed from time to time and are subject to change if the circumstances so indicate. The effect of any such change is reflected in results of operations for the period in which the change is made.
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.
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 8.2%, and a discount rate of 9.8%. 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.
Our Company’s goodwill impairment analysis performed as of December 28, 2013 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 10% 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, four to twenty years for customer relationships, four to nine 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 (Loss) Income.
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 require us to expense Class B Common Units of our Parent, or Units, granted under our Parent’s Equity 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. For Units issued through December 13, 2012, our Company used the Black-Scholes option pricing model to determine the fair value of the Units granted. For Units issued subsequent to December 13, 2012, we utilized the Monte Carlo simulation pricing model, or the Monte Carlo Analysis, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome.
Recent Accounting Pronouncements
In February 2013, the FASB issued a new standard that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component for those items reclassified to net income in their entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The new standard is effective for fiscal years beginning after December 15, 2012. The provisions of this standard did not have a material impact on our Company’s consolidated financial statements.
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. Our Company intends to adopt this guidance at the beginning of the first quarter of fiscal year 2014, and is currently evaluating the impact on our Company’s consolidated financial statements and disclosures.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
Our net sales and expenses are predominantly denominated in United States dollars. During the fiscal years ended December, 28, 2013, December 29, 2012 and December 31, 2011, approximately 90.6%, 87.3%, and 87.7% of our net sales were in United States dollars, respectively, 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 December 28, 2013, there were no foreign currency exchange forward contracts in place. 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, a hypothetical 10% weakening of the United States dollar relative to other currencies would not have a material adverse effect on our expected first quarter 2014 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 December 28, 2013 the outstanding principal balance under this facility was $23.0 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 fiscal 2013, based on the average ABL Facility balance of $42.3 million would have resulted in approximately a $0.1 million increase in interest expense for the fiscal year ended December 28, 2013.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements of Easton-Bell Sports, Inc. and its subsidiaries for each of the years in the three-year period ended December 28, 2013 are included in this Item:
The information under the heading “Quarterly Results” of Item 7 on page 41 of this Form 10-K is incorporated herein by reference.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of
Easton-Bell Sports, Inc.
We have audited the accompanying consolidated balance sheets of Easton-Bell Sports, Inc. and subsidiaries as of December 28, 2013 and December 29, 2012, and the related consolidated statements of comprehensive (loss) income, stockholder’s equity, and cash flows for each of the three years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries at December 28, 2013 and December 29, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
March 28, 2014
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
See accompanying notes to consolidated financial statements.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
See accompanying notes to consolidated financial statements.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except as specified)
1. Business and Summary of Significant Accounting Policies
Organization and Business
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-K to Easton-Bell, we, us, our, and our 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.
Our Company is a designer, developer and marketer of sporting goods and related accessories under authentic brands. Our products are used in baseball, softball, ice hockey, football and other team sports, and in various action sports, including cycling, snowsports, powersports and skateboarding. We currently sell a broad range of products primarily under four brands - Easton (baseball, softball, ice hockey and cycling equipment), Bell (cycling and action sports helmets and accessories), Giro (cycling and snowsports helmets and accessories) and Riddell (football and reconditioning services).
Reporting Period
Our Company follows a 52/53 week fiscal year, which ends on the Saturday closest to December 31. Fiscal years 2013, 2012 and 2011 were comprised of 52 weeks and ended on December 28, 2013, December 29, 2012 and December 31, 2011, respectively.
Principles of Consolidation
The consolidated financial statements of our Company and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany accounts and transactions have been eliminated.
Adjustment to Prior Year Financial Statements
In the Consolidated Statements of Stockholder’s Equity, the Distribution to RBG in 2012 has been reclassified from Additional Paid-in Capital to Retained Earnings. The effect of the reclassification is also reflected in the Stockholder’s equity section of the Consolidated Balance Sheet for 2012. This reclassification has no effect on total stockholder’s equity or on the previously reported income (loss).
Reclassification
Certain amounts in the December 29, 2012 consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the December 28, 2013 consolidated financial statements. These reclassifications have no effect on the previously reported income (loss).
Cash and Cash Equivalents
Our Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 28, 2013 and December 29, 2012 were $43,698 and $40,852, respectively.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Accounts Receivable and Concentration of Credit Risk
Accounts receivable at December 28, 2013 and December 29, 2012 are net of allowances for doubtful accounts of $7,833 and $8,738, respectively. We sell our products to a wide range of customers. Our customers are not geographically concentrated. As of December 28, 2013 and December 29, 2012, 34.0% and 31.4%, respectively, of our gross accounts receivable were attributable to our top ten customers. In 2013, 2012 and 2011, one customer accounted for 12.6%, 12.9%, and 13.9% of our net sales, respectively, but no other customer accounted for more than 10% of our net sales. Our Company’s top ten customers accounted for approximately 32.2%, 31.6% and 34.8% of our net sales for 2013, 2012 and 2011, respectively. Ongoing credit evaluations of customers are performed and collateral on trade accounts receivable is generally not required. An allowance is determined based on the age of the accounts receivable balance and specific charge-off history. Trade accounts receivable are charged to the allowance when we determine that the receivable will not be collectable. Trade accounts receivable balances are determined to be delinquent when the amount is past due based on the payment terms with our customer.
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 our assessment of excess and obsolete inventory on a product-by-product basis. At December 28, 2013 and December 29, 2012, we had a reserve for excess and obsolete inventories of $10,951 and $15,267, respectively. Inventories, which are net of excess and obsolete inventory, consisted of the following at December 28, 2013 and December 29, 2012:
Property, Plant and Equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation. Property under capital lease is recorded at the lower of fair market value of the asset or the present value of future minimum lease payments. Repairs and maintenance costs that do not extend the lives of property and equipment are expensed as incurred.
Depreciation, which includes amounts amortized under capital leases, is being computed using the straight-line method over the estimated useful lives of the related assets, except for leasehold improvements, which are depreciated over the lesser of the lease term or their useful life, as follows:
Property, plant and equipment consisted of the following at December 28, 2013 and December 29, 2012:
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Depreciation expense relating to all property, plant and equipment amounted to $20,992, $21,593 and $19,230 for 2013, 2012 and 2011, respectively.
Capitalized costs of internal use software is amortized on a straight-line basis over the estimated useful life commencing from the date the software asset is ready for its intended use.
In 2013, our Company purchased $914 of property, plant and equipment, for which cash payment had not yet been made as of December 28, 2013.
Goodwill and Intangible Assets
Goodwill and other indefinite-lived intangible assets resulting from acquisitions are not amortized. A fair value method of testing goodwill and other indefinite-lived intangible assets for impairment is completed on an annual basis, or on an interim basis if an event occurs or circumstances change that would indicate impairment or reduce the fair value of the indefinite-lived intangible asset or a reporting unit (for goodwill) below its carrying value. Our Company’s annual impairment assessments are performed as of the fiscal year end date by determining an estimate of the fair value of our indefinite-lived intangible assets or, for goodwill, the fair value of the reporting units to evaluate whether an impairment exists. A reporting unit is an operating segment or one level below an operating segment (e.g., a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and our executive management team regularly reviews the operating results of that component.
The results of our Company’s annual analysis indicated that no impairment occurred in the carrying amount of goodwill and other indefinite-lived intangible assets in 2013, 2012 or 2011, and that none of the reporting units was at risk of failing the impairment test as of the date of each respective impairment assessment. We also reviewed our finite-lived intangible assets and noted no impairment occurred in the carrying amount in 2013, 2012 or 2011.
Our Company’s acquired intangible assets were as follows at December 28, 2013 and December 29, 2012:
Our Company amortizes certain acquired intangible assets on a straight-line basis over estimated useful lives of 4 to 20 years for customer relationships, 7 to 19 years for patents and 4 to 9 years for licensing and other agreements. As of December 28, 2013, the weighted average life is 11.9 years for customer relationships, 10.2 years for patents, 4.7 years for licensing and other agreements and the overall weighted average life for acquired intangible assets is approximately 10.7 years. For 2013, 2012 and 2011 acquired intangible asset amortization was $7,881, $10,394, and $9,612, respectively. We estimate that amortization of existing intangible assets will be $6,912, $6,203, $3,235, $2,610 and $780 for 2014, 2015 2016, 2017 and 2018, respectively.
Our Company does not amortize most of our trademarks, which are determined to have indefinite lives. The Riddell tradename has been in existence since 1929. The Riddell brand is currently one of the most widely recognized and sold football helmet brands in the world. This brand is one of the primary product lines of our Company’s business and management plans to use the trademark for an indefinite period of time. We plan to continue to make investments in product development to enhance the value of the brand in the future. There are no legal, regulatory, contractual, competitive, economic or other factors that we are aware of that our Company believes would limit the useful life of the trademark. The Riddell trademark registration can be renewed in the countries in which we operate at a nominal cost.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
As a result of our Company’s acquisition of Bell in September 2004, we identified the Bell, Giro and Blackburn trademarks as indefinite-lived assets. The Bell, Giro and Blackburn trademarks have been in existence since 1952, 1986 and 1988, respectively. We plan to use these trademarks for an indefinite period of time and will continue to make investments in product development to enhance the value of the brands in the future. There are no legal, regulatory, contractual, competitive, economic or other factors that we are aware of that our Company believes would limit the useful life of the trademarks. The Bell, Giro and Blackburn trademark registrations can be renewed in the countries in which we operate at a nominal cost.
As a result of our Company’s acquisition of Easton in March 2006, we identified the Easton trademark as an indefinite-lived asset. The Easton brand has been in existence since 1922 and we plan to use this trademark for an indefinite period of time and will continue to make investments in product development to enhance the value of the brand in the future. There are no legal, regulatory, contractual, competitive, economic or other factors that we are aware of that our Company believes would limit the useful life of the Easton trademark.
There were no material changes to goodwill during 2012. Changes in the carrying amount of goodwill during the year ended December 28, 2013 and December 29, 2012 are summarized as follows:
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.
During the third fiscal quarter of 2012, Bell acquired certain international trademark rights and domain names for its powersports business for a cash purchase price of $2,500. As a result, in our Action Sports segment, the carrying amount of indefinite-lived trademarks increased by $2,380 and finite-lived licensing and other increased by $120.
During the second fiscal quarter 2013, our Company made the decision to discontinue selling lacrosse equipment. This decision resulted in the write-off of $958 of goodwill directly associated with lacrosse.
During the third fiscal quarter of 2013, Bell acquired an entity whose principal asset was a license to distribute certain Bell products throughout the world (excluding USA, Mexico and Canada). As a result, the carrying amount of indefinite-lived intangible assets related to our Action Sports segment increased by $11,377, of which $8,662 was paid in cash.
Long-Lived Assets
Our Company reviews our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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. An impairment loss would be recognized based on the difference between the carrying values and estimated fair value. The estimated fair value will be determined based on either the discounted future cash flows or other appropriate fair value methods with the amount of any such deficiency charged to income in the current year. If the asset being tested for recoverability was acquired in a business combination, amortizable intangible assets resulting from the acquisition that are related to the asset are included in the assessment. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. We also evaluate the amortization periods assigned to our intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell. During 2013, 2012 and 2011, except as noted above with lacrosse, we did not have any other impairment of long-lived assets.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Deferred Financing Fees
Deferred financing fees are being amortized by the straight-line method over the term of the related debt, which does not vary significantly from the effective interest method. In connection with the Amendment in May 2011, $120 of debt issuance costs that were associated with a former syndicate member that did not participate in the Amendment were written-off. We also incurred bank fees and other costs of $1,282, which have been recorded as debt issuance costs. We amortized $2,659, $2,658 and $2,788 of debt issuance fees during 2013, 2012 and 2011, respectively, which is included in Interest expense, net.
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. Our Company is included in the consolidated tax return of EB Sports.
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 our dealer or distributor upon shipment from our Company’s facilities and the risk of loss upon damage, theft or destruction of the product in transit is the responsibility of our dealer or distributor. 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 historically has not been material, is recorded when earned based upon contract terms with licensees which provide for royalties.
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 for 2013 and 2012.
Advertising Costs
Our Company expenses all advertising costs as incurred. Cooperative advertising costs are recorded as a reduction of sales at the time the revenue is earned. Advertising costs were $5,580, $5,759 and $5,846, for 2013, 2012 and 2011, respectively.
Shipping and Handling
All shipping and handling fees billed to our customers are included as a component of net sales. Shipping and handling costs incurred by us are included in cost of sales.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Research and Development Expenses
Our Company expenses all research and development costs as incurred. Research and development expenses were approximately $27,549, $29,236 and $23,369 for 2013, 2012 and 2011, respectively, and are included in selling, general and administrative expenses.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amount of revenues during the reporting period. Actual results could differ from those estimates. The estimates made by our management primarily relate to accounts receivable allowances, inventory reserves, product liability reserves, deferred income taxes, intangible assets, goodwill and certain other liabilities.
Foreign Currency Translation
The financial position and results of operations outside the United States are measured using the local currency as the functional currency. Revenues and expenses are translated into United States dollars at average exchange rates prevailing during the fiscal period, and assets and liabilities are translated using the exchange rates at the balance sheet date. Translation adjustments are included in accumulated other comprehensive (loss) income in stockholder’s equity. Gains and losses, which result from foreign currency transactions, are included in earnings.
Fair Values 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” approximate 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 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 our Company’s long-term debt including accrued interest were as follows:
Equity-Based Employee Compensation
Our Company expenses Class B Common Units, or Units, granted under our Parent’s equity incentive plan, or the Incentive Plan, based upon the fair market value of such Units calculated under the Black-Scholes option pricing model or the Monte Carlo simulation pricing model on the date of grant. We amortize the fair market value of the Units granted over the vesting period of the Units.
Recent Accounting Pronouncements
In February 2013, the FASB issued a new standard that requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component for those items reclassified to net income in their entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The new standard is effective for fiscal years beginning after December 15, 2012. The provisions of this standard did not have a material impact on our Company’s consolidated financial statements.
In July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The provisions of this standard did not have a material impact on our Company’s consolidated financial statements.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
2. Long-term Debt
Long-term debt consisted of the following at December 28, 2013 and December 29, 2012:
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 all or any of the Notes 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. 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 (described herein below), 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.
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 December 28, 2013, we had $23,000 outstanding under the ABL facility and $161,699 of additional availability.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
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 December 28, 2013, 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.
At December 28, 2013, the aggregate contractual maturity of long-term debt of the 9.750% Senior Secured Notes was as follows:
Cash payments for interest were $39,874, $39,678 and $40,543 for 2013, 2012 and 2011, respectively.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
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 December 28, 2013 and December 29, 2012, outstanding letters of credit issued under the revolving credit facilities for both periods totaled $3,256. The amount of unused lines of credit at December 28, 2013 and December 29, 2012, was $161,699 and $181,061 respectively. The average interest rate on short term borrowings under the credit facilities during both 2013 and 2012 was approximately 2.5%.
In connection with the Amendment in May 2011, $120 of debt issuance costs that were associated with a former syndicate member that did not participate in the Amendment were written-off. We also incurred bank fees and other costs of $1,282, which have been recorded as debt issuance costs. We amortized $2,659, $2,658 and $2,788 of debt issuance fees during 2013, 2012 and 2011, respectively, which is included in Interest expense, net.
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 certain other investors 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 bear interest at 11.5% per annum, such interest to 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. In 2013 and 2012, our Company distributed $17,276 and $8,385, respectively, to RBG, primarily to enable EB Sports to pay interest on the New Holdco Facility.
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 December 28, 2013, the amount of loans issued under the New Holdco Facility was $144,868 including accrued interest.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
3. Accrued Expenses
Accrued expenses consist of the following at December 28, 2013 and December 29, 2012:
4. Leases
Our Company leases various facilities and equipment under non-cancelable operating leases with terms ranging from 2 to 20 years. Most leases contain renewal options and may be subject to periodic adjustments for inflation and scheduled escalations. At December 28, 2013, future minimum commitments for capital leases and for operating leases with non-cancelable terms were as follows:
Property and equipment included the following amounts under capital leases at December 28, 2013 and December 29, 2012:
Rent expense for operating leases was approximately $11,673, $11,178 and $10,317 for 2013, 2012 and 2011, respectively.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
5. Employee Benefit Plans
At December 28, 2013, our Company had two noncontributory defined benefit pension plans that cover certain unionized employees. Funding and administrative expense for these plans was approximately $38, $25 and $9 for 2013, 2012 and 2011, respectively. Further disclosures have not been made due to the immateriality of these plans.
At December 28, 2013, our Company had one defined contribution plan covering substantially all of our non-union employees. We contribute to each participant a matching contribution determined on a discretionary basis. Discretionary contributions were made in 2013, 2012 and 2011. Expenses related to the plan amounted to approximately $1,632, $1,650 and $1,344 for 2013, 2012 and 2011, respectively.
In November 2012, our Company established a deferred compensation savings plan which is a non-qualified benefit plan for certain executives of our Company. Expenses related to the plan amounted to approximately $34 and $11 for 2013 and 2012, respectively.
6. Segment Information
Our Company has two reportable segments: Team Sports and Action Sports. The majority of Easton’s activity is reflected in our Team Sports segment which primarily consists of football, baseball, softball, ice hockey and other team sports products including apparel and reconditioning services related to certain of these products. Our Action Sports segment consists primarily of helmets, equipment, components, footwear, apparel and accessories for cycling, snowsports and powersports. Our Company evaluates segment performance primarily based on income from operations excluding equity compensation expense, 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 operating income as presented by our Company may not be comparable to similarly titled measures used by other companies. As a result, the components of operating income for one segment may not be comparable to another segment.
Segment results for 2013, 2012 and 2011 are as follows:
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
A reconciliation from the segment information to the Consolidated Statements of Comprehensive (Loss) Income is set forth below:
The following table summarizes net sales by product line. The categorization of our Company’s products into product lines is based on the characteristics of the individual products and is subject to judgment in some cases and can vary over time. In instances where products move between product lines, we reclassify the amounts in the product lines for all prior periods. Such reclassifications typically do not materially change the sizing of, or the underlying trends of results within each product line.
Net sales by customer location for 2013, 2012 and 2011 were as follows:
Property, plant and equipment, net by location at December 28, 2013 and December 29, 2012 were as follows:
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Total assets by location at December 28, 2013 and December 29, 2012 were as follows:
7. 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 December 28, 2013, 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 lawsuits by groups of former collegiate players (1 lawsuit) and retired NFL players (74 lawsuits consolidated into one multidistrict litigation). These cases are at preliminary stages and we are unable to predict outcomes or reasonably estimate a range of possible losses, if any. While the claims are complex and the alleged injury occurrences span many years, we believe these complaints are without merit and are vigorously defending against them. Further, during the time period of the factual allegations, the entity had product liability insurance from numerous carriers. Through insurance coverage counsel, we have been able to identify policies, put carriers on notice and pursue coverage claims. We anticipate that the insurance policies that were in place during the time periods covered by the allegations will afford considerable coverage for defense costs during the course of the litigation. In the event that we are determined to have liability in these matters, there can be no assurance that our insurance coverage will adequately cover such liability.
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 and three additional excess layers of our Company’s product liability coverage are written under policies expiring in January 2015.
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. We do not believe that any resulting damage awards will have a material adverse effect on our financial results. In 2002, one of our competitors sued us in Canadian Federal Court alleging infringement of a hockey skate patent. The details of such lawsuit have been previously disclosed in prior Company filings. In June 2013, we settled the lawsuit.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
8. Income Taxes
Our Company applies FASB ASC topic 740, “Income Taxes” or ASC 740 which addresses the determination of whether tax benefits claimed, or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, our Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.
Our Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Changes in unrecognized benefits in any given year are recorded as a component of deferred tax expense. Interest accrued on unrecognized tax benefits at December 28, 2013 and December 29, 2012 was $771 and $522, respectively. At December 28, 2013 and December 29, 2012, there were $2,874 and $3,123 of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
A reconciliation of the total gross amount of unrecognized tax benefits at December 28, 2013 and December 29, 2012 is as follows:
Our Company is generally subject to tax examination for a period of three years after tax returns are filed. Therefore, the statute of limitations remains open for tax years 2010 and forward. However, when a company has net operating loss carryovers, those tax years remain open until three years after the net operating losses are utilized. Therefore, the tax years for Bell Sports, Inc. remain open back to 2001. The tax years for Riddell remain open back to 2004.
Income tax expense (benefit) consisted of the following for December 28, 2013, December 29, 2012 and December 31, 2011:
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
A reconciliation of income taxes computed at the United States federal statutory income tax rate (35%) to the provision for income taxes reflected in the Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended December 28, 2013, December 29, 2012 and December 31, 2011 is as follows:
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. The significant components of deferred income tax assets and liabilities consist of the following at December 28, 2013 and December 29, 2012:
At December 28, 2013, our Company had estimated net operating loss carryforwards available for U.S. federal, state and foreign income tax purposes of approximately $90,687, $60,566 and $2,103, respectively. Based on Internal Revenue Code Section 382 relating to changes in ownership of our Company, utilization of the federal net operating loss carryforwards is limited to $72,141, which is the primary reason for a valuation allowance of $6,513. Also included in the 2013 deferred tax asset for the net operating losses of $32,965 are unrecognized tax benefits of $2,901. These net operating loss carryforwards will begin to expire in 2021 through 2029. An additional valuation allowance of $142 was established in the current year relating to net operating losses and capital loss carryforwards in foreign jurisdictions, including Canada and Sweden, resulting in a total valuation allowance of $972 for these jurisdictions. A valuation allowance of $520 was established against the separate company state NOLs of Riddell, Inc. and Easton Sports, Inc.
Our Company files a U.S. federal income tax return as a member of a U.S. consolidated group with EB Sports as the common parent. We record our provision for income taxes on a separate return basis which excludes any impact of EB Sports. As a result of filing our tax returns on a consolidated basis with EB Sports, there are additional net operating loss carryforwards that would be available to offset future income of our Company and EB Sports. To the extent these net operating losses are utilized to offset future income of our Company, a tax sharing agreement would be entered into providing that the tax benefit received by our Company ascribed to those net operating losses be recorded as either a payable to EB Sports or a contribution of capital by EB Sports to our Company.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
(Loss) income before income taxes, consisted of the following:
Our Company has cumulative undistributed earnings of non-U.S. subsidiaries of $15,912 for which U.S. taxes have not been provided. These earnings are intended to be permanently reinvested outside the U.S. If future events necessitate that these earnings should be repatriated to the U.S., an additional tax expense and related liability may be required.
Cash paid for income taxes was $2,078, $2,066 and $3,465 for 2013, 2012 and 2011, respectively.
9. 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 (loss) income. The deferred items are recognized in the period the derivative contract is settled. As of December 28, 2013, 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 (Loss) 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.
Our Company utilizes foreign currency exchange forward contracts 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 (Loss) Income.
No foreign currency exchange contracts were in place as of December 28, 2013.
The foreign currency exchange contracts in aggregated notional amounts in place to exchange United States Dollars at December 29, 2012 were as follows:
As of December 29, 2012, the fair value of the foreign currency exchange forward contracts, using Level 2 inputs from a third party bank, represented an asset of $147. Changes in the fair value of the foreign currency exchange forward contracts are reflected in selling, general and administrative expenses each period.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
The assets and liabilities measured at fair value on a recurring basis at December 29, 2012, were as follows:
10. Equity-Based Employee Compensation
Cash Incentive Plan
On December 14, 2012, our Company adopted the Easton-Bell Sports, Inc. 2012 Cash Incentive Plan, or the CIP. Certain members of management, members of the board of directors, consultants and representatives of our Company, subsidiaries and the Parent are eligible to participate in the CIP. Payments from the CIP occur upon the occurrence of a qualified liquidity event, which include a change of control, partial sale, initial public offering or refinancing. Participants in the CIP receive various payments upon such events depending on the number of units held by that participant, type of event and total enterprise value of our Company at such time. The maximum number of units available and currently outstanding under the CIP is 21,200. The aggregate proceeds available to the holders of CIP units are determined by the type of qualified liquidity event and whether certain total enterprise value thresholds are reached. The maximum aggregate proceeds available for CIP payments is $27,723.
To receive units under the CIP, each prospective participant had to return to our Company any outstanding Class B Common units that were previously issued to such prospective participant pursuant to the Parent’s equity incentive plan. All units granted under the CIP will vest upon a qualified liquidity event that occurs prior to the seven-year anniversary of the effective date of the CIP. The vesting of all or any portion of the participants’ units may be accelerated at any time at the sole discretion of the board of directors of our Company. As of December 28, 2013, we have not recognized any compensation expense for the CIP as the occurrence of a qualified liquidity event is currently deemed to be improbable. As conditions change, we will assess the probability and record any such compensation costs deemed necessary in accordance with applicable accounting standards.
Equity Incentive Plan
On March 16, 2006, our Parent adopted the Equity Incentive Plan, or the Incentive Plan as amended in December 2009. On December 14, 2012, the Incentive Plan was further amended to increase the number of authorized units issuable under the Incentive Plan to 112,766,083 Units. 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 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, change of control or partial sale. On December 14, 2012, our Parent, in exchange for the forfeiture of previously issued Class B Common Units, issued new Class B Common Units to certain unit holders, which, in each case, are eligible, subject to certain conditions, for distributions from our Parent in the event that certain total enterprise values are met in connection with certain qualifying transactions.
As a result of the modifications to the Incentive Plan on December 14, 2012, or the Modification, as well as adoption of the CIP, we utilized the Monte Carlo simulation pricing model, or the Monte Carlo Analysis, to determine whether additional value was granted to the unit holders upon receipt of the new Units. The Monte Carlo Analysis calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. The Monte Carlo simulation pricing model simulated a number of different enterprise value paths until an expected liquidation date. The drift term, used to evolve the simulated enterprise value, is the risk-free rate. The liquidation date of each simulation path is determined by the time the simulated enterprise value exceeds $1.2 billion or December 31, 2017, whichever occurs first. As a result of the Modification, in 2012 we recognized incremental non-cash equity compensation expense of $1,363 in the accompanying Consolidated Statements of Comprehensive (Loss) Income.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
During fiscal year 2012, our Company also utilized the Monte Carlo Analysis for 7,238,477 Units granted subsequent to December 13, 2012 and expects to use the Monte Carlo Analysis for future grants. We calculated the weighted average fair value per Unit of $0.33 and based on this calculation, we recognized $1,143 of additional non-cash equity compensation expense in 2012. For Units granted during the 2013 fiscal year, the weighted average fair value per Unit was also $0.33.
The following weighted average assumptions were used in the Monte Carlo Analysis for Units granted during fiscal year 2013:
_________________________________________________________
(1)
Expected volatility is based upon a peer group of companies given no historical data for the Units.
For Units issued prior to December 14, 2012, our Company used the Black-Scholes option pricing model to determine the fair value of the Units granted. This model uses such factors as the market price of the underlying Units at date of issuance, an exercise price of $1.32 for Units issued during fiscal years 2012 and 2011, and the expected term of the Unit, which is approximately two to four years, utilizing the simplified method. The $1.32 represents the fair market value of a Class A Common Unit of our Parent on the date the Units were granted. The weighted average grant date fair value of Units granted during 2012 and 2011 amounted to $0.30 and $0.23, respectively.
In fiscal years 2012 and 2011, the weighted average assumptions used in the Black-Scholes Option Pricing Model were as follows:
(1)
Expected volatility is based upon a peer group of companies given no historical data for the Units.
Accordingly, 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. Our Company used a forfeiture rate of 8.3% in 2013 and 2012 and 7.7% in 2011. Compensation expense for the performance based vesting Units is recognized when it becomes probable that the performance conditions will be met. As of December 28, 2013, 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 the following unit based non-cash compensation expense, included in selling, general and administrative expenses for its Units during 2013, 2012 and 2011:
As of December 28, 2013, there was $19,507 of unrecognized compensation costs, net of actual and estimated forfeitures related to the Units comprised of $8,499 related to time based vesting units and $11,008 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 2 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.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Our Company’s Unit activity under the Incentive Plan is as follows:
11. Related Party Transactions
Our Company, certain of our subsidiaries, RBG and our Parent have entered into 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 also affiliates of our Parent. Pursuant to these management agreements, 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 Easton acquisition, these management agreements were amended and removed any obligation to pay an annual management fee, but we are still obligated to pay for advisory services in connection with certain types of transactions. The fee to be paid is 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. and (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.
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. In 2013 and 2012, our Company distributed $17,276 and $8,385, respectively, to RBG, primarily to enable EB Sports to pay interest on the New Holdco Facility.
Affiliates of Jas. D. Easton, Inc. and James L. Easton owned certain of the properties leased by Easton through November 2013. During the fiscal years ended 2013, 2012 and 2011, Easton paid approximately $1,006, $1,191 and $1,186, respectively, in rent pursuant to such affiliate leases.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
On December 14, 2012, our Company entered into an amended and restated consulting agreement with Terry Lee, a then member of our board of directors. Pursuant to the terms of the consulting agreement, Mr. Lee agreed to provide us and our affiliates with certain consulting services. In exchange for his services, Mr. Lee was entitled to an annual compensation of $200. The term of Mr. Lee’s consulting agreement continued until the agreement was terminated on February 13, 2013, when Mr. Lee was appointed as Executive Chairman and Chief Executive Officer of our Company to fill the vacancy resulting from the resignation of our former President and Chief Executive Officer, Paul Harrington.
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 former 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 was entitled to a compensation of $80 for 2011, $265 for 2012 and $60 for the first three months of 2013, with the agreement expiring on March 31, 2013.
12. 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 2013 and 2012. In addition, condensed consolidating financial statements for the results of operations and cash flows for 2011 are presented. 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 following presentation.
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Condensed Consolidating Balance Sheet
December 28, 2013
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Condensed Consolidating Balance Sheet
December 29, 2012
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Condensed Consolidating Statement of Comprehensive (Loss) Income
Fiscal Year Ended December 28, 2013
Condensed Consolidating Statement of Comprehensive (Loss) Income
Fiscal Year Ended December 29, 2012
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Condensed Consolidating Statement of Comprehensive Income
Fiscal Year Ended December 31, 2011
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended December 28, 2013
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended December 29, 2012
Condensed Consolidating Statement of Cash Flows
Fiscal Year Ended December 31, 2011
EASTON-BELL SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Amounts in thousands, except as specified)
13. Subsequent Event
On February 13, 2014, our Company entered into an agreement with Bauer Performance Sports or BPS under which BPS will acquire the Easton Baseball/Softball business for $330,000 in cash, subject to adjustments for working capital and certain other items. The Asset Purchase Agreement filed February 19, 2014 on Form 8-K is incorporated herein by reference. The acquisition is subject to regulatory approvals and customary closing conditions and is expected to be completed in the next 30 days. Our Company is also working towards an agreement with a third party for the sale of the Easton Hockey business.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
At December 28, 2013, the end of the period covered by this annual 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.
We maintain a disclosure committee to assist the Principal Executive Officer and Principal Financial Officer in performing the evaluation discussed above. The members of this committee include our executive officers, senior operating managers and senior members of our finance and accounting staff.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-l5(f) under the Exchange Act) and for assessing the effectiveness of our internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with United States’ generally accepted accounting principles.
Our internal control over financial reporting is supported by written policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and our board of directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 28, 2013 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control - Integrated Framework of 1992. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this assessment, our management concluded that, as of December 28, 2013, our internal control over financial reporting was effective.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements or fraud. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of our Company’s independent registered public accounting firm, Ernst & Young, LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by our Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Our board of directors and the board of managers of our Parent, Easton-Bell Sports, LLC, are controlled by Fenway Partners Capital Fund II, L.P. The board of managers of our Parent is comprised of the same individuals as our board of directors. Each of our directors were chosen to serve as directors based on their prior work experience and directorships. The following table sets forth certain information regarding our directors and executive officers as of the date of this annual report:
James L. Easton joined our board of directors and became Chairman in connection with the closing of our acquisition of Easton in 2006. Since 1973, Mr. Easton has served as Chairman and CEO of Jas. D. Easton, Inc. and Chairman of Easton. Mr. Easton was elected as a member of the International Olympic Committee (IOC) in 1994, and in 2002, was elected as a member of the IOC Executive Board and one of the four Vice Presidents of the IOC. He presently serves on the IOC Nominations Commission and IOC Marketing Commission and is a member of the United States Olympic Committee (USOC) Board of Directors. Mr. Easton was President of Federation Internationale de Tir a l’Arc (FITA-International Archery Federation) from 1989 until 2005 and is currently a member of the Board of Visitors of the Anderson School of Management at UCLA and the LA84 Foundation.
Terry G. Lee has served as our Executive Chairman and Chief Executive Officer since February 2013 and has served as one of our directors since 2004. Mr. Lee also serves as Executive Chairman of Bell Automotive Products, Inc. and is a Managing Director and co-founder of Hayden Capital Investments, LLC. In 1984, Mr. Lee and a partner acquired Bell Sports, Inc. and Mr. Lee served as Chairman and Chief Executive Officer of Bell from 1989 to 1998 and as Interim Chief Executive Officer in 2000. From 1998 to 2004, Mr. Lee served as Chairman of Bell. Prior to joining Bell, Mr. Lee was employed by Wilson Sporting Goods for 14 years, where he began his career in sales and distribution and ultimately served as Senior Vice President of Sales before departing in 1983. Mr. Lee previously served as a Director of Jurlique International Pty Ltd., which was acquired by POLA Orbis.
Timothy P. Mayhew has served as our President and Chief Operating Officer since February 2013 and has served as one of our directors since 2004. Prior to joining our Company, Mr. Mayhew was a Managing Director of Fenway Consulting Partners, LLC, an affiliate of Fenway Partners Capital Fund II, L.P. and Fenway Partners Capital Fund III, L.P. Prior to joining Fenway Partners in June 2003, Mr. Mayhew was a founding member of Palladium Equity Partners. Prior to forming Palladium, Mr. Mayhew was a principal of Joseph Littlejohn & Levy. Mr. Mayhew was formerly in the restructuring group at Merrill Lynch & Co. Mr. Mayhew is a board member of Thismoment (a social media company) and American Achievement Corporation. Previously, he served as Chairman of 1-800 Contacts and was a board member for Fastfrate Holdings, Inc., Panther Expedited Services, RoadLink Inc. and Targus Group International, Inc.
Mark A. Tripp has served as our Chief Financial Officer since April 2006, as our Senior Vice President of Finance and Treasurer since November 2006 and as our Secretary since March 2009. Mr. Tripp previously served as the Chief Financial Officer and Vice President of Finance for Easton since 2001. From 1998 to 2001, he was with the Black & Decker Corporation working as Director of Finance for the Hardware & Home Improvement Group and the Division Controller for Price Pfister. From 1991 to 1998, Mr. Tripp was with Corning, Inc. where he held various finance positions. Prior to joining Corning, Inc. Mr. Tripp was with Deloitte & Touche from 1984 to 1991. Mr. Tripp is a certified public accountant in New York State.
Jackelyn E. Werblo has served as our Senior Vice President of Human Resources since April 2006 and as our Chief People Officer since October 2013. Prior to that time, from April 2005, Ms. Werblo was Vice President of Human Resources for our Company. From January 2004 to April 2005, Ms. Werblo was a Senior Consultant in the Mercer HR Services division. From April 2000 to January 2004, Ms. Werblo was Vice President, Product Strategy and HR Outsourcing Services for SynHRgy HR Technologies. This company was acquired by Mercer, Inc. in January 2004.
Daniel J. Arment has served as our President of Riddell Sports since May 2008. Mr. Arment previously served as our Executive Vice President, General Manager Mass-Market Division since January 2005. Prior to that time, from September 2001 to December 2004, Mr. Arment was Vice President of Mass Sales for Bell and Bell Riddell Holdings. From 2000 to 2001, Mr. Arment was Vice President of National Sales for the Speedo Division of the Authentic Fitness Corporation. From 1991 to 2000 Mr. Arment served in various sales and customer marketing positions including Vice President of Field Sales for the Mass Cosmetics and Beauty Care Division of Revlon Inc. Prior to 1991, Mr. Arment worked for the Paper Art Company Inc./A Mennen Company and Playtex Family Products, Inc.
Michael F. Zlaket has served as our President of Easton Sports since April 2013. Previously, he was President and General Manager of NEP Entertainment from 2012 to 2013. Mr. Zlaket also served as our Executive Vice President and General Manager of Easton Baseball/Softball from 2008 to 2011 and Senior Vice President of Riddell Marketing and Product Development from 2006 to 2008. Prior to that time, from 1996 to 2006, Mr. Zlaket served as Vice President of Easton Baseball/Softball Products. From 1991 to 1996, he served in several roles including, Product Manager, Group Marketing Manager and Director of Easton Baseball/Softball Products.
Gregory B. Shapleigh has served as our Executive Vice President and General Manager of Giro/Easton Cycling since February 2013. Since 2000, Mr. Shapleigh has held numerous positions at our Company including Senior Vice President of Product and Brand Marketing for the Giro and Easton brands, and Senior Vice President of Marketing and Product Development for the Specialty Retail Division. During this time, he has led several new business initiatives including the Giro brand’s expansion into snowsports helmets, goggles, and cycling footwear and apparel. From 1998 to 1999, Mr. Shapleigh was employed by The North Face where he was part of the team that introduced that brand’s footwear product line.
Jessica L. Klodnicki has served as our Executive Vice President and General Manager of Bell/Blackburn since February 2013. Ms. Klodnicki joined our Company in February 2012 as Senior Vice President of Brand and Product Marketing of Bell/Blackburn. Prior to joining our Company, she was the Vice President of Brand Marketing and Management at Mizuno USA from 2010 to 2012, spearheading the development of the brand management function across golf, running, baseball, softball and volleyball. From 2004 to 2010, Ms. Klodnicki was at Newell Rubbermaid in various capacities including Global Vice President of Marketing for the Fine Writing and Luxury Accessories Business Unit (Parker, Waterman and Rotring brands). She spent her early career from 1995 to 2004 with infant products company Kids II in various brand and product marketing roles, including serving as the Vice President of Marketing for its portfolio of owned and licensed brands - Bright Starts, Carter’s and Disney. Ms. Klodnicki currently serves on the board of directors for the non-profit industry organization, People for Bikes.
Bernard P. Doering has served as our Senior Vice President of Global Sales, Independent Bicycle Dealers (IBD) and Action Sports since September 2010, inclusive of a short break in late 2012. Previously, Mr. Doering spent 21 years in various executive sales positions at Nike, Inc., including from 2009 to 2010, Sales Director - Strategic Sporting Goods, US. From 2004 to 2009, Mr. Doering was Director of Footwear Sales EMEA based in Amsterdam. Prior to 1990, he worked for the Capital Markets division of Bank of New York Mellon.
William L. Beane III has been one of our directors since 2005. Mr. Beane also serves as General Manager of the Oakland A’s, a position that he has held since 1997. Prior to becoming the General Manager of the Oakland A’s, Mr. Beane served as the Assistant to the Oakland A’s General Manager and as an Advance Scout. He is also a former major league baseball player and played for the New York Mets, the Minnesota Twins, the Detroit Tigers and the Oakland A’s.
Edward C. Forst has been one of our directors since November 2013. Mr. Forst currently serves as President and Chief Executive Officer of Cushman & Wakefield, Inc., in addition to numerous leadership commitments for educational and other not-for-profit organizations. He previously served as a Senior Advisor to Fenway Partners, LLC. In 2012, Mr. Forst served as a team leader of the Mitt Romney for President transition team and as a member of the National Finance Committee leadership. Mr. Forst retired from Goldman Sachs at the end of 2011 where during his career he held numerous executive roles including: Co-Chief Executive Officer of Goldman Sachs Asset Management and Goldman Sachs Private Wealth Management as well as EVP and Chief Administrative Officer of the firm. Mr. Forst was elected Partner at Goldman Sachs in 1998 and served seven years on the Goldman Sachs Management Committee. During the financial crisis of 2008-2009, Mr. Forst was the first Executive Vice President and Principal Operating Officer of Harvard University with leadership responsibility for the non-academic affairs of the institution. He was also a member of the board of the Harvard Management Company, overseeing the $30 billion endowment. Additionally, during this period, Mr. Forst served as an Advisor to the Secretary of the Treasury of the United States.
Mary J. George has been one of our directors since August 2013. Since 2005, Ms. George has served as Vice Chairman of Bell Automotive Products, Inc. and from 1994 to 2004 in various executive positions at Bell Sports including Chairman, Chief Operations Officer and Chief Executive Officer. She currently serves on the Board of Directors of 3 Day Blinds.
Dennis E. Glazer has been one of our directors since November 2013. He retired as a law partner of Davis Polk & Wardwell LLP at the end of 2012 where he represented numerous public and private companies, their boards and their directors. During his time at Davis Polk, Mr. Glazer also served as Co-Head of the Litigation Department. In addition to serving as a director on our board, Mr. Glazer currently serves as a director of two privately held internet companies, AppOrchard LLC and Rapid Ratings International,Inc. and a regional energy company, Paraco Gas Corporation. Mr. Glazer also holds leadership positions in several not-for-profit health care organizations in Westchester County, New York.
Peter D. Lamm has been one of our directors since 2004. Mr. Lamm also serves as Chairman and Chief Executive Officer of Fenway Partners, LLC, an affiliate of Fenway Partners Capital Fund II, L.P. and Fenway Partners Capital Fund III, L.P. Mr. Lamm co-founded Fenway Partners in 1994. He was previously a General Partner of the investment partnerships managed by Butler Capital Corporation and a Managing Director of Butler Capital Corporation. Mr. Lamm serves on the boards of Fastfrate Holdings, Inc., Preferred Freezer Services, LLC and Roadlink, Inc., and is also a board member and Chairman of the United States Fund for UNICEF. Mr. Lamm previously served on the Board of Directors of 1-800 Contacts, Inc., American Achievement Corporation, and Panther Expedited Services, Inc.
Kevin M. Mansfield has been one of our directors since November 2013. He is a Portfolio Manager in the consumer and retail team of Teachers’ Private Capital or TPC, the private equity arm of Ontario Teachers’ Pension Plan. Mr. Mansfield joined TPC in 2005 after working at Scotia Merchant Capital, the private equity arm of the Bank of Nova Scotia. He is also a director of Munchkin, Inc., Helly Hansen AS and Plano Synergy Holdings.
David A. Perdue joined our board of directors in August 2011. Since 2007, Mr. Perdue has been the Chief Executive Officer of the Aquila Group LLC, a private investment firm that is involved with retail markets in India. He is also a Partner with Perdue Partners, LLC, an international trading company. He served as Chief Executive Officer and Chairman of Dollar General from April 2003 to July 2007. His prior experience includes serving as President of Reebok, in addition to executive positions with Haggar Inc. and the Sara Lee Corporation. He currently serves on the Board of Directors of Graphic Packaging Holding Corporation, Cardlytics, Inc., Liquidity Service, Inc., and Alliant Energy Corporation. Previously, he served on the Boards of Jo-Ann Stores and Pillowtex Corporation.
Peter V. Ueberroth joined our board of directors in 2006 in connection with the closing of our acquisition of Easton. Mr. Ueberroth is a managing director of Contrarian Group, Inc., an investment and business management company, where he has served since 1989. He is also an owner and Co-Chairman of the Pebble Beach Company. Mr. Ueberroth served as Chairman of the Board of the United States Olympic Committee (USOC) from June 2004 to October 2008. He previously served as Commissioner of Major League Baseball and as President and Chief Executive Officer of the Los Angeles Olympic Organizing Committee for the 1984 Los Angeles Olympic Games. He is a Director of the Coca-Cola Company, Aircastle Limited and The Irvine Company.
Richard E. Wenz joined our board of directors in July 2006 and serves as the Chairman of the Audit Committee. Mr. Wenz is a consultant and private investor. Mr. Wenz served as Chief Executive Officer of Jenny Craig International from 2002 to 2003. During 2000 to 2003, Mr. Wenz also was an operating affiliate of DB Capital Partners, LLC, the private equity investment group of Deutsche Bank A.G. From 1997 to 2000, Mr. Wenz was President and Chief Operating Officer of Safety 1st, Inc. During 1995 and 1996, Mr. Wenz was the partner in charge of the Chicago office of The Lucas Group, a business strategy consulting firm. Prior to 1995, Mr. Wenz held senior executive positions with Professional Golf Corporation, Electrolux Corporation, The Regina Company and Wilson Sporting Goods Company. Mr. Wenz began his career in 1971 with Arthur Young & Co. (predecessor of Ernst & Young LLP) and left the firm as a partner in 1983. Mr. Wenz is a certified public accountant and he currently serves on the Board of Directors of Armstrong World Industries, Summer Infant Company, Baby Jogger Inc. and Pet Supplies Plus, Inc.
Code of Ethics
We have adopted a formal, written code of conduct within the specific guidelines as promulgated by the Securities and Exchange Commission. This document can be found on our website at www.eastonbellsports.com. Our Code of Ethics applies to our named executive officers, as well as all other employees. We have communicated the high level of ethical conduct expected from all of our employees, including our officers.
Audit Committee
Our board of directors has a separately designated standing audit committee, or Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Mr. Wenz is the Chairman of the Audit Committee. Our board of directors has determined that Mr. Wenz is an “audit committee financial expert” as that term is defined by Securities and Exchange Commission rules.
Item 11.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Philosophy
At Easton-Bell we design all of our compensation programs to retain and as necessary attract key employees who are motivated to achieve outstanding results. Our programs are designed to reward superior performance based on team and individual performance. Annual compensation programs recognize the impact of earnings growth each year. Long term equity based incentives reward executives for achieving increased value over a specified term. Our executive compensation programs impact all employees because these programs help establish our performance expectations and our general approach to rewards. As part of our overall philosophy of pay for performance, we have developed an innovative performance management program which measures the results of all employees and executives in a common way. This encourages our business leaders to work together to create a high performance environment that is reinforced by constant attention to common business and unique individual goals and expectations. This linkage between expectations, results and compensation is intended to assure that all employees are focused on the long term success of our Company and that compensation is performance-based throughout our Company.
We believe that the performance of the executives in managing our Company should be considered in light of general economic and specific company, industry and competitive conditions. We believe that our compensation programs for our executives should reflect our success as a management team, in attaining key operating objectives, such as growth of sales, growth of operating earnings and growth or maintenance of market share and long-term competitive advantage, and ultimately, in attaining an increased value for us. We also believe that individual performance should be evaluated annually and considered in compensation decisions.
Overview of Compensation and Process
Elements of compensation for our executives include: salary, annual bonus, equity unit awards consisting of grants of Class B Common Units of our Parent, unit awards under the Cash Incentive Plan where proceeds are determined by the type of qualified liquidity event, 401(k) plan participation, medical, disability, life insurance, a voluntary nonqualified deferred compensation plan and miscellaneous fringe benefits and other perquisites. Our compensation committee, or the Committee, consists of Messrs. Lamm and Mansfield. It generally meets early in the fiscal year to formally approve the annual incentive plans. Executive awards under the prior year’s plan are reviewed and approved subsequent to receipt of audited financial data, generally in February of each year. In addition, the Committee annually or more frequently as deemed necessary, reviews and considers merit increases and additive equity awards for key executives.
As part of this annual review, the history of all the elements of each executive’s total compensation over each of the past three years is evaluated and compared to the compensation of other executive officers in an appropriate market comparison group. Typically, our chief executive officer makes compensation recommendations to the Committee with respect to the executive officers who report to him. Such executive officers are not present at the time of these deliberations. The Committee considers and then determines any annual compensation changes with respect to the Chief Executive Officer. Terry G. Lee, our Executive Chairman and Chief Executive Officer, was not present at the meeting when his compensation was discussed by the Committee. The Committee has the right to set the applicable compensation, taking into account any such recommendations as it sees fit.
We choose to pay each element of compensation to attract and retain the necessary executive talent, reward annual performance and provide incentive for their balanced focus on long-term strategic goals, as well as short-term performance. The amount of each element of compensation is determined by the Committee, which uses the following factors to determine the amount of salary and other benefits to pay each executive:
·
performance against corporate and individual objectives for the previous year;
·
difficulty of achieving desired results in the coming year;
·
value of their unique skills and capabilities to support long-term performance of our Company;
·
performance of their general management responsibilities; and
·
contribution as a member of the management team.
These elements fit into our overall compensation objectives by helping to secure the future potential of our operations, facilitating our entry into new markets, providing proper compliance and regulatory guidance and helping to create a cohesive team.
Our policy for allocating between long-term and currently paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing incentives to maximize long-term value for our Company. Likewise, we provide cash compensation in the form of base salary to meet competitive salary norms and provide bonus compensation to recognize superior performance against specific short-term goals.
Compensation Consultant
From time to time, the Committee may request and receive advice from independent compensation consultants. In the past, Towers Watson & Co., a global human resources consulting company was retained to provide independent analysis of the compensation of certain key executives as compared to national industry averages as obtained through market surveys and an analysis of similarly sized companies, which was then summarized and presented to the compensation committee. This work was limited to certain key executive reviews and was not broad in scope. In the event of any significant compensation restructuring, the Committee may use independent compensation consultants for assistance.
Base Salary and Bonus
It is the goal of the Committee to establish salary compensation for our executive officers based on our Company’s operating performance relative to comparable peer companies. It is our policy to pay our chief executive officer competitively and on a basis that is relative to both the market and other members of our senior management team. We believe that this gives us the opportunity to attract and retain talented managerial employees both at the senior executive level and below.
The management incentive plan is designed to reward our executives for the achievement of shorter-term financial goals, principally EBITDA (as reported to our lenders) and working capital. It is our general philosophy that management be rewarded for their performance as a team in the attainment of these goals, but that individual performance be accounted for as well. Thus, executive bonuses may be adjusted if individual performance has been less than expected or required. The Committee also reserves the right to award discretionary payments based on superior individual performance. We believe that this is important to aligning our executive officers and promoting teamwork among them and also in maintaining each executive’s personal commitment to delivering superior results.
Equity Incentives
A significant goal of our compensation is to afford our executives an opportunity to participate in our performance through direct equity interests in our ultimate Parent, Easton-Bell Sports, LLC. We accomplish this goal, from time to time, by giving certain qualifying executives the right to purchase certain securities of our Parent directly or by making grants of Class B Common Units of our Parent to managers, directors, employees, consultants or advisers pursuant to the terms of our Parent’s Incentive Plan.
Direct Investment
In August and December 2009, we provided certain existing investors of our Parent, including certain members of management, the opportunity to invest cash in our Parent and EB Sports by purchasing Class C Common Units of our Parent and shares of Series A Preferred Stock of EB Sports. Class C Common Units represent limited liability company membership interests in our Parent.
Incentive Plans
On December 14, 2012, our Company adopted the Easton-Bell Sports, Inc. 2012 Cash Incentive Plan or the CIP. Certain members of management, members of the board of directors, consultants and representatives of our Company, subsidiaries and the Parent are eligible to participate in the CIP. Payments from the CIP occur upon the occurrence of a qualified liquidity event, which may include a change of control, partial sale, initial public offering or refinancing.
On March 16, 2006 our Parent adopted the Incentive Plan. The purpose of the Incentive Plan is to advance the interests of our Parent to attract and retain managers, directors, employees, consultants or advisers who are in a position to make significant contributions to the success of our Parent and to encourage such persons to take into account the long-term interests of our Parent, us and our subsidiaries. On December 14, 2012, the Incentive Plan was amended to increase the number of authorized Units issuable under the Incentive Plan to 112,766,083 Units.
Class B Common Units represent limited liability company membership interests in our Parent. The Class B Common Units entitle the holder to participate in certain distributions made by our Parent.
Pursuant to the terms of our Parent’s limited liability company agreement holders of the Class A Common Units, Class B Common Units and Class C Common Units of our Parent are entitled to receive certain distributions in accordance with the waterfall distribution provisions of our Parent’s limited liability company agreement.
The board of managers of our Parent, its designees, and the compensation committee of the board of managers of our Parent serve as the administrator of the Incentive Plan. The administrator of the Incentive Plan has the authority, in its sole discretion, to select participants to receive awards, to determine the time of receipt, the number of Class B Common Units subject to each award and to establish any other terms, conditions and provisions of the awards under the Incentive Plan. The awards granted under the Incentive Plan will vest at such time or times as the administrator of the Incentive Plan may determine and the administrator of the Incentive Plan may accelerate the vesting of any award at any time. Although the terms of individual grants vary, generally, time vesting occurs over a four-year period measured from the date of the grant, and performance vesting is based on achievement of certain Company performance goals (including certain EBITDA thresholds). Subject to certain conditions, Units are also eligible to vest in the event of an initial public offering or change of control.
Except as otherwise determined by the administrator of the Incentive Plan or as expressly provided in an employment agreement between a participant under the Incentive Plan and our Parent or one of its subsidiaries, if a participant under the Incentive Plan is terminated from employment with our Parent or one of its subsidiaries for cause (as described in the Incentive Plan or such participant’s employment agreement, as applicable), then all awards held by such participant, whether or not they are vested, will terminate and be forfeited. Additionally, except as otherwise determined by the administrator of the Incentive Plan or as expressly provided in an employment agreement between a participant under the Incentive Plan and our Parent or one of its subsidiaries, if the employment of a participant under the Incentive Plan is terminated for any reason other than for cause, then all unvested awards will terminate.
Perquisites
We limit the perquisites that we make available to our executive officers. Our executives are entitled to few benefits that are not otherwise available to all of our employees. The benefits available to certain members of the Executive Management team is an insured supplemental medical benefits program that reimburses executives for certain medical expenses not otherwise paid through the group medical plan and a supplemental insured long term disability policy that normalizes coverage not available to executives through our Company’s group plan. In addition, certain executive officers are provided with an auto allowance and some executives receive a housing/geographic allowance based upon their location.
Post-Employment Compensation
We do not provide post-retirement health coverage for our executives or employees. Our executive officers are eligible to participate in our 401(k) Contributory Defined Contribution Plan. Currently, we contribute to each participant a matching contribution equal to 50.0% of the first 6.0% of the participant’s compensation that has been contributed to the plan, subject to applicable legal limits. Most of our executive officers participated in our 401(k) plan during fiscal 2013 and received matching contributions.
Deferred Compensation Plan
In November 2012, our Company established a deferred compensation savings plan which is a non-qualified benefit plan for certain executives of our Company. Participants can defer up to 50% of their pre-tax base salary and up to 100% of their annual bonus into participant directed funds.
Specific Compensation of Named Executive Officers
The following compensation discussion describes the material elements of the compensation awarded to, earned by, or paid our officers who are considered “named executive officers” during our last completed fiscal year. Named executive officers consist of Terry G. Lee, Executive Chairman and Chief Executive Officer, Paul E. Harrington, former Chief Executive Officer, Mark A. Tripp, Chief Financial Officer and the three most-highly compensated individuals serving as executive officers at the end of 2013 (which includes Timothy P. Mayhew, President and Chief Operating Officer, Daniel J. Arment, President of Riddell Sports and Michael F. Zlaket, President of Easton Sports).
Summary Compensation Table
(1)
Mr. Lee’s employment with us began on February 13, 2013. Prior to Mr. Lee’s employment with us, he was paid as a consultant. For 2013, his salary reflects earned amounts after the commencement of employment. For 2013, all other compensation for Mr. Lee includes $51,000 for auto allowance, $33,300 for consulting fees and $7,650 for 401K company contributions and the remainder for medical expenses and life insurance and disability insurance premiums.
(2)
On February 13, 2013, Mr. Harrington resigned from his position as President and Chief Executive Officer. For 2013, all other compensation for Mr. Harrington includes $726,600 for post-employment compensation, $180,000 for housing allowance and related taxes paid of $155,200, $127,000 for unused vacation and the remainder for auto allowance and life insurance and disability insurance premiums.
(3)
For 2013, all other compensation for Mr. Tripp includes $9,600 for auto allowance, $7,650 for 401K company contributions, $4,900 for medical expenses and the remainder for life insurance and disability insurance premiums.
(4)
Mr. Mayhew’s employment with us began on February 13, 2013. For 2013, his salary reflects earned amounts after the commencement of employment. For 2013, all other compensation for Mr. Mayhew includes $36,600 for auto allowance and the remainder for life insurance and disability insurance premiums.
(5)
For 2013, all other compensation for Mr. Arment includes $58,750 for housing allowance and related taxes paid of $12,800, $9,600 for auto allowance, $7,650 for 401K company contributions and the remainder for medical expenses and life insurance and disability insurance premiums.
(6)
Mr. Zlaket’s employment with us began on April 1, 2013. Mr. Zlaket previously resigned on June 30, 2011 and then was paid as a consultant to our Company until his return in 2013. For 2013, his salary reflects earned amounts after the commencement of employment. For 2013, all other compensation for Mr. Zlaket includes $31,700 for consulting fees, $9,020 for medical expenses, $7,200 for auto allowance, $3,200 for 401K company contributions and the remainder for life insurance and disability insurance premiums.
(7)
For all named executive officers, unit awards include the Class B Common Units of our Parent granted to such officer under our Parent’s Incentive Plan. The amounts set forth in the table reflect the amounts reported for financial statement reporting purposes for the respective fiscal year. The assumptions made in establishing such amounts are more fully described in Note 10 to the Audited Consolidated Financial Statements included in Item 8 of this annual report.
Outstanding Equity Awards at Fiscal Year-End
(1)
Awards consist of Class B Common Units issued pursuant to our Parent’s Incentive Plan.
(2)
Total number of unvested Class B Common Units as of December 28, 2013. These Class B Common Units consist of a portion of the Units that vest over time, and a portion of the Units that vest if certain performance conditions are met.
(3)
Represents the fair market value of a Class A Common Unit of our Parent on the date the applicable Class B Common Units were granted to such holder, some of which were amended in December 2009 to effect, among other things, a reduction in the applicable distribution threshold.
(4)
Date on which 100% of time based units will have vested. Generally, time based units vest evenly on an annual basis over a 4 year period (in increments of 25% per year).
Vested Equity Awards at Fiscal Year-End
(1)
Awards consist of Class B Common Units issued pursuant to our Parent’s Incentive Plan that have time vested prior to December 28, 2013.
(2)
Cumulative expense recognized through December 28, 2013 as compensation expense computed.
Nonqualified Deferred Compensation
Employment Arrangements and Payments Upon Termination or Change of Control
Set forth below is a brief description of the employment agreements that we have with our named executive officers.
Terry G. Lee entered into an employment agreement with us as of April 19, 2013. The employment agreement provides, among other things; a base salary, monthly car allowance and an annual bonus as determined by our board of directors or designated committee; and equity-based compensation as determined by the board of managers of our Parent.
Mr. Lee’s employment agreement provides that if he is terminated for cause, or if he terminates his employment without good reason (as defined therein), Mr. Lee will be entitled to any accrued and unpaid base salary through the date of termination and any amounts owing but not paid for any annual bonus earned and any reimbursements of certain expenses. If we terminate Mr. Lee without cause, or if he terminates his employment for good reason (as defined therein), then, subject to the conditions set forth below, we will, in addition to providing the payments and benefits referred to above:
(1) provide Mr. Lee monthly payments equal to one-twelfth of his annual base salary at the time of termination, plus one-twelfth of the Target Bonus per month for 18 months immediately following the date of termination; and
(2) pay an amount equal to the full premium cost of our health and dental plans participated in by Mr. Lee and his eligible dependents for the earliest to occur of (1) the expiration of the 18 months immediately following the date of termination, (2) the date Mr. Lee becomes eligible for participation in the health or dental plan of a new employer or (3) the date Mr. Lee is no longer eligible for continuation of participation under COBRA.
In the event that Mr. Lee terminates his employment for certain enumerated good reasons or we terminate his employment other than for cause on or following the date of a Liquidity Event (as defined in the employment agreement), Mr. Lee shall be entitled to substantially the same payments and benefits as if we had otherwise terminated Mr. Lee without cause prior to such Liquidity Event, except that Mr. Lee will not receive pro-rata Target Bonus payments. In addition, in the event of a change of control, Mr. Lee will be eligible to receive a success bonus of $750,000 if the adjusted total enterprise value of the Company is equal to or greater than $1,100,000,000 plus an additional $1,500,000 if the adjusted total enterprise value of the Company is equal to or greater than $1,200,000,000.
The following table sets forth the cash amounts that we would be obliged to pay Mr. Lee under each triggering event scenario as if it had occurred on December 28, 2013 (assuming no accrued and unpaid amounts of base salary, annual bonus for the previous fiscal year, earned vacation or certain qualified reimbursements):
If a change of control (as defined in Mr. Lee’s Class B Common Unit certificate) of our Parent should occur and Mr. Lee is continuously employed with us at the time of the change of control, then 100% of Mr. Lee’s Class B Common Units shall accelerate and immediately vest. If a partial sale (as defined in Mr. Lee’s Class B Common Units certificate) of our Parent should occur and Mr. Lee is either (a) continuously employed by the subsidiary sold in such partial sale or (b) continuously employed in a position primarily related to the assets being sold in such partial sale, then 100% of Mr. Lee’s Class B Common Units shall accelerate and immediately vest. If we terminate Mr. Lee within four months prior to a change of control or partial sale of our Parent for reasons other than for cause, then Mr. Lee shall be deemed to have remained employed through the date of such change of control or partial sale.
In connection with an Initial Public Offering, all vested Class B Common Units and/or any successor equity instruments (that is, any options, shares or share units into which the Units have been converted or for which they have been exchanged) shall remain vested and all Class B Common Units and/or any successor equity instruments that are scheduled to become Vested on the next scheduled vesting date (if any) shall become immediately vested, with the remaining unvested Class B Common Units and/or successor equity instruments to continue to vest in accordance with the original vesting schedule set forth in Mr. Lee’s Class B Common Unit certificate.
Upon termination for cause, Mr. Lee’s Class B Common Units shall expire and terminate immediately, whether or not all or any portion of the Class B Common Units have become vested. Notwithstanding the above provisions, if Mr. Lee is terminated for any other reason except for cause, then the portion of Class B Common Units that have not become vested prior to the date of such termination of employment shall expire and terminate immediately.
All payments and benefits are conditioned on Mr. Lee’s timely delivery of an effective release of claims to us, as well as Mr. Lee’s compliance with non-competition, non-solicitation and other restrictive covenants for a period of 18 months from the date of termination.
Paul E. Harrington entered into an employment agreement with us as of March 5, 2008 and resigned as chief executive officer on February 13, 2013, the Resignation Date. Mr. Harrington entered into a Post-Employment Compensation Agreement, which summarized the payments and benefits he earned following the termination of his employment. Specifically, our Company shall pay Mr. Harrington one twelfth of $825,000 per month through March 31, 2016. Our Company paid Mr. Harrington an $825,000 bonus in March 2013, in lieu of his 2013 bonus which otherwise would have been payable on the next payroll date following March 1, 2014. Pursuant to his Post-Employment Compensation Agreement, Mr. Harrington will receive two subsequent bonuses of $825,000, the first on the next regular payroll date following March 1, 2015, and the final on the next regular payroll date following March 1, 2016. Our Company will be paying Mr. Harrington and his eligible dependents’ full premium cost for health and dental plan coverage until the earliest of (A) the expiration of eighteen months past the resignation date, (B) the date that Mr. Harrington becomes eligible for participation in health and dental plans of another employer, or (C) the date that Mr. Harrington ceases to be eligible for participation under our Company’s health and dental plans under COBRA. Our Company will pay Mr. Harrington a housing allowance equal to $15,000 plus a gross-up for state and federal income tax liability per month until March 31, 2014.
All of Mr. Harrington’s Series A Preferred Shares have been repurchased by EB Sports for an aggregate repurchase price of $714,760.58. All of Mr. Harrington’s vested Class B Common Units and Class C Common Units have been repurchased by Parent for an aggregate repurchase price of $25,800. The 5,000 units granted to Mr. Harrington pursuant to the CIP shall be subject to the provisions of the CIP. Mr. Harrington’s CIP units vest upon a Qualified Liquidity Event (as defined in the CIP, including a change in control) that occurs prior to the seven-year anniversary of December 14, 2012.
Mark A. Tripp entered into an employment agreement with us as of March 16, 2006. The employment agreement provides, among other things, for an initial term of 18 months, with an automatic renewal for additional one-year terms; a base salary, subject to annual review, and an annual bonus as determined by our board of directors or compensation committee; and equity-based compensation as determined by the board of managers of our Parent.
Mr. Tripp’s employment agreement provides that if he is terminated for cause, or if he terminates his employment without good reason (as defined therein), Mr. Tripp will be entitled to any accrued and unpaid base salary through the date of termination and any amounts owing but not paid for any annual bonus earned and any reimbursements of certain expenses. If we terminate Mr. Tripp without cause, or if he terminates his employment for good reason (as defined therein), then, subject to the conditions set forth below, we will, in addition to providing the payments and benefits referred to above:
(1) provide Mr. Tripp monthly payments equal to one-twelfth of his annual base salary at the time of termination, for 18 months immediately following the date of termination;
(2) pay Mr. Tripp an annual bonus of up to 75% of base salary for the fiscal year in which termination occurs, payable in a single lump sum, pro-rated for the fiscal year in which termination occurs; and
(3) pay or reimburse the premium cost for participation by Mr. Tripp and his eligible dependents in our group health and dental plans under COBRA for the earliest to occur of (1) the expiration of the 18 months immediately following the date of termination, (2) the date Mr. Tripp becomes eligible for participation in the health or dental plan of a new employer or (3) the date Mr. Tripp is no longer eligible for continuation of participation under COBRA.
In the event that Mr. Tripp terminates his employment for certain enumerated good reasons or we terminate his employment other than for cause during the 24 months after a change of control (as defined in the employment agreement) has occurred, Mr. Tripp shall be entitled to substantially the same payments and benefits as if we had otherwise terminated Mr. Tripp without cause prior to such change of control, except that if Mr. Tripp is terminated during the 24 months after a change of control he shall be entitled to a single lump sum payment equal to 18 months of his base salary.
The following table sets forth the cash amounts that we would be obliged to pay Mr. Tripp under each triggering event scenario as if it had occurred on December 28, 2013 (assuming no exercise of the put right described below and also assuming no accrued and unpaid amounts of base salary, annual bonus for the previous fiscal year, earned vacation or certain qualified reimbursements):
If a change of control (as defined in Mr. Tripp’s Class B Common Unit certificate) of our Parent should occur and Mr. Tripp is continuously employed with us at the time of the change of control, then 100% of Mr. Tripp’s Class B Common Units shall accelerate and immediately vest. If a partial sale (as defined in Mr. Tripp’s Class B Common Units certificate) of our Parent should occur and Mr. Tripp is either (a) continuously employed by the subsidiary sold in such partial sale or (b) continuously employed in a position primarily related to the assets being sold in such partial sale, then 100% of Mr. Tripp’s Class B Common Units shall accelerate and immediately vest. If we terminate Mr. Tripp for reasons other than for cause, then all unvested Class B Common Units of our Parent shall expire and terminate on the date of termination. Upon termination, our Parent shall have the right to call up to 100% of Mr. Tripp’s vested Class B Common Units of our Parent at the fair market value on the date of termination, provided that such call right is exercised within 90 days from the date of termination. In accordance with our Parent’s LLC Agreement, Mr. Tripp has the right to put his vested Class B Common Units to our Parent at 75% of fair market value, provided that (1) our EBITDA and target growth rate of EBITDA exceed certain thresholds, (2) Mr. Tripp is terminated other than for cause or he elects to terminate for good reason and (3) Mr. Tripp exercises his put option within 120 days of the date of termination. If we terminate Mr. Tripp for cause, all of his Class B Common Units shall expire and terminate on the date of termination, whether vested or not.
All payments and benefits, (except for the participation rights provided to Mr. Tripp under COBRA) are conditioned on Mr. Tripp’s timely delivery of an effective release of claims to us, as well as Mr. Tripp’s compliance with non-competition, non-solicitation and other restrictive covenants for a period of 18 months from the date of termination.
Timothy P. Mayhew entered into an employment agreement with us as of April 19, 2013. The employment agreement provides, among other things; a base salary, an annual bonus as determined by our board of directors or designated committee; and equity-based compensation as determined by the board of managers of our Parent.
Mr. Mayhew’s employment agreement provides that if he is terminated for cause, or if he terminates his employment without good reason (as defined therein), Mr. Mayhew will be entitled to any accrued and unpaid base salary through the date of termination and any amounts owing but not paid for any annual bonus earned and any reimbursements of certain expenses. If we terminate Mr. Mayhew without cause, or if he terminates his employment for good reason (as defined therein), then, subject to the conditions set forth below, we will, in addition to providing the payments and benefits referred to above:
(1) provide Mr. Mayhew monthly payments equal to one-twelfth of his annual base salary at the time of termination, plus one-twelfth of the Target Bonus per month for 12 months immediately following the date of termination; and
(2) pay an amount equal to the full premium cost of our health and dental plans participated in by Mr. Mayhew and his eligible dependents for the earliest to occur of (1) the expiration of the 12 months immediately following the date of termination, (2) the date Mr. Mayhew becomes eligible for participation in the health or dental plan of a new employer or (3) the date Mr. Mayhew is no longer eligible for continuation of participation under COBRA.
In the event that Mr. Mayhew terminates his employment for certain enumerated good reasons or we terminate his employment other than for cause on or following the date of a Liquidity Event (as defined in the employment agreement), Mr. Mayhew shall be entitled to substantially the same payments and benefits as if we had otherwise terminated Mr. Mayhew without cause prior to such Liquidity Event, except that Mr. Mayhew will not receive pro-rata Target Bonus payments. In addition, in the event of a change of control, Mr. Mayhew will be eligible to receive a success bonus of $500,000 if the adjusted total enterprise value of the Company is equal to or greater than $1,100,000,000 or $1,000,000 if the adjusted total enterprise value of the Company is equal to or greater than $1,200,000,000 (in each case, less the amount of the target bonus (if any) previously paid).
The following table sets forth the cash amounts that we would be obliged to pay Mr. Mayhew under each triggering event scenario as if it had occurred on December 28, 2013 (assuming no accrued and unpaid amounts of base salary, annual bonus for the previous fiscal year, earned vacation or certain qualified reimbursements, and in the event of a Change of Control less the amount of the target bonus (if any) previously paid):
If a change of control (as defined in Mr. Mayhew’s Class B Common Unit certificate) of our Parent should occur and Mr. Mayhew is continuously employed with us at the time of the change of control, then 100% of Mr. Mayhew’s Class B Common Units shall accelerate and immediately vest. If a partial sale (as defined in Mr. Mayhew’s Class B Common Units certificate) of our Parent should occur and Mr. Mayhew is either (a) continuously employed by the subsidiary sold in such partial sale or (b) continuously employed in a position primarily related to the assets being sold in such partial sale, then 100% of Mr. Mayhew’s Class B Common Units shall accelerate and immediately vest. If we terminate Mr. Mayhew within four months prior to a change of control or partial sale of our Parent for reasons other than for cause, then Mr. Mayhew shall be deemed to have remained employed through the date of such change of control or partial sale.
In connection with an Initial Public Offering, all vested Class B Common Units and/or any successor equity instruments (that is, any options, shares or share units into which the Units have been converted or for which they have been exchanged) shall remain vested and all Class B Common Units and/or any successor equity instruments that are scheduled to become vested on the next scheduled vesting date (if any) shall become immediately vested, with the remaining unvested Class B Common Units and/or successor equity instruments to continue to vest in accordance with the original vesting schedule set forth in Mr. Mayhew’s Class B Common Unit certificate.
Upon termination for cause, Mr. Mayhew’s Class B Common Units shall expire and terminate immediately, whether or not all or any portion of the Class B Common Units have become vested. Notwithstanding the above provisions, if Mr. Mayhew is terminated for any other reason except for cause, then the portion of Class B Common Units that have not become vested prior to the date of such termination of employment shall expire and terminate immediately.
All payments and benefits are conditioned on Mr. Mayhew’s timely delivery of an effective release of claims to us, as well as Mr. Mayhew’s compliance with non-competition, non-solicitation and other restrictive covenants for a period of 12 months from the date of termination.
Daniel J. Arment entered into an employment agreement with us as of October 22, 2010. Mr. Arment’s employment agreement provides that if he is terminated for cause, or if he terminates his employment without good reason (as defined therein), Mr. Arment will be entitled to any accrued and unpaid base salary through the date of termination, pay at his base salary rate for any earned but unused vacation for the fiscal year immediately preceding the date of termination, and any amounts owing but not paid for any annual bonus earned and reimbursements of certain expenses. If we terminate Mr. Arment without cause, or if he terminates his employment for good reason (as defined therein), then, subject to the conditions set forth below, we will, in addition to providing the payments and benefits referred to above:
(1) provide Mr. Arment monthly payments equal to one-twelfth of his annual base salary for 24 months immediately following the date of termination;
(2) pay Mr. Arment an annual bonus of up to 75% of base salary for the fiscal year in which termination occurs, payable in a single lump sum, pro-rated for the fiscal year in which termination occurs and subject to increase by our board of directors; and
(3) pay or reimburse the premium cost for participation by Mr. Arment and his eligible dependents in our group health and dental plans under COBRA for the earliest to occur of (1) the expiration of the 18 months (with an expected modification to 18 months) following the date of termination, (2) the date Mr. Arment becomes eligible for participation in the health or dental plan of a new employer or (3) the date Mr. Arment is no longer eligible for continuation of participation under COBRA.
The following table sets forth the cash amounts that we would be obliged to pay Mr. Arment under each triggering event scenario as if it had occurred on December 28, 2013 (assuming no exercise of the put right described below and also assuming no accrued and unpaid amounts of base salary, annual bonus for the previous fiscal year, earned vacation or certain qualified reimbursements):
If a change of control (as defined in Mr. Arment’s Class B Common Unit certificate) of our Parent should occur, then up to 100% of Mr. Arment’s Class B Common Units shall accelerate and immediately vest. If we terminate Mr. Arment for reasons other than for cause, then all unvested Class B Common Units of our Parent shall expire and terminate on the date of termination. Upon termination, our Parent shall have the right to call up to 100% of Mr. Arment’s vested Class B Common Units of our Parent at the fair market value on the date of termination, provided that such call right is exercised within 90 days from the date of termination. In accordance with our Parent’s LLC Agreement, Mr. Arment has the right to put his vested Class B Common Units to our Parent at 75% of fair market value, provided that (1) our EBITDA and target growth rate of EBITDA exceed certain thresholds, (2) Mr. Arment is terminated other than for cause or he elects to terminate for good reason and (3) Mr. Arment exercises his put option within 120 days of the date of termination. If we terminate Mr. Arment for cause, all of his Class B Common Units shall expire and terminate on the date of termination, whether vested or not.
All payments and benefits, (except for the participation rights provided to Mr. Arment under COBRA) are conditioned on Mr. Arment’s timely delivery of an effective release of claims and assignment of certain intellectual property to us, as well as Mr. Arment’s compliance with non-competition, non-solicitation and other restrictive covenants for a period of 24 months from the date of termination.
Michael F. Zlaket entered into an employment agreement with us as of April 1, 2013. The employment agreement provides, among other things; a base salary, an annual bonus as determined by our board of directors or designated committee; and equity-based compensation as determined by the board of managers of our Parent. The initial term of Mr. Zlaket’s employment agreement ends on March 31, 2015 and automatically renews thereafter for successive terms of one (1) year each.
Mr. Zlaket’s employment agreement provides that if he is terminated for cause, or if he terminates his employment without good reason (as defined therein), Mr. Zlaket will be entitled to any accrued and unpaid base salary through the date of termination and any amounts owing but not paid for any annual bonus earned and any reimbursements of certain expenses. If we terminate Mr. Zlaket without cause, or if he terminates his employment for good reason (as defined therein), then, subject to the conditions set forth below, we will, in addition to providing the payments and benefits referred to above:
(1) provide Mr. Zlaket monthly payments equal to one-twelfth of his annual base salary at the time of termination, for twelve (12) months immediately following the date of termination;
(2) pay Mr. Zlaket an annual bonus of up to 75% of base salary for the fiscal year in which termination occurs, payable in a single lump sum, pro-rated for the fiscal year in which termination occurs and subject to increase in the event certain performance goals are met; and
(3) pay an amount equal to the full premium cost of our health and dental plans participated in by Mr. Zlaket and his eligible dependents for the earliest to occur of (1) the expiration of the eighteen (18) months immediately following the date of termination, (2) the date Mr. Zlaket becomes eligible for participation in the health or dental plan of a new employer or (3) the date Mr. Zlaket is no longer eligible for continuation of participation under COBRA.
In the event that Mr. Zlaket terminates his employment for certain enumerated good reasons or we terminate his employment other than for cause immediately following the occurrence of a Change of Control (as defined in the employment agreement) and ending twenty-four (24) months thereafter, Mr. Zlaket shall be entitled to substantially the same payments and benefits as if we had otherwise terminated Mr. Zlaket without cause prior to such Change of Control, except that Mr. Zlaket will receive a single lump sum payment equal to twelve (12) months of base salary, instead of 12 monthly payments.
The following table sets forth the cash amounts that we would be obliged to pay Mr. Zlaket under each triggering event scenario as if it had occurred on December 28, 2013 (assuming no accrued and unpaid amounts of base salary, annual bonus for the previous fiscal year, earned vacation or certain qualified reimbursements):
If a change of control (as defined in Mr. Zlaket’s Class B Common Unit certificate) of our Parent should occur and Mr. Zlaket is continuously employed with us at the time of the change of control, then 100% of Mr. Zlaket’s Class B Common Units shall accelerate and immediately vest. If a partial sale (as defined in Mr. Zlaket’s Class B Common Units certificate) of our Parent should occur and Mr. Zlaket is either (a) continuously employed by the subsidiary sold in such partial sale or (b) continuously employed in a position primarily related to the assets being sold in such partial sale, then 100% of Mr. Zlaket’s Class B Common Units shall accelerate and immediately vest. If we terminate Mr. Zlaket within four months prior to a change of control or partial sale of our Parent for reasons other than for cause, then Mr. Zlaket shall be deemed to have remained employed through the date of such change of control or partial sale.
In connection with an Initial Public Offering, all vested Class B Common Units and/or any successor equity instruments (that is, any options, shares or share units into which the Units have been converted or for which they have been exchanged) shall remain vested and all Class B Common Units and/or any successor equity instruments that are scheduled to become vested on the next scheduled vesting date (if any) shall become immediately vested, with the remaining unvested Class B Common Units and/or successor equity instruments to continue to vest in accordance with the original vesting schedule set forth in Mr. Zlaket’s Class B Common Unit certificate.
Upon termination for cause, Mr. Zlaket’s Class B Common Units shall expire and terminate immediately, whether or not all or any portion of the Class B Common Units have become vested. Notwithstanding the above provisions, if Mr. Zlaket is terminated for any other reason except for cause, then the portion of Class B Common Units that have not become vested prior to the date of such termination of employment shall expire and terminate immediately.
All payments and benefits are conditioned on Mr. Zlaket’s timely delivery of an effective release of claims to us, as well as Mr. Zlaket’s compliance with non-competition, non-solicitation and other restrictive covenants for a period of twelve (12) months from the date of termination.
Specific Compensation of Directors
Except as set forth below, the members of our board of directors and the board of managers of our Parent are not separately compensated for their services as directors or managers, as applicable, other than reimbursement for out-of-pocket expenses incurred with rendering such services. From time to time members of our board of directors and the board of managers of our Parent may be granted Class B Common Units of our Parent pursuant to awards made under the Incentive Plan. All such grants are reflected in the table set forth in Item 12
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
All of our issued and outstanding shares of capital stock are held by RBG. All of RBG’s issued and outstanding shares of capital stock are held by EB Sports Corp. and all of EB Sports Corp.’s outstanding shares of common stock are held directly by our Parent. The following table provides certain information as of March 28, 2014 with respect to the beneficial ownership of the membership interests of our Parent by (i) each holder known by us who beneficially owns 5% or more of any class of the outstanding membership units of our Parent and shares of Series A Preferred Stock of EB Sports, (ii) each of the members of our board of directors and the board of managers of our Parent and (iii) each of our named executive officers. Unless otherwise indicated in a footnote, the business address of each person is our corporate address.
*
means less than 1%.
(1)
For a discussion of the Series A Preferred Stock of EB Sports, see Item 11 - Executive Compensation and Item 13
Item 13. Certain Relationships and Related Transactions, and Director Independence
Limited Liability Company Agreement
All holders of our Parent’s equity securities are parties to our Parent’s limited liability company agreement. The limited liability company agreement provides, among other things, for the various rights, preferences and privileges of the holders of our Parent’s equity securities, restrictions on transfer of equity interests, drag-along rights in favor of investors affiliated with Fenway Partners Capital Fund II, L.P. and Fenway Partners Capital Fund III, L.P., tag-along rights in favor of all members on certain transfers by such investors, certain participation rights for members in connection with equity issuances to investors affiliated with Fenway Partners Capital Fund II, L.P. and Fenway Partners Capital Fund III, L.P. and certain put and call rights with respect to shares held by management. The operating agreement also contains customary indemnification rights.
Pursuant to our Parent’s limited liability company agreement and subject to certain limitations, the Fenway Investors have the right to appoint members to the board of managers of our Parent (such appointees being, William Beane, Dennis Glazer, Edward Forst, Mary George, Peter Lamm, Terry Lee, Timothy Mayhew and Richard Wenz), Ontario Teachers’ Pension Plan Board has the right to appoint two members to the board of managers of our Parent (such appointees being Kevin Mansfield and David Perdue) and affiliates of James Easton have the right to appoint two members of the board of managers of our Parent (such appointees being James Easton and Peter Ueberroth).
Stockholders Agreement
All holders of shares of Series A Preferred Stock of EB Sports are parties to the preferred stockholders agreement of EB Sports. The stockholders agreement provides, among other things, for the various rights, preferences and privileges of the holders of shares of Series A Preferred Stock of EB Sports, restrictions on transfer of the Series A Preferred Stock, drag-along rights in favor of investors affiliated with the Fenway Investors, tag-along rights in favor of all stockholders on certain transfers by the Fenway Investors, certain participation rights for stockholders in connection with equity issuances to investors affiliated with the Fenway Investors and certain call rights with respect to shares held by management. The stockholders agreement also contains customary indemnification rights.
Holdco Facility Refinancing and Equity Investment
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 (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 million in cash in exchange for Class C Common Units of our Parent (of which, $1.466 million 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 million 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 $13.2 million invested by existing investors of Parent, their respective affiliates and certain other investors in August 2009, the issuance of new shares of Series A Preferred Stock on December 3, 2009 resulted in an aggregate of $126.475 million 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 $108.3 million under the New Holdco Facility. Borrowings under the New Holdco Facility bear interest at 11.5% per annum, such interest to 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. In 2013 and 2012, our Company distributed $17.3 million and $8.4 million, respectively, to RBG, primarily to enable EB Sports to pay interest on the New Holdco Facility.
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 our Company’s existing senior secured credit facility 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 December 28, 2013, the amount of loans issued under the New Holdco Facility was approximately $144.9 million, including accrued interest.
Management Agreements
We, our Parent and certain of its other subsidiaries entered into management agreements with Fenway Partners, LLC and Fenway Partners Resources, Inc., each an affiliate of Fenway Partners Capital Fund II, L.P., in September 2004. Pursuant to these management agreements, as subsequently amended, Fenway Partners LLC and Fenway Partners Resources, Inc. provide advisory services in connection with certain types of transactions and will be entitled to receive 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. The management agreements include customary indemnification provisions in favor of these entities and their affiliates and have initial terms of ten years.
Employment Agreements and Arrangements with Management
We have employment agreements with the following fiscal 2013 named executive officers, Terry Lee, our Executive Chairman and Chief Executive Officer, Paul Harrington, our former President and Chief Executive Officer, Mark Tripp, our Chief Financial Officer, Senior Vice President of Finance, Treasurer and Secretary, Timothy Mayhew, our Chief Operating Officer and President and Daniel Arment, our President of Riddell Sports and Michael Zlaket, our President of Easton Sports. Mr. Harrington’s employment agreement was terminated in connection with his resignation and entering into the Post-Employment Compensation Agreement. Mr. Tripp’s employment agreement contains an evergreen term provision which provides for automatic renewal of the agreement for a one year term each year. We also have employment agreements with certain of our other executive officers.
On July 14, 2004, Bell entered into a license agreement with Bell Automotive Products, Inc., an entity of which Terry Lee, a member of our board of directors is a minority owner and occupies the position of Co-Chairman. Mary George, a member of our board of directors is the Vice Chairman of Bell Automotive. Under the license agreement, Bell Automotive, as the licensee, has the worldwide, exclusive, perpetual and royalty-free right to use the Bell trademarks in connection with certain auto accessories and equipment. The license agreement replaced a 1999 license agreement, as amended, between Bell and Bell Racing Company, and a 2000 sublicense agreement, as amended, between Bell, Bell Racing Company and Bell Automotive.
On December 14, 2012, our Company entered into an amended and restated consulting agreement with Terry Lee, a then member of our board of directors. Pursuant to the terms of the consulting agreement, Mr. Lee agreed to provide us and our affiliates with certain consulting services. In exchange for his services, Mr. Lee was entitled to an annual compensation of $200,000. The term of Mr. Lee’s consulting agreement continued until the agreement was terminated on February 13, 2013, when Mr. Lee was appointed as Executive Chairman and Chief Executive Officer of our Company to fill the vacancy resulting from the resignation of our former President and Chief Executive Officer, Paul Harrington.
Arrangements with Jas. D. Easton, Inc.
Jas. D. Easton, Inc. is an affiliate of James Easton and former owner of Easton. On February 1, 2006, we entered into a Stock Purchase Agreement with Jas. D. Easton, Inc., to acquire 100% of the outstanding capital stock of Easton and we consummated the Easton acquisition on March 16, 2006. Pursuant to the transaction, we paid the seller $401.2 million (including a post-close working capital adjustment payment). The stock purchase agreement contains customary representations, warranties and covenants. In addition, the stock purchase agreement provides that Jas. D. Easton, Inc. will indemnify us for breaches of its representations, warranties and covenants, subject to certain baskets and caps. Simultaneously with the closing of our acquisition of Easton, Jas. D. Easton, Inc. purchased equity in our Parent pursuant to a subscription agreement described above in an aggregate amount of $25.0 million.
In connection with our acquisition of Easton, 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, solely in connection with specific products or services, none of which are currently competitive with us. The trademarks licensed to Easton Technical Products under this license include the Easton brand. Easton has also granted Easton Technical Products, Hoyt Archery and Easton, Inc. 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.
We have entered into a right of first offer agreement with Jas. D. Easton, Inc. and Easton Technical Products, Inc. pursuant to which we are 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) the tenth anniversary of the consummation of our acquisition of Easton, (2) the date Easton Technical Products, Inc. no longer uses the name “Easton,” (3) the effectiveness of any registered public offering by Easton Technical Products, Inc. and (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 owned certain of the properties leased by Easton through November 2013. During the fiscal years ended 2013, 2012 and 2011, Easton paid approximately $1.0 million, $1.2 million and $1.2 million, respectively, in rent pursuant to such affiliate leases. We believe the rents payable pursuant to such leases are consistent with the market rents for similar facilities in such jurisdictions.
Other Related Party Transactions
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 former 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 was entitled to a compensation of $80,000 for 2011, $265,000 for 2012 and $60,000 for the first three months of 2013, with the agreement expiring on March 31, 2013.
Review, Approval or Ratification of Transactions with Related Persons
Under the Audit Committee’s charter, any material potential or actual conflict of interest or transaction between our Company and any “related person” of our Company must be reviewed and approved or ratified by the Audit Committee. SEC rules define a related person of our Company as any Company director (or nominee), executive officer, 5%-or-greater shareholder or immediate family member of any of these persons.
Director Independence
Our Company’s securities are not listed on a national securities exchange or interdealer quotation system that has requirements as to board composition. The following members of our board of directors are “independent directors” as such term is defined in the regulations of the NASDAQ Stock Market: William Beane, Edward Forst, Dennis Glazer, Mary George, Kevin Mansfield, Peter Lamm, David Perdue, Peter Ueberroth and Richard Wenz.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit-Related and All Other Fees
Aggregate fees which were billed to us by our principal accountants, Ernst & Young, LLP for audit services related to the two most recent fiscal years and for other professional services in the most recent two fiscal years were as follows:
Audit-Related Fees consist of fees for the audit of our Company’s annual consolidated financial statements, the review of financial statements included in our Company’s quarterly Form 10-Q reports, and the services that an independent auditor would customarily provide in connection with subsidiary audits, statutory requirements, regulatory filings, registration statements and similar engagements for the fiscal year, such as comfort letters, attest services, consents and assistance with review of documents filed with the SEC. “Audit Fees” also include advice on accounting matters that arose in connection with or as a result of the audit or the review of periodic consolidated financial statements and statutory audits the non-U.S. jurisdictions require.
Other Fees consist of fees for professional services rendered for financial due diligence, lease and working capital projects.
Policy of Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor
The audit committee of our Company’s board of directors is responsible for appointing, setting compensation and overseeing the work of the independent auditor. The audit committee has established a policy regarding pre-approval of all audit and permissible non-audit services provided by the independent auditor. The audit committee has approved the pre-authorization of audit and non-audit services up to $20,000.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
(1) The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm for Easton-Bell Sports, Inc. and its subsidiaries are presented on pages 50 to 81 under Item 8 of this Form 10-K.
(2) Financial Statement Schedules:
The following Consolidated Financial Statement Schedule of Easton-Bell Sports, Inc. and its subsidiaries is included herein on page II-1.
Schedules other than that listed above have been omitted because the required information is contained in the Notes to the Consolidated Financial Statements or because such schedules are not required or are not applicable.
(3) The following exhibits are filed or incorporated by reference as part of this report. Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*).
†
Indicates furnished herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Date: March 28, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
ANNUAL REPORT ON FORM 10-K
ITEM 15 (a)(2)
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 28, 2013
II-1
VALUATION AND QUALIFYING ACCOUNTS